---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



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



For the quarterly period ended April 30, 2005



OR



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



For the transition period from
 to



Commission file number 0-21103



---



ADVANCED DIGITAL INFORMATION CORPORATION



|                                                       |  |                                              
|------------------------------------------------------ |  | ---------------------------------------------
|Incorporated under the laws of the State of Washington |  | I.R.S. Employer Identification No. 91-1618616



11431 Willows Road
N.E.

P.O. Box 97057

Redmond, Washington 98073-9757



(425)
881-8004



Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.



Yes x     No ̈



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)



Yes x     No ̈



The total shares of common stock without par value outstanding at the end of the quarter reported is 63,020,788.



---



---

PART IFINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



Advanced Digital Information Corporation

Condensed Consolidated Balance
Sheets

(In thousands, except for share data)

(Unaudited)



|                                                                                                                  |  |                |         |   |                 |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                  |  | April 30, 2005 |         |   | October 31,2004 |  
|Assets                                                                                                            |  |                |         |   |                 |   |         |  
|Current assets:                                                                                                   |  |                |         |   |                 |   |         |  
|Cash and cash equivalents                                                                                         |  | $              | 47,705  |   |                 | $ | 94,695  |  
|Accounts receivable, net of allowances of $1,726 in 2005 and $1,319 in 2004                                       |  |                | 85,029  |   |                 |   | 93,025  |  
|Inventories, net                                                                                                  |  |                | 30,462  |   |                 |   | 38,728  |  
|Short-term marketable securities                                                                                  |  |                | 192,729 |   |                 |   | 138,238 |  
|Assets held for sale                                                                                              |  |                | 1,364   |   |                 |   |        |  
|Prepaid expenses and other                                                                                        |  |                | 4,833   |   |                 |   | 2,845   |  
|Deferred income taxes                                                                                             |  |                | 10,526  |   |                 |   | 10,757  |  
|                                                                                                                  |  |                |         |   |                 |   |         |  
|Total current assets                                                                                              |  |                | 372,648 |   |                 |   | 378,288 |  
|Property, plant and equipment, net of accumulated depreciation of $38,482 in 2005 and $31,201 in 2004             |  |                | 44,228  |   |                 |   | 45,913  |  
|Service parts for maintenance, net of accumulated amortization of $34,752 in 2005 and $30,042 in 2004             |  |                | 29,309  |   |                 |   | 29,993  |  
|Deferred income taxes                                                                                             |  |                | 13,509  |   |                 |   | 13,461  |  
|Investments                                                                                                       |  |                | 3,196   |   |                 |   | 2,769   |  
|Goodwill                                                                                                          |  |                | 2,596   |   |                 |   | 2,596   |  
|Intangible and other assets, net of accumulated amortization of $3,269 in 2005 and $2,879 in 2004                 |  |                | 1,628   |   |                 |   | 2,010   |  
|                                                                                                                  |  |                |         |   |                 |   |         |  
|                                                                                                                  |  | $              | 467,114 |   |                 | $ | 475,030 |  
|                                                                                                                  |  |                |         |   |                 |   |         |  
|Liabilities and Shareholders Equity                                                                              |  |                |         |   |                 |   |         |  
|Current liabilities:                                                                                              |  |                |         |   |                 |   |         |  
|Accounts payable                                                                                                  |  | $              | 42,899  |   |                 | $ | 47,991  |  
|Accrued liabilities                                                                                               |  |                | 16,483  |   |                 |   | 17,035  |  
|Income taxes payable                                                                                              |  |                | 359     |   |                 |   | 174     |  
|Current portion of deferred revenue                                                                               |  |                | 33,618  |   |                 |   | 31,727  |  
|                                                                                                                  |  |                |         |   |                 |   |         |  
|Total current liabilities                                                                                         |  |                | 93,359  |   |                 |   | 96,927  |  
|Long-term deferred revenue                                                                                        |  |                | 15,546  |   |                 |   | 13,605  |  
|Other long-term liabilities                                                                                       |  |                | 400     |   |                 |   | 600     |  
|Commitments and contingencies (Note 10)                                                                           |  |                |         |   |                 |   |         |  
|Shareholders equity:                                                                                             |  |                |         |   |                 |   |         |  
|Preferred stock, no par value; 4,000,000 shares authorized; none issued and outstanding                           |  |                |        |   |                 |   |        |  
|Common stock, no par value; 160,000,000 shares authorized, 63,020,788 issued and outstanding (63,758,716 in 2004) |  |                | 228,064 |   |                 |   | 234,724 |  
|Retained earnings                                                                                                 |  |                | 128,340 |   |                 |   | 127,877 |  
|Accumulated other comprehensive income (loss):                                                                    |  |                |         |   |                 |   |         |  
|Cumulative translation adjustment                                                                                 |  |                | 1,413   |   |                 |   | 1,301   |  
|Unrealized investment losses                                                                                      |  |                | (8      | ) |                 |   | (4      | )
|                                                                                                                  |  |                |         |   |                 |   |         |  
|Total shareholders equity                                                                                        |  |                | 357,809 |   |                 |   | 363,898 |  
|                                                                                                                  |  |                |         |   |                 |   |         |  
|                                                                                                                  |  | $              | 467,114 |   |                 | $ | 475,030 |  
|                                                                                                                  |  |                |         |   |                 |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



1



---

Advanced Digital Information Corporation



Condensed Consolidated Statements of Operations



(In thousands, except for per share data)



(Unaudited)



|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|---------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | ---------- | - |  | - | ------- | -
|                                                           |  | Three months endedApril 30, |         |   | Six months ended April 30, |  
|                                                           |  | 2005                        |         |   | 2004                       |   |         | 2005 |  |   | 2004       |  
|                                                           |  |                             |         |   | (Restated)                 |   |         |      |  |   | (Restated) |  
|Revenue:                                                   |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Product                                                    |  | $                           | 92,047  |   |                            | $ | 99,828  |      |  | $ | 189,677    |   |  | $ | 207,762 |  
|Service                                                    |  |                             | 14,124  |   |                            |   | 11,239  |      |  |   | 27,314     |   |  |   | 21,610  |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|                                                           |  |                             | 106,171 |   |                            |   | 111,067 |      |  |   | 216,991    |   |  |   | 229,372 |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Cost of revenue:                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Product                                                    |  |                             | 63,268  |   |                            |   | 70,999  |      |  |   | 131,803    |   |  |   | 146,453 |  
|Service                                                    |  |                             | 10,167  |   |                            |   | 8,743   |      |  |   | 19,659     |   |  |   | 17,275  |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|                                                           |  |                             | 73,435  |   |                            |   | 79,742  |      |  |   | 151,462    |   |  |   | 163,728 |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Gross profit                                               |  |                             | 32,736  |   |                            |   | 31,325  |      |  |   | 65,529     |   |  |   | 65,644  |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Operating expenses:                                        |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Sales and marketing                                        |  |                             | 16,227  |   |                            |   | 17,345  |      |  |   | 32,909     |   |  |   | 31,417  |  
|General and administrative                                 |  |                             | 6,418   |   |                            |   | 6,080   |      |  |   | 12,691     |   |  |   | 12,284  |  
|Research and development                                   |  |                             | 10,050  |   |                            |   | 9,320   |      |  |   | 21,307     |   |  |   | 18,700  |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|                                                           |  |                             | 32,695  |   |                            |   | 32,745  |      |  |   | 66,907     |   |  |   | 62,401  |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Operating profit (loss)                                    |  |                             | 41      |   |                            |   | (1,420  | )    |  |   | (1,378     | ) |  |   | 3,243   |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Other income (expense):                                    |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Interest income                                            |  |                             | 1,270   |   |                            |   | 519     |      |  |   | 2,315      |   |  |   | 1,061   |  
|Gain (loss) on securities and investment transactions, net |  |                             | (36     | ) |                            |   | (25     | )    |  |   | (2         | ) |  |   | 636     |  
|Foreign currency transaction losses, net                   |  |                             | (225    | ) |                            |   | (961    | )    |  |   | (132       | ) |  |   | (87     | )
|Other                                                      |  |                             | (202    | ) |                            |   | (94     | )    |  |   | (287       | ) |  |   | (180    | )
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|                                                           |  |                             | 807     |   |                            |   | (561    | )    |  |   | 1,894      |   |  |   | 1,430   |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Income (loss) before provision (benefit) for income taxes  |  |                             | 848     |   |                            |   | (1,981  | )    |  |   | 516        |   |  |   | 4,673   |  
|Provision (benefit) for income taxes                       |  |                             | 115     |   |                            |   | (661    | )    |  |   | 53         |   |  |   | 1,225   |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Net income (loss)                                          |  | $                           | 733     |   |                            | $ | (1,320  | )    |  | $ | 463        |   |  | $ | 3,448   |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Basic net income (loss) per share                          |  | $                           | 0.01    |   |                            | $ | (0.02   | )    |  | $ | 0.01       |   |  | $ | 0.05    |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  
|Diluted net income (loss) per share                        |  | $                           | 0.01    |   |                            | $ | (0.02   | )    |  | $ | 0.01       |   |  | $ | 0.05    |  
|                                                           |  |                             |         |   |                            |   |         |      |  |   |            |   |  |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



2



---

Advanced Digital Information Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                  |  |                            |          |   |            |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ---------- | - | ------- | -
|                                                                                  |  | Six months ended April 30, |         
|                                                                                  |  | 2005                       |          |   | 2004       |  
|                                                                                  |  |                            |          |   | (Restated) |  
|Cash flows from operating activities:                                             |  |                            |          |   |            |   |         |  
|Net income                                                                        |  | $                          | 463      |   |            | $ | 3,448   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |          |   |            |   |         |  
|Depreciation and amortization                                                     |  |                            | 12,901   |   |            |   | 12,108  |  
|Bad debt expense                                                                  |  |                            | 454      |   |            |   | 39      |  
|Inventory obsolescence                                                            |  |                            | 924      |   |            |   | 1,473   |  
|(Gain) loss on securities and investment transactions                             |  |                            | 2        |   |            |   | (636    | )
|Deferred income taxes                                                             |  |                            | 185      |   |            |   | (83     | )
|Tax benefit from exercise of stock options                                        |  |                            | 72       |   |            |   | 1,693   |  
|Other                                                                             |  |                            | 32       |   |            |   | 39      |  
|Change in assets and liabilities:                                                 |  |                            |          |   |            |   |         |  
|Accounts receivable                                                               |  |                            | 8,257    |   |            |   | 4,940   |  
|Inventories                                                                       |  |                            | 7,364    |   |            |   | (5,934  | )
|Prepaid expenses and other assets                                                 |  |                            | (2,028   | ) |            |   | (228    | )
|Service parts for maintenance                                                     |  |                            | (4,326   | ) |            |   | (5,886  | )
|Accounts payable                                                                  |  |                            | (5,708   | ) |            |   | (1,559  | )
|Accrued liabilities                                                               |  |                            | (589     | ) |            |   | (4,283  | )
|Income taxes                                                                      |  |                            | 153      |   |            |   | (787    | )
|Deferred revenue                                                                  |  |                            | 3,757    |   |            |   | 7,158   |  
|                                                                                  |  |                            |          |   |            |   |         |  
|Net cash provided by operating activities                                         |  |                            | 21,913   |   |            |   | 11,502  |  
|                                                                                  |  |                            |          |   |            |   |         |  
|Cash flows from investing activities:                                             |  |                            |          |   |            |   |         |  
|Purchase of property, plant and equipment                                         |  |                            | (7,057   | ) |            |   | (8,950  | )
|Proceeds from assets held for sale                                                |  |                            |         |   |            |   | 15,117  |  
|Purchase of marketable securities                                                 |  |                            | (163,022 | ) |            |   | (78,268 | )
|Proceeds from securities transactions                                             |  |                            | 108,525  |   |            |   | 60,703  |  
|Purchase of other investments                                                     |  |                            | (429     | ) |            |   | (364    | )
|Return of investment on other investments                                         |  |                            |         |   |            |   | 71      |  
|                                                                                  |  |                            |          |   |            |   |         |  
|Net cash used in investing activities                                             |  |                            | (61,983  | ) |            |   | (11,691 | )
|                                                                                  |  |                            |          |   |            |   |         |  
|Cash flows from financing activities:                                             |  |                            |          |   |            |   |         |  
|Repayment of short-term and long-term debt                                        |  |                            |         |   |            |   | (103    | )
|Repurchase of common stock                                                        |  |                            | (8,516   | ) |            |   |        |  
|Proceeds from issuance of common stock for stock options and Stock Purchase Plan  |  |                            | 1,784    |   |            |   | 5,893   |  
|                                                                                  |  |                            |          |   |            |   |         |  
|Net cash provided by (used in) financing activities                               |  |                            | (6,732   | ) |            |   | 5,790   |  
|                                                                                  |  |                            |          |   |            |   |         |  
|                                                                                  |  |                           
|Effect of exchange rate changes on cash                                           |  |                            | (188     | ) |            |   | 247     |  
|                                                                                  |  |                            |          |   |            |   |         |  
|                                                                                  |  |                           
|Net increase (decrease) in cash and cash equivalents                              |  |                            | (46,990  | ) |            |   | 5,848   |  
|                                                                                  |  |                           
|Cash and cash equivalents at beginning of period                                  |  |                            | 94,695   |   |            |   | 91,451  |  
|                                                                                  |  |                            |          |   |            |   |         |  
|                                                                                  |  |                           
|Cash and cash equivalents at end of period                                        |  | $                          | 47,705   |   |            | $ | 97,299  |  
|                                                                                  |  |                            |          |   |            |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.





3



---



Advanced Digital
Information Corporation



Condensed Consolidated
Statements of Changes in Shareholders Equity



Six
months ended April 30, 2005



(In thousands)



(Unaudited)



|                                                                     |  |              |   |  |                  |         |                                            |  |   |         |  |   |       |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------------ | - |  | ---------------- | ------- | ------------------------------------------ |  | - | ------- |  | - | ----- | - |  | - | ------- | -
|                                                                     |  | Common Stock |   |  | RetainedEarnings |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total   | 
|                                                                     |  | Shares       |   |  | Amount           |         |                                            |  |  
|Balance at October 31, 2004                                          |  | 63,759       |   |  | $                | 234,724 |                                            |  | $ | 127,877 |  | $ | 1,297 |   |  | $ | 363,898 |  
|Shares repurchased                                                   |  | (1,016       | ) |  |                  | (8,516  | )                                          |  |   |         |  |   |       |   |  |   | (8,516  | )
|Purchases under Stock Purchase Plan                                  |  | 177          |   |  |                  | 1,252   |                                            |  |   |         |  |   |       |   |  |   | 1,252   |  
|Exercise of stock options, including tax benefit of $72              |  | 101          |   |  |                  | 604     |                                            |  |   |        |  |   |      |   |  |   | 604     |  
|Comprehensive income:                                                |  |              |   |  |                  |         |                                            |  |   |         |  |   |       |   |  |   |         |  
|Net income                                                           |  |             |   |  |                  |        |                                            |  |   | 463     |  |   |      |   |  |   |        |  
|Change in unrealized investment gains:                               |  |              |   |  |                  |         |                                            |  |   |         |  |   |       |   |  |   |         |  
|Unrealized investment losses, net of tax of $2                       |  |             |   |  |                  |        |                                            |  |   |        |  |   | (4    | ) |  |   |        |  
|Change in foreign currency translation adjustment, net of tax of $60 |  |             |   |  |                  |        |                                            |  |   |        |  |   | 112   |   |  |   |        |  
|Total comprehensive income                                           |  |             |   |  |                  |        |                                            |  |   |        |  |   |      |   |  |   | 571     |  
|                                                                     |  |              |   |  |                  |         |                                            |  |   |         |  |   |       |   |  |   |         |  
|Balance at April 30, 2005                                            |  | 63,021       |   |  | $                | 228,064 |                                            |  | $ | 128,340 |  | $ | 1,405 |   |  | $ | 357,809 |  
|                                                                     |  |              |   |  |                  |         |                                            |  |   |         |  |   |       |   |  |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



4



---



Advanced Digital
Information Corporation



Notes to Interim Condensed
Consolidated Financial Statements



April 30, 2005



(Unaudited)



Note 1. Financial statement presentation



Basis of presentation



The accompanying condensed consolidated financial statements are unaudited
and include the accounts of the Company and its subsidiaries. All significant intercompany transactions, balances and profits have been eliminated in consolidation.



The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial
statements included in our Annual Report on Form 10-K for the year ended October 31, 2004. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting
principles. In our opinion all normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the three and six month periods ended April 30, 2005 are not
necessarily indicative of results to be expected for a full year.



Restatement of previously issued financial statements



Our financial statements for the three and six months ended April 30, 2004 have been restated to correct our accounting for our investment in a private technology venture limited partnership. During the fourth quarter
of fiscal 2004, we determined that our investment in Frazier Technology Venture Fund I (FTVI), a limited partnership, had been improperly accounted for since fiscal 2000. We initially accounted for our investment under the cost method since our
ownership interest in FTVI is less than 20% and we do not have significant influence over the partnerships operating and financial policies. Subsequently it was determined that the equity method is appropriate under EITF Topic D-46,
Accounting for Limited Partnership Investments, because our limited partnership ownership interest is greater than 5%. The following table summarizes the impact of this restatement on our financial statements as reported in the Form 10-Q
for the three and six months ended April 30, 2004 (in thousands, except for per share data):



|                                                           |  |                                  |         |   |                                |   |         |            |  |            |         |  |   |        
|---------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------ | - | ------- | ---------- |  | ---------- | ------- |  | - | -------
|                                                           |  | Three months endedApril 30, 2004 |         |   | Six months endedApril 30, 2004
|                                                           |  | AsReported                       |         |   | AsRestated                     |   |         | AsReported |  | AsRestated
|Investments                                                |  | $                                | 4,021   |   |                                | $ | 3,005   |            |  | $          | 4,021   |  | $ | 3,005  
|Deferred income taxes, non current                         |  | $                                | 2,515   |   |                                | $ | 2,159   |            |  | $          | 2,515   |  | $ | 2,159  
|Retained earnings                                          |  | $                                | 124,250 |   |                                | $ | 123,590 |            |  | $          | 124,250 |  | $ | 123,590
|Gain (loss) on securities and investment transactions, net |  | $                                |        |   |                                | $ | (25     | )          |  | $          | 871     |  | $ | 636    
|Other income (expense)                                     |  | $                                | (536    | ) |                                | $ | (561    | )          |  | $          | 1,665   |  | $ | 1,430  
|Provision (benefit) for income taxes                       |  | $                                | (652    | ) |                                | $ | (661    | )          |  | $          | 1,308   |  | $ | 1,225  
|Net income (loss)                                          |  | $                                | (1,304  | ) |                                | $ | (1,320  | )          |  | $          | 3,600   |  | $ | 3,448  
|Basic net income (loss) per share                          |  | $                                | (0.02   | ) |                                | $ | (0.02   | )          |  | $          | 0.06    |  | $ | 0.05   
|Diluted net income (loss) per share                        |  | $                                | (0.02   | ) |                                | $ | (0.02   | )          |  | $          | 0.06    |  | $ | 0.05   



5



---

Reclassifications



During the three months ended January 31, 2005, we concluded it was appropriate to classify our auction rate marketable
securities as current investments. Previously, we classified these securities as cash equivalents because of an interest rate reset feature that provides short-term liquidity. Accordingly, we have revised the classification to report these
securities as current investments in the line item short-term marketable securities in the Condensed Consolidated Balance Sheet as of October 31, 2004. Further, we have also made corresponding adjustments to our Condensed Consolidated Statement of
Cash Flows for the period ended April 30, 2004 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect cash flows
from operations or from financing activities in our previously reported Condensed Consolidated Statements of Cash Flows or our previously reported Condensed Consolidated Statements of Income for any period.



As of April 30, 2005 and October 31, 2004, $187.7 million and $132.2 million
of these current investments are classified as short-term marketable securities on our Condensed Consolidated Balance Sheet. For the six months ended April 30, 2005 and 2004, net cash used in investing activities related to these current investments
is $53.5 million and $33.7 million, respectively, in our Condensed Consolidated Statements of Cash Flows.



During the three months ended January 31, 2005, we began presenting revenue and cost of revenue separately for products and services because in fiscal
2005 our annual service revenue is expected to exceed 10% of our total revenue for the first time. We have made a corresponding adjustment to the Condensed Consolidated Income Statement for the three and six months ended April 30, 2004. Our
accounting policy for product and service revenue and cost of revenue is described in Note 2 below.



No other prior year information has been reclassified to conform to the current year presentation.



Note 2. Summary of significant accounting policies



The significant accounting policies used in the preparation of our
consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended October 31, 2004. New significant accounting policies for fiscal 2005 are disclosed below.



6



---

Product and service revenue and cost of revenue



We have presented revenue and cost of revenue separately for products and
services beginning in the first quarter of fiscal 2005. Product revenue includes sales of hardware and software data storage solutions, as well as installation and professional services related to these products. Service revenue is derived from
contracts for field support provided to our branded customers and not otherwise included in the base price of the product. Service does not include revenue or costs associated with basic warranty support on new branded or OEM products. We classify
expenses as costs of service revenue by estimating the portion of our total cost of revenue that relates to providing field support to our customers under contract. These estimates are based upon a variety of factors, including the nature of the
support activity, the cost of stocking and shipping service parts for maintenance and the level of infrastructure required to support the activities that comprise service revenue. In the event our service business changes, our estimates of cost of
service revenue may be impacted.



Auction rate securities



At April 30, 2005 and October 31, 2004, we held
$187.7 million and $132.2 million, respectively, of investments in auction rate marketable securities. Our investments in these securities are recorded at fair value, which approximates cost due to the variable interest rates of these securities,
which typically reset every 7 to 49 days. As a result, we have no unrealized or realized investment gains or losses from these auction rate securities. Additionally, despite the long-term nature of their stated contractual maturities, we have the
ability to quickly liquidate these securities within the current operating cycle and therefore have classified them as short-term marketable securities in the Condensed Consolidated Balance Sheet. All income generated from these auction rate
securities is recorded as interest income.



Note 3. Stock-based compensation
plans



Stock-based compensation plans are accounted for
using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and by FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation
 an Interpretation of APB Opinion No. 25. No stock-based compensation cost is reflected in net income (loss), as all stock options granted under those plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, our net income (loss) and basic and diluted net income (loss) per share would have been changed to the pro forma amounts indicated below (in thousands, except for per share data):



|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ----- | - | ------------------------- | - | ------ | ---- |  | - | ---------- | - |  | - | -----
|                                                                                                                   |  | Three months endedApril 30, |       |   | Six months endedApril 30,
|                                                                                                                   |  | 2005                        |       |   | 2004                      |   |        | 2005 |  |   | 2004      
|                                                                                                                   |  |                             |       |   | (Restated)                |   |        |      |  |   | (Restated)
|Net income (loss), as reported                                                                                     |  | $                           | 733   |   |                           | $ | (1,320 | )    |  | $ | 463        |   |  | $ | 3,448
|Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax |  |                             | 1,714 |   |                           |   | 1,757  |      |  |   | 3,484      |   |  |   | 3,398
|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|Pro forma net income (loss)                                                                                        |  | $                           | (981  | ) |                           | $ | (3,077 | )    |  | $ | (3,021     | ) |  | $ | 50   
|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|Basic net income (loss) per share:                                                                                 |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|As reported                                                                                                        |  | $                           | 0.01  |   |                           | $ | (0.02  | )    |  | $ | 0.01       |   |  | $ | 0.05 
|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|Pro forma                                                                                                          |  | $                           | (0.02 | ) |                           | $ | (0.05  | )    |  | $ | (0.05      | ) |  | $ | 0.00 
|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|Diluted net income (loss) per share:                                                                               |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|As reported                                                                                                        |  | $                           | 0.01  |   |                           | $ | (0.02  | )    |  | $ | 0.01       |   |  | $ | 0.05 
|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      
|Pro forma                                                                                                          |  | $                           | (0.02 | ) |                           | $ | (0.05  | )    |  | $ | (0.05      | ) |  | $ | 0.00 
|                                                                                                                   |  |                             |       |   |                           |   |        |      |  |   |            |   |  |   |      



7



---

All of the options granted during the three and six months ended April 30, 2005 and 2004 expire after ten
years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results for options granted during the periods presented:



|                                         |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|---------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                         |  | Three months endedApril 30, |      |   | Six months endedApril 30, |  
|                                         |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Weighted average risk free interest rate |  |                             | 4.11 | % |                           |   | 3.14 | %    |  |   | 3.95 | % |  |   | 3.42 | %
|Expected dividend yield                  |  |                             | 0    | % |                           |   | 0    | %    |  |   | 0    | % |  |   | 0    | %
|Expected volatility                      |  |                             | 75   | % |                           |   | 79   | %    |  |   | 76   | % |  |   | 80   | %
|Expected life (in years)                 |  |                             | 6.0  |   |                           |   | 6.0  |      |  |   | 6.0  |   |  |   | 6.0  |  
|Weighted average fair value              |  | $                           | 5.96 |   |                           | $ | 9.78 |      |  | $ | 6.24 |   |  | $ | 9.14 |  



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



|                                         |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|---------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                         |  | Three months endedApril 30, |      |   | Six months endedApril 30, |  
|                                         |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Weighted average risk free interest rate |  |                             | 3.09 | % |                           |   | 1.01 | %    |  |   | 3.09 | % |  |   | 1.01 | %
|Expected dividend yield                  |  |                             | 0    | % |                           |   | 0    | %    |  |   | 0    | % |  |   | 0    | %
|Expected volatility                      |  |                             | 48   | % |                           |   | 60   | %    |  |   | 48   | % |  |   | 60   | %
|Expected life (in years)                 |  |                             | 0.5  |   |                           |   | 0.5  |      |  |   | 0.5  |   |  |   | 0.5  |  
|Weighted average fair value              |  | $                           | 2.35 |   |                           | $ | 3.70 |      |  | $ | 2.35 |   |  | $ | 3.70 |  



8



---

Note 4. Assets held for sale



In May 2005, we completed a sale-leaseback transaction for our facility in Böehmenkirch, Germany, where we manufacture
certain of our largest libraries and perform service operations for several products. Assets held for sale at April 30, 2005 relate to this transaction and are comprised of the land, building and leasehold improvements in Böehmenkirch. We sold
the facility for 3.5 million euros, and the total gain on this sale is approximately $3.2 million, $2.5 million of which has been recorded on the date of sale in the third quarter of fiscal 2005. The remaining gain will be deferred and recognized
over the term of our lease with the purchaser. Our lease ends in December 2007, though we have the option to extend the lease one year past the original expiration date.



Note 5. Benchmark outsourcing agreement



In November 2003, we expanded an existing outsource manufacturing relationship with Benchmark Electronics, Inc. to include final assembly and test of a
significant portion of our entry-level and workgroup tape automation product line. In connection with this expansion, we transferred to Benchmark approximately 150 team members associated with manufacturing, test and supply chain management.
Benchmark assumed the lease on our Redmond, Washington manufacturing facility and purchased inventory associated with the product line and property, plant and equipment related to the operation for $15.1 million in cash. There was no gain or loss
recorded on this transaction.



Note 6. Earnings per share



For the three months ended April 30, 2004, options to purchase 3,860,000
shares of common stock, which would be equal to 857,000 adjusted weighted average shares, were not included in the computation of diluted net loss per share because they are antidilutive. The following table sets forth the computation of basic and
diluted net income (loss) per share for the three and six months ended April 30, 2005 and 2004 (in thousands, except for per share data):



|                                                                                                             |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ---------- | ------------------------- | ------ | ---- |  | ---------- | ------ |  | - | ------
|                                                                                                             |  | Three months endedApril 30, |        |            | Six months endedApril 30,
|                                                                                                             |  | 2005                        |        | 2004       |                           |        | 2005 |  | 2004      
|                                                                                                             |  |                             |        | (Restated) |                           |        |      |  | (Restated)
|Numerator:                                                                                                   |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|Net income (loss)                                                                                            |  | $                           | 733    |            | $                         | (1,320 | )    |  | $          | 463    |  | $ | 3,448 
|                                                                                                             |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|Denominator:                                                                                                 |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|Denominator for basic net income (loss) per shareweighted average shares                                    |  |                             | 63,313 |            |                           | 64,360 |      |  |            | 63,556 |  |   | 64,084
|Dilutive potential common shares from Team Member (employee) stock options and warrants                      |  |                             | 247    |            |                           |       |      |  |            | 336    |  |   | 1,156 
|                                                                                                             |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|Denominator for diluted net income (loss) per shareadjusted weighted average shares and assumed conversions |  |                             | 63,560 |            |                           | 64,360 |      |  |            | 63,892 |  |   | 65,240
|                                                                                                             |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|Basic net income (loss) per share                                                                            |  | $                           | 0.01   |            | $                         | (0.02  | )    |  | $          | 0.01   |  | $ | 0.05  
|                                                                                                             |  |                             |        |            |                           |        |      |  |            |        |  |   |       
|Diluted net income (loss) per share                                                                          |  | $                           | 0.01   |            | $                         | (0.02  | )    |  | $          | 0.01   |  | $ | 0.05  
|                                                                                                             |  |                             |        |            |                           |        |      |  |            |        |  |   |       



9



---

Note 7. Inventories



Inventories are comprised of the following (in thousands):



|                                     |  |               |         |   |                 |   |         |  
|------------------------------------ |  | ------------- | ------- | - | --------------- | - | ------- | -
|                                     |  | April 30,2005 |         |   | October 31,2004 |  
|Finished goods                       |  | $             | 20,097  |   |                 | $ | 27,976  |  
|Work-in-process                      |  |               | 329     |   |                 |   | 173     |  
|Raw materials                        |  |               | 22,305  |   |                 |   | 23,870  |  
|                                     |  |               |         |   |                 |   |         |  
|                                     |  |               | 42,731  |   |                 |   | 52,019  |  
|Allowance for inventory obsolescence |  |               | (12,269 | ) |                 |   | (13,291 | )
|                                     |  |               |         |   |                 |   |         |  
|                                     |  | $             | 30,462  |   |                 | $ | 38,728  |  
|                                     |  |               |         |   |                 |   |         |  



Note 8. Investments in short-term
marketable securities and other investments



At April 30,
2005, the cost basis of the marketable securities we held was $192,741,000 and the fair value was $192,729,000. The difference between the cost basis and fair value of $12,000, net of taxes of $4,000, is recorded as an unrealized investment loss. At
April 30, 2005, marketable securities comprised investment-grade government and commercial debt securities purchased in accordance with our investment policy to generate a higher yield than cash equivalents. Consistent with our investment policy,
effective investment maturities do not exceed 24 months at the date of purchase. The objectives of our investment policy are safety and preservation of funds, liquidity sufficient to meet cash flow requirements and attainment of a market rate of
return. We did not sell any marketable securities during the three or six month periods ended April 30, 2005 or the three month period ended April 30, 2004. During the six month period ended April 30, 2004, sales of marketable equity securities
resulted in a gain of $48,000.



We also hold strategic
investments in two private technology venture limited partnerships that are accounted for under the equity method. During the three months ended April 30, 2005 and 2004, we recorded losses of $36,000 and $25,000, respectively, reflecting our pro
rata share of the limited partnerships net losses. During the six months ended April 30, 2005 and 2004, we recorded losses of $2,000 and $235,000, respectively. These loss amounts are primarily based on the general partners estimates of
the fair value of non-marketable securities held by the partnerships and, to a lesser extent, realized gains and losses from the partnerships disposal of securities.



From time to time, we make other strategic investments that are accounted for under the cost method. We review these
non-marketable investments on a regular basis to determine if there has been any impairment of value which is other than temporary by reviewing their financial information, gaining knowledge of any new financing or other business agreements and
assessing their operating viability. We have not recorded any impairment write downs during the three or six months ended April 30, 2005 or 2004. During the six months ended April 30, 2004, we recorded additional gains on securities transactions of
$823,000 as a result of receiving additional shares of marketable equity securities under earnout and escrow provisions of a November 2002 transaction in which we received $8.4 million of cash and marketable equity securities for one of our
strategic investments. There was no such gain during the three months ended April 30, 2004.



Note 9. Indemnifications and warranties



In the normal course of business, we are party to a variety of agreements under which we may be obligated to indemnify the other party for certain matters. These obligations typically arise in contracts where we
customarily agree to hold the other party harmless against losses arising from a breach of representations or covenants for certain matters such as title to assets and intellectual property rights



10



---

associated with the sale of products. The duration of these indemnifications varies, and in certain cases, is indefinite. In each of these circumstances,
payment by us depends upon the other party making an adverse claim according to the procedures outlined in the particular agreement, which procedures generally allow us to challenge the other partys claims. In certain instances, we may have
recourse against third parties for payments made by us.



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



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



Changes in our accrued warranty balance for the six months ended April 30, 2005 are as follows (in thousands):



|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Balance at October 31, 2004    |  | $ | 6,932  |  
|Accruals for warranties issued |  |   | 5,430  |  
|Settlements during the period  |  |   | (5,834 | )
|                               |  |   |        |  
|Balance at April 30, 2005      |  | $ | 6,528  |  
|                               |  |   |        |  



Note 10. Exit costs



Research and development facility closures



In February 2005, we announced plans to close our research and development
facilities in Ithaca, New York and Santa Clara, California. The purpose of these closures is to improve customer service, optimize efficiency and lower our cost structure by streamlining and integrating overhead from several acquisitions. Both
closures are expected to be completed during the fourth quarter of fiscal 2005. The charges related to these closures are recorded in research and development expense. The activity for the six months ended April 30, 2005 is as follows (in
thousands):



|                            |  |                                        |      |   |                        |   |             |  |   |       |   |  |   |      |  
|--------------------------- |  | -------------------------------------- | ---- | - | ---------------------- | - | ----------- |  | - | ----- | - |  | - | ---- | -
|                            |  | Workforcereduction andrelocation costs |      |   | Facility-related costs |   | Other costs |  |   | Total |  
|Balance at October 31, 2004 |  | $                                      |     |   |                        | $ |            |  | $ |      |   |  | $ |     |  
|Charges                     |  |                                        | 421  |   |                        |   |            |  |   | 5     |   |  |   | 426  |  
|Cash payments               |  |                                        | (189 | ) |                        |   |            |  |   | (5    | ) |  |   | (194 | )
|                            |  |                                        |      |   |                        |   |             |  |   |       |   |  |   |      |  
|Balance at April 30, 2005   |  | $                                      | 232  |   |                        | $ |            |  | $ |      |   |  | $ | 232  |  
|                            |  |                                        |      |   |                        |   |             |  |   |       |   |  |   |      |  



11



---

We expect to record additional charges related to the closures during the third and fourth quarters of
fiscal 2005, with up to $300,000 in future years. Further, we expect the majority of the additional charges will be accrued during the fourth quarter upon our exit of both facilities. We currently anticipate total additional charges as follows (in
thousands):



|                                         |  |   |      
|---------------------------------------- |  | - | -----
|Workforce reduction and relocation costs |  | $ | 400  
|Facility-related costs                   |  |   | 1,800
|Other costs                              |  |   | 200  
|                                         |  |   |      
|                                         |  | $ | 2,400
|                                         |  |   |      



The facility-related costs exclude the
impact of potential future sublease income, which has yet to be determined.



European shared services reorganization



In February 2005, we began a reorganization of our European operations to create a shared services center in Switzerland. The purpose of this reorganization is to improve our ability to meet our customers needs;
centralize our administrative support functions and operating and financial controls; streamline our reporting; and improve our operating cost model by streamlining and integrating overhead from several acquisitions. The reorganization will impact
administrative team members in our France and Germany offices, some of whom will be relocating elsewhere within the Companys European operations. The reorganization is expected to be complete by the end of the calendar year. The charges
related to the reorganization are recorded in general and administrative expense. The activity for the six months ended April 30, 2005 is as follows (in thousands):



|                            |  |                                        |     |             |   |       |  |   |    
|--------------------------- |  | -------------------------------------- | --- | ----------- | - | ----- |  | - | ---
|                            |  | Workforcereduction andrelocation costs |     | Other costs |   | Total
|Balance at October 31, 2004 |  | $                                      |    |             | $ |      |  | $ |   
|Charges                     |  |                                        | 104 |             |   |      |  |   | 104
|Cash payments               |  |                                        |    |             |   |      |  |   |   
|                            |  |                                        |     |             |   |       |  |   |    
|Balance at April 30, 2005   |  | $                                      | 104 |             | $ |      |  | $ | 104
|                            |  |                                        |     |             |   |       |  |   |    



We expect to record
additional charges related to the reorganization primarily during the third quarter of fiscal 2005. We currently anticipate total additional charges as follows (in thousands):



|                                         |  |   |    
|---------------------------------------- |  | - | ---
|Workforce reduction and relocation costs |  | $ | 450
|Facility-related costs                   |  |   |   
|Other costs                              |  |   | 100
|                                         |  |   |    
|                                         |  | $ | 550
|                                         |  |   |    



Other



During fiscal 2001, we recorded a $2,318,000
liability to reflect anticipated costs to exit a manufacturing and development site in Englewood, Colorado which was replaced by a larger facility in Englewood in fiscal 2002. These accrued costs represent our estimate of the net amount of lease
payments related to unused capacity of the old facility. Changes in this accrual for the three and six months ended April 30, 2005 are as follows (in thousands):



|                               |  |                                 |     |   |                               |   |      |  
|------------------------------ |  | ------------------------------- | --- | - | ----------------------------- | - | ---- | -
|                               |  | Three monthsended April30, 2005 |     |   | Six monthsended April30, 2005 |  
|Balance at beginning of period |  | $                               | 416 |   |                               | $ | 497  |  
|Cash payments                  |  |                                 | (86 | ) |                               |   | (167 | )
|                               |  |                                 |     |   |                               |   |      |  
|Balance at April 30, 2005      |  | $                               | 330 |   |                               | $ | 330  |  
|                               |  |                                 |     |   |                               |   |      |  



12



---

We believe the remaining accrual at April 30, 2005 is adequate to cover the cost of unused capacity in
the facility through the end of the lease term in December 2006.



Note 11.
Recent accounting pronouncements



In March 2004, the EITF
reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity
securities accounted for under SFAS 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In September 2004,
the FASB approved the issuance of FASB Staff Position EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that
are impaired. The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of operations.



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



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment (Revised 2004). This statement addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for the companys equity instruments or liabilities
that are based on the fair value of the companys equity securities or may be settled by the issuance of these securities. SFAS 123R eliminates the ability to account for share-based compensation using APB 25 and generally requires that such
transactions be accounted for using a fair value method. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2005 and will become effective for ADIC beginning in fiscal 2006. We
have not yet determined which transition method we will use to adopt SFAS 123R. Assuming the modified prospective method with no restatement is used, we will record stock compensation expense of approximately $5.5 million between the first quarter
of fiscal 2006 through fiscal 2009 for stock awards outstanding as of April 30, 2005. Any additional impact that the adoption of this statement will have on our financial position and results of operations will be determined by share-based payments
granted in future periods and the assumptions on which the value of those share-based payments is based.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets  an Amendment of APB
Opinion No. 29. This statement amends APB 29 to eliminate an exception to the fair value measurement principle for nonmonetary exchanges of



13



---

similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions
of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and will become effective for ADIC beginning in the fourth quarter of fiscal 2005. The adoption of this accounting principle is
not expected to have a significant impact on our financial position or results of operations.



14



---

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



This Form 10-Q, including the following discussion and analysis, contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements can be identified by references to future events, circumstances, results or actions. They often contain words such as expect, anticipate,
believe, may, will, could, or should, or similar expressions and variations of these words. Readers are cautioned to not place undue reliance on these forward-looking statements because all
forward-looking statements are inherently uncertain as they relate to future events. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that may subsequently arise.



A number of risks and uncertainties could cause our actual results to
differ materially from those contained in the forward-looking statements. Risk factors are detailed in our Annual Report on Form 10-K for the year ended October 31, 2004 and are incorporated herein by reference. They include risks relating to
changes in global economic and political conditions; increased competition and pricing pressures; our need to continually develop new products; uncertain results of research and development spending; reliance on tape technology for a substantial
portion of our revenue; our strategy to extend products and services beyond the tape library market; our dependence on key suppliers and contract manufacturers; our concentration of manufacturing in one location; our reliance on indirect sales
channels and OEM sales; litigation risks; product liability risks; our ability to retain key personnel; ongoing service obligations; the volatility of our stock price; antitakeover provisions that make it difficult for us to be acquired; and
international expansion, regulatory compliance and foreign currency fluctuations.



General



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



Revenues for the second quarter of fiscal 2005 declined 4% from both the same period a year ago and the first quarter of fiscal 2005. These decreases were primarily due to a drop in sales to OEM customers, resulting from an anticipated
decrease in the sale of certain entry-level products. We anticipate that our OEM revenues will resume growth after we begin making significant shipments of new OEM products that we expect to release later this fiscal year. Strong branded sales
offset a portion of the decrease in OEM revenues, as service revenue and sales of enterprise-class products, which include tape and disk-based offerings as well software, increased compared to the same quarter last year. Branded sales represented
60% of revenue, the highest level since the third quarter of fiscal 2002. Despite the decrease in revenue, operating income improved $1.5 million compared to both the second quarter of fiscal 2004 and the first quarter of fiscal 2005. Gross profit
for the quarter was at its highest level since the end of fiscal 2003 primarily as a result of improved sales channel and product mix consisting of higher branded and enterprise-class product sales and increasing utilization rates for our global
services personnel and parts infrastructure, the effects of which were partially offset by lower product sales volumes. During the quarter, sales and marketing expenses decreased compared to the same quarter a year ago primarily due to a decline in
sales promotion costs related to the timing of product introductions. Research and development expenses increased during the second quarter of fiscal 2005 compared to 2004 due to a combination of severance, relocation and other exit costs related to
the planned fourth quarter



15



---

closures of our Ithaca, New York and Santa Clara, California research and development facilities and higher material costs associated with product
development efforts for products expected to be released later this fiscal year. Our general and administrative expenses during the quarter increased modestly compared to the same quarter in fiscal 2004 largely due to higher professional services
fees related to our first year of Sarbanes-Oxley Section 404 compliance in fiscal 2005 and to support ongoing tax and business strategy planning.



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



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



During
the second quarter of fiscal 2005, we announced plans to close our research and development facilities in Ithaca, New York and Santa Clara, California and began a reorganization of our European operations. The purpose of these changes is to improve
customer service, centralize administrative support functions in a shared services center, optimize efficiency, streamline reporting and lower our cost structure by streamlining and integrating overhead from several acquisitions. We expect the
domestic facilities closures to be completed during the fourth quarter of fiscal 2005 and the European shared services reorganization to be completed by the end of the calendar year. During the second quarter, we recorded approximately $500,000 of
expenses related to these restructurings. We expect to incur additional costs of approximately $3 million for these restructurings, the majority of which will be recorded during the remainder of fiscal 2005.



In May 2005, we completed a sale-leaseback transaction for our facility in
Böehmenkirch, Germany, where we manufacture certain of our largest libraries and perform service operations for several products. We sold the facility for 3.5 million euros, and the total gain on this sale is approximately $3.2 million, $2.5
million of which has been recorded on the date of sale in the third quarter of fiscal 2005. The remaining gain will be deferred and recognized over the term of our lease with the purchaser. Our lease ends in December 2007, though we have the option
to extend the lease one year past the original expiration date.



16



---

During the first quarter of fiscal 2006, we will begin recording the fair value of our share-based
compensation in our financial statements in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment (Revised 2004). We have not yet determined which transition method we will use to adopt SFAS 123R.
Assuming the modified prospective method with no restatement is used, we will record stock compensation expense of approximately $5.5 million between the first quarter of fiscal 2006 through fiscal 2009 for stock awards outstanding as of April 30,
2005. A substantial majority of this $5.5 million of future expense relates to stock options with exercise prices above the fair market value of our common stock as of the end of the second quarter. Any additional impact that the adoption of this
statement will have on our financial position and results of operations will be determined by share-based payments granted in future periods and the assumptions on which the value of those share-based payments is based.



Our financial statements for the three and six months ended April 30, 2004
have been restated to correct our accounting for our investment in a private technology venture limited partnership. During the fourth quarter of fiscal 2004, we determined that our investment in Frazier Technology Venture Fund I (FTVI), a limited
partnership, had been improperly accounted for since fiscal 2000. We initially accounted for our investment under the cost method since our ownership interest in FTVI is less than 20% and we do not have significant influence over the
partnerships operating and financial policies. Subsequently it was determined that the equity method is appropriate under EITF Topic D-46, Accounting for Limited Partnership Investments, because our limited partnership ownership
interest is greater than 5%. See Note 1 of the Notes to Interim Condensed Consolidated Financial Statements for additional information. The following discussion and analysis gives effect to the restatement.



During the first quarter of fiscal 2005, we began presenting revenue and cost
of revenue separately for products and services because in fiscal 2005 our annual service revenue is expected to exceed 10% of our total revenue for the first time. We have made a corresponding adjustment to the Condensed Consolidated Income
Statement for the three and six months ended April 30, 2004. See Notes 1 and 2 of the Notes to Interim Condensed Consolidated Financial Statements for additional information. The following discussion and analysis gives effect to the adjustment.



17



---

Results of Operations



The following table presents our results of operations for the second quarter of fiscal 2005 and 2004. Percentage of revenue data is stated as a
percentage of total revenue, except for product and service cost of revenue, which is stated as percentage of the applicable revenue type (in thousands, except for percentages):



|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|--------------------------------------------------------- |  | ---------------------------- | ------- | - | ----------- | --- | - | ---------- | - | ------- | ----------- |  | --- | -
|                                                          |  | Three months ended April 30, |        
|                                                          |  | 2005                         |         |   | 2004        |    
|                                                          |  | Dollars                      |         |   | % ofrevenue |     |   | Dollars    |   |         | % ofrevenue | 
|                                                          |  |                              |         |   |             |     |   | (Restated) |   |         |             | 
|Revenue:                                                  |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Product                                                   |  | $                            | 92,047  |   |             | 87  | % |            | $ | 99,828  |             |  | 90  | %
|Service                                                   |  |                              | 14,124  |   |             | 13  | % |            |   | 11,239  |             |  | 10  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|                                                          |  |                              | 106,171 |   |             | 100 | % |            |   | 111,067 |             |  | 100 | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Cost of revenue:                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Product                                                   |  |                              | 63,268  |   |             | 69  | % |            |   | 70,999  |             |  | 71  | %
|Service                                                   |  |                              | 10,167  |   |             | 72  | % |            |   | 8,743   |             |  | 78  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|                                                          |  |                              | 73,435  |   |             | 69  | % |            |   | 79,742  |             |  | 72  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Gross profit                                              |  |                              | 32,736  |   |             | 31  | % |            |   | 31,325  |             |  | 28  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Operating expenses:                                       |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Sales and marketing                                       |  |                              | 16,227  |   |             | 15  | % |            |   | 17,345  |             |  | 16  | %
|General and administrative                                |  |                              | 6,418   |   |             | 6   | % |            |   | 6,080   |             |  | 5   | %
|Research and development                                  |  |                              | 10,050  |   |             | 9   | % |            |   | 9,320   |             |  | 8   | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|                                                          |  |                              | 32,695  |   |             | 31  | % |            |   | 32,745  |             |  | 29  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Operating profit (loss)                                   |  |                              | 41      |   |             | 0   | % |            |   | (1,420  | )           |  | -1  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Other income (expense):                                   |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Interest income                                           |  |                              | 1,270   |   |             | 1   | % |            |   | 519     |             |  | 0   | %
|Loss on securities and investment transactions, net       |  |                              | (36     | ) |             | 0   | % |            |   | (25     | )           |  | 0   | %
|Foreign currency transaction losses, net                  |  |                              | (225    | ) |             | 0   | % |            |   | (961    | )           |  | -1  | %
|Other                                                     |  |                              | (202    | ) |             | 0   | % |            |   | (94     | )           |  | 0   | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|                                                          |  |                              | 807     |   |             | 1   | % |            |   | (561    | )           |  | -1  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Income (loss) before provision (benefit) for income taxes |  |                              | 848     |   |             | 1   | % |            |   | (1,981  | )           |  | -2  | %
|Provision (benefit) for income taxes                      |  |                              | 115     |   |             | 0   | % |            |   | (661    | )           |  | -1  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  
|Net income (loss)                                         |  | $                            | 733     |   |             | 1   | % |            | $ | (1,320  | )           |  | -1  | %
|                                                          |  |                              |         |   |             |     |   |            |   |         |             |  |     |  



18



---

The following table presents our results of operations for the first six months of fiscal 2005 and 2004.
Percentage of revenue data is stated as a percentage of total revenue, except for product and service cost of revenue, which is stated as percentage of the applicable revenue type (in thousands, except for percentages):



|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|---------------------------------------------------------- |  | -------------------------- | ------- | - | ----------- | --- | - | ---------- | - | ------- | ----------- |  | --- | -
|                                                           |  | Six months ended April 30, |        
|                                                           |  | 2005                       |         |   | 2004        |    
|                                                           |  | Dollars                    |         |   | % ofrevenue |     |   | Dollars    |   |         | % ofrevenue | 
|                                                           |  |                            |         |   |             |     |   | (Restated) |   |         |             | 
|Revenue:                                                   |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Product                                                    |  | $                          | 189,677 |   |             | 87  | % |            | $ | 207,762 |             |  | 91  | %
|Service                                                    |  |                            | 27,314  |   |             | 13  | % |            |   | 21,610  |             |  | 9   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|                                                           |  |                            | 216,991 |   |             | 100 | % |            |   | 229,372 |             |  | 100 | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Cost of revenue:                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Product                                                    |  |                            | 131,803 |   |             | 69  | % |            |   | 146,453 |             |  | 70  | %
|Service                                                    |  |                            | 19,659  |   |             | 72  | % |            |   | 17,275  |             |  | 80  | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|                                                           |  |                            | 151,462 |   |             | 70  | % |            |   | 163,728 |             |  | 71  | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Gross profit                                               |  |                            | 65,529  |   |             | 30  | % |            |   | 65,644  |             |  | 29  | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Operating expenses:                                        |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Sales and marketing                                        |  |                            | 32,909  |   |             | 15  | % |            |   | 31,417  |             |  | 14  | %
|General and administrative                                 |  |                            | 12,691  |   |             | 6   | % |            |   | 12,284  |             |  | 5   | %
|Research and development                                   |  |                            | 21,307  |   |             | 10  | % |            |   | 18,700  |             |  | 8   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|                                                           |  |                            | 66,907  |   |             | 31  | % |            |   | 62,401  |             |  | 27  | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Operating profit (loss)                                    |  |                            | (1,378  | ) |             | -1  | % |            |   | 3,243   |             |  | 1   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Other income (expense):                                    |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Interest income                                            |  |                            | 2,315   |   |             | 1   | % |            |   | 1,061   |             |  | 0   | %
|Gain (loss) on securities and investment transactions, net |  |                            | (2      | ) |             | 0   | % |            |   | 636     |             |  | 0   | %
|Foreign currency transaction losses, net                   |  |                            | (132    | ) |             | 0   | % |            |   | (87     | )           |  | 0   | %
|Other                                                      |  |                            | (287    | ) |             | 0   | % |            |   | (180    | )           |  | 0   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|                                                           |  |                            | 1,894   |   |             | 1   | % |            |   | 1,430   |             |  | 1   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Income before provision for income taxes                   |  |                            | 516     |   |             | 0   | % |            |   | 4,673   |             |  | 2   | %
|Provision for income taxes                                 |  |                            | 53      |   |             | 0   | % |            |   | 1,225   |             |  | 1   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  
|Net income                                                 |  | $                          | 463     |   |             | 0   | % |            | $ | 3,448   |             |  | 2   | %
|                                                           |  |                            |         |   |             |     |   |            |   |         |             |  |     |  



Revenue.
Product revenue includes sales of hardware and software data storage solutions, as well as installation and professional services related to these products. Service revenue includes revenue derived from contracts for field support provided to our
branded customers and not otherwise included in the base price of the product. Product revenue decreased 8% during the second quarter of fiscal 2005 and 9% during the first six months of fiscal 2005 compared to the same periods in fiscal 2004. This
decrease is primarily due to lower sales to OEM customers, which decreased 19% from the second quarter of fiscal 2004 and 20% from the first six months of fiscal 2004. This drop in OEM revenue resulted from an anticipated decline in the sale of
certain lower-margin products. Service revenue increased 26% during both the second quarter and first six months of fiscal 2005 compared to the same periods last year. These increases are due to growth in our installed base of products at branded
customers.



Combined product and service revenue decreased 4%
during the second quarter of fiscal 2005 and 5% during the first six months of fiscal 2005 from the comparable periods in fiscal 2004. These decreases are the result of lower sales to OEM customers as described above. During the second quarter of
fiscal 2005, sales to branded customers increased 9% compared to the same period a year ago. ADIC



19



---

branded revenues represented 60% and 53% of sales for the second quarter of fiscal 2005 and 2004, respectively. Revenue from OEM customers comprised 40% and
47% of sales for the second quarter of fiscal 2005 and 2004, respectively. The increase in branded revenue during the second quarter of fiscal 2005 is primarily attributable to a $2.9 million increase in service revenue and higher sales of our
enterprise-class products, which include tape and disk-based offerings as well software. During the six months ended April 30, 2005, sales to branded customers increased 8% compared to the same period a year ago. ADIC branded revenues represented
59% and 52% of sales for the first six months of fiscal 2005 and 2004, respectively. Revenue from OEM customers comprised 41% and 48% of sales for the first six months of fiscal 2005 and 2004, respectively. The increase in branded revenue during the
first six months of fiscal 2005 is primarily attributable to a $5.7 million increase in service revenue and higher sales of our enterprise products. During the third quarter, we expect branded and OEM revenues to be fairly similar to the second
quarter. In the fourth quarter, we anticipate increased revenues and a greater proportion of sales to branded customers.



Gross Profit.Gross profit increased to 31% of revenue for the three months ended April 30, 2005 compared to 28% of revenue for the same period in
fiscal 2004. For the six months ended April 30, 2005, gross profit was 30% of revenue compared to 29% of revenue for the same period in fiscal 2004. Gross profit margins depend on a number of factors, including sales channel and product mix, fixed
infrastructure costs, price competition and tape drive costs. The increase in gross profit as a percentage of sales during the second quarter of fiscal 2005 is primarily the combined result of improved service margins resulting from increasing
utilization rates for our global services personnel and parts infrastructure and an increase in the proportion of product sales to branded customers versus OEM customers. Both of these factors impacted gross margin percentage by approximately the
same amount. The increase in gross profit as a percentage of sales during the first six months of fiscal 2005 is substantially attributable to improved service margins. We expect gross margin will continue to improve throughout fiscal 2005 as we
continue to gain operating leverage on our investment in our service infrastructure and advance our strategy of shifting our customer mix toward our branded channels and shifting the product mix in both our branded and OEM channels toward newer,
more technologically sophisticated products that include elements of our proprietary storage management software and connectivity technology.



Sales and Marketing Expenses. Sales and marketing expenses decreased in absolute dollars and as a percentage of revenue during the second quarter
of fiscal 2005 compared to the second quarter of fiscal 2004 primarily due to a decline in sales promotion costs related to the timing of product introductions. Sales and marketing expenses increased in absolute dollars and as a percentage of
revenue during the first six months of fiscal 2005 compared to the first six months of fiscal 2004 primarily due to increased labor costs related to additional headcount added throughout fiscal 2004 as part of our efforts to expand our sales
channels in order to penetrate new markets, reach new customers and support new product offerings. For all of fiscal 2005, we expect sales and marketing expenditures to increase modestly compared to fiscal 2004 as we leverage the investment we have
made in sales and marketing over the past few years.



General and Administrative Expenses. General and administrative expenses increased in absolute dollars and as a percentage of revenue during the first three and six months of fiscal 2005 compared to the same periods in fiscal 2004
largely due to higher professional services fees related to our first year of Sarbanes-Oxley Section 404 compliance in fiscal 2005 and to support ongoing tax and business strategy planning. We expect general and administrative expenses to continue
to increase during fiscal 2005 compared to fiscal 2004 primarily as a result of higher professional services fees related to our Sarbanes-Oxley Section 404 compliance and costs associated with reorganization among our European operations.



20



---

Research and Development Expenses. Research and development expenses increased in absolute dollars
and as a percentage of revenue during the first three and six months of fiscal 2005 compared to the same periods in fiscal 2004. During the second quarter of fiscal 2005, we recorded $426,000 of severance, relocation and other exit costs related to
the planned fourth quarter closures of our Ithaca, New York and Santa Clara, California research and development facilities. The remainder of the increase in research and development expenses during the second quarter of fiscal 2005 is largely due
to higher material costs associated with product development efforts for products expected to be released later this fiscal year. The remainder of the increase in research and development expenses during the first six months of fiscal 2005 is
primarily due to incremental expenses related to prototype branded and OEM products. These increased prototype expenses do not reflect an increase in headcount or other costs that are likely to be repeated in this fiscal year. We expect to record
additional costs related to our two planned facilities closures during both of the remaining quarters in fiscal 2005. We anticipate research and development spending will be lower during the third quarter, with higher costs in the fourth quarter of
fiscal 2005 when we expect to record the majority of the costs related to the facilities closures.



Other Income (Expense). Other income (expense) primarily consists of interest income, net foreign currency transaction losses and net gain (loss)
on securities and investment transactions. The increase in interest income during both the three and six month periods ended April 30, 2005 is primarily the result of higher interest rates during fiscal 2005. Our foreign currency transaction losses
are primarily the result of the dollar strengthening against the euro during the first half of both fiscal 2005 and 2004. Our net foreign currency transaction losses are impacted by fluctuations in the currency markets, which can cause this number
to vary significantly quarter over quarter. The net losses on securities and investment transactions during the first six months of fiscal 2005 and the second quarters of fiscal 2005 and 2004 consist of our pro rata share of losses from our equity
method investments. During the first six months of fiscal 2004, we recorded securities gains primarily related to the receipt of shares of marketable securities under earnout and escrow provisions of a November 2002 investment transaction in which
one of our strategic investments was converted to cash and marketable securities. These gains were partially offset by our pro rata share of losses on our equity method investments. During the third quarter, we will record a gain of approximately
$2.5 million related to the sale of our facility in Böehmenkirch, Germany in early May. During the remainder of fiscal 2005, we expect interest income to remain flat. Net foreign currency transaction gains (losses) and net gain (loss) on
securities and investment transactions will be driven by prevailing market conditions.



Provision (Benefit) for Income Taxes. In the second quarter of fiscal 2005 we had an effective tax expense of 14%, and in the second quarter of fiscal 2004 we had an effective tax benefit of 33%. In the first
six months of fiscal 2005 and 2004 we had an effective tax expense of 10% and 26%, respectively. The effective tax rate includes tax expense (benefit) for various federal, state and international jurisdictions at statutory rates, which are reduced
for tax benefits relating to our business credits, extraterritorial income exclusion and non-taxable interest income. For the remainder of fiscal 2005, we expect to record a provision for income taxes, whether a benefit or expense, comparable to the
first six months of fiscal 2005; however, our effective tax rate may fluctuate based on a number of factors including variations in estimated taxable income in our geographic locations, unforeseen changes in the valuation of our net deferred tax
assets, changes in our estimates regarding resolution of open tax matters or changes in tax laws or our interpretations of them.



Exit Costs



Research and development facility closures



In February 2005, we announced plans to close our research and development facilities in Ithaca, New York and Santa Clara, California. The purpose of
these closures is to improve customer service,



21



---

optimize efficiency and lower our cost structure by streamlining and integrating overhead from several acquisitions. Both closures are expected to be
completed during the fourth quarter of fiscal 2005. The charges related to these closures are recorded in research and development expense. The activity for the six months ended April 30, 2005 is as follows (in thousands):



|                            |  |                                         |      |   |                       |   |            |  |   |       |   |  |   |      |  
|--------------------------- |  | --------------------------------------- | ---- | - | --------------------- | - | ---------- |  | - | ----- | - |  | - | ---- | -
|                            |  | Workforce reductionand relocation costs |      |   | Facility-relatedcosts |   | Othercosts |  |   | Total |  
|Balance at October 31, 2004 |  | $                                       |     |   |                       | $ |           |  | $ |      |   |  | $ |     |  
|Charges                     |  |                                         | 421  |   |                       |   |           |  |   | 5     |   |  |   | 426  |  
|Cash payments               |  |                                         | (189 | ) |                       |   |           |  |   | (5    | ) |  |   | (194 | )
|                            |  |                                         |      |   |                       |   |            |  |   |       |   |  |   |      |  
|Balance at April 30, 2005   |  | $                                       | 232  |   |                       | $ |           |  | $ |      |   |  | $ | 232  |  
|                            |  |                                         |      |   |                       |   |            |  |   |       |   |  |   |      |  



We expect to record
additional charges related to the closures during the third and fourth quarters of fiscal 2005, with up to $300,000 in future years. Further, we expect the majority of the additional charges will be accrued during the fourth quarter upon our exit of
both facilities. We currently anticipate total additional charges as follows (in thousands):



|                                         |  |   |      
|---------------------------------------- |  | - | -----
|Workforce reduction and relocation costs |  | $ | 400  
|Facility-related costs                   |  |   | 1,800
|Other costs                              |  |   | 200  
|                                         |  |   |      
|                                         |  | $ | 2,400
|                                         |  |   |      



The facility-related
costs exclude the impact of potential future sublease income, which has yet to be determined.



European shared services reorganization



In February 2005, we began a reorganization of our European operations to create a shared services center in Switzerland. The purpose of this reorganization is to improve our ability to meet our customers needs;
centralize our administrative support functions and operating and financial controls; streamline our reporting; and improve our operating cost model by streamlining and integrating overhead from several acquisitions. The reorganization will impact
administrative team members in our France and Germany offices, some of whom will be relocating elsewhere within the Companys European operations. The reorganization is expected to be complete by the end of the calendar year. The charges
related to the reorganization are recorded in general and administrative expense. The activity for the six months ended April 30, 2005 is as follows (in thousands):



|                            |  |                                        |     |            |   |       |  |   |    
|--------------------------- |  | -------------------------------------- | --- | ---------- | - | ----- |  | - | ---
|                            |  | Workforcereduction andrelocation costs |     | Othercosts |   | Total
|Balance at October 31, 2004 |  | $                                      |    |            | $ |      |  | $ |   
|Charges                     |  |                                        | 104 |            |   |      |  |   | 104
|Cash payments               |  |                                        |    |            |   |      |  |   |   
|                            |  |                                        |     |            |   |       |  |   |    
|Balance at April 30, 2005   |  | $                                      | 104 |            | $ |      |  | $ | 104
|                            |  |                                        |     |            |   |       |  |   |    



22



---

We expect to record additional charges related to the reorganization primarily during the third quarter
of fiscal 2005. We currently anticipate total additional charges as follows (in thousands):



|                                         |  |   |    
|---------------------------------------- |  | - | ---
|Workforce reduction and relocation costs |  | $ | 450
|Facility-related costs                   |  |   |   
|Other costs                              |  |   | 100
|                                         |  |   |    
|                                         |  | $ | 550
|                                         |  |   |    



Other



During fiscal 2001, we recorded a $2,318,000
liability to reflect anticipated costs to exit a manufacturing and development site in Englewood, Colorado which was replaced by a larger facility in Englewood in fiscal 2002. These accrued costs represent our estimate of the net amount of lease
payments related to unused capacity of the old facility. Changes in this accrual for the three and six months ended April 30, 2005 are as follows (in thousands):



|                               |  |                                  |     |   |                                |   |      |  
|------------------------------ |  | -------------------------------- | --- | - | ------------------------------ | - | ---- | -
|                               |  | Three months endedApril 30, 2005 |     |   | Six months endedApril 30, 2005 |  
|Balance at beginning of period |  | $                                | 416 |   |                                | $ | 497  |  
|Cash payments                  |  |                                  | (86 | ) |                                |   | (167 | )
|                               |  |                                  |     |   |                                |   |      |  
|Balance at April 30, 2005      |  | $                                | 330 |   |                                | $ | 330  |  
|                               |  |                                  |     |   |                                |   |      |  



We believe the
remaining accrual at April 30, 2005 is adequate to cover the cost of unused capacity in the facility through the end of the lease term in December 2006.



Liquidity and Capital Resources



The following table summarizes our statement of cash flows for the six months ended April 30, 2005 and 2004 (in thousands):



|                                                             |  |                            |         |   |            |   |         |  
|------------------------------------------------------------ |  | -------------------------- | ------- | - | ---------- | - | ------- | -
|                                                             |  | Six months ended April 30, |        
|                                                             |  | 2005                       |         |   | 2004       |  
|                                                             |  |                            |         |   | (Restated) |  
|Net cash flows provided by (used in):                        |  |                            |         |   |            |   |         |  
|Operating activities                                         |  | $                          | 21,913  |   |            | $ | 11,502  |  
|Investing activities                                         |  |                            | (61,983 | ) |            |   | (11,691 | )
|Financing activities                                         |  |                            | (6,732  | ) |            |   | 5,790   |  
|Effect of exchange rate changes on cash and cash equivalents |  |                            | (188    | ) |            |   | 247     |  
|                                                             |  |                            |         |   |            |   |         |  
|Net increase (decrease) in cash and cash equivalents         |  | $                          | (46,990 | ) |            | $ | 5,848   |  
|                                                             |  |                            |         |   |            |   |         |  



During the first six
months of fiscal 2005, the difference between reported net income and cash provided by operating activities was primarily due to depreciation and amortization and decreases in accounts receivable and inventories, which were offset by a decrease in
accounts payable. Accounts receivable decreased primarily due to the timing of sales to and collections from both our OEM and



23



---

branded customers. The decrease in inventories is primarily due to a reduction in finished goods held at third-party warehouses for certain OEM customers.
Accounts payable decreased primarily due to the timing of payments to suppliers. During the first six months of fiscal 2004, the difference between reported net income and cash provided by operating activities was primarily due to depreciation and
amortization and an increase in deferred revenue, which were offset by increases in inventories and service parts for maintenance. Deferred revenue increased due to increased sales of service contracts, which are typically billed at the beginning of
the contract term and recognized as revenue over the service period. Inventories increased primarily due to an increase in raw materials to support our forecasted revenue. The increase in service parts for maintenance relates to maintenance of our
increasing installed base of products.



Cash flows used in
investing activities included proceeds from certain securities transactions, primarily the maturities of marketable debt securities and sale of marketable equity securities of $108.5 million and $60.7 million for the first six months of 2005 and
2004, respectively. These proceeds were offset by purchases of marketable securities of $163.0 million and $78.3 million during the first six months of fiscal 2005 and 2004, respectively, and $429,000 and $364,000 of investments in non-marketable
securities of non-public technology businesses during the first six months of fiscal 2005 and 2004, respectively. Investments in property, plant and equipment were $7.1 million and $9.0 million during the first six months of fiscal 2005 and 2004,
respectively. Capital expenditures during the first six months of fiscal 2005 were comprised primarily of computer hardware and software for our global information technology infrastructure and to support initiatives within our global services
organization and tooling and equipment related to new product introductions. Capital expenditures during the first six months of fiscal 2004 were comprised primarily of computer hardware and software to support initiatives within our global services
and research and development organizations and tooling and equipment related to new product introductions. During the six months ended April 30, 2004, we received proceeds of $15.1 million from the disposal of assets held for sale, which primarily
comprised inventory and leasehold improvements related to the Benchmark outsourcing agreement completed during the period.



With respect to cash flows provided by financing activities, during the first six months of fiscal 2005 and 2004, we received proceeds from the issuance
of common stock under our Stock Purchase Plan and the exercise of stock options of $1.8 million and $5.9 million, respectively. We repurchased $8.5 million of our common stock during the six months ended April 30, 2005; there were no such
repurchases during the six months ended April 30, 2004.



Our
cash and cash equivalents totaled $47.7 million and $94.7 million at April 30, 2005 and October 31, 2004, respectively. At April 30, 2005, our cash and cash equivalents and marketable securities totaled $240.4 million, up from $232.9 million at
October 31, 2004. Our working capital, the difference between current assets and current liabilities, was $279.3 million at April 30, 2005 compared to $281.4 million at October 31, 2004. The ratio of current assets to current liabilities was 4.0 to
1 at April 30, 2005 and 3.9 to 1 at October 31, 2004.



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



24



---

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



Critical Accounting Estimates



Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The critical accounting policies that involve significant judgments and estimates used in the
preparation of our consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended October 31, 2004. New critical accounting policies that involve significant judgments and estimates are disclosed below.



We have presented revenue and cost of revenue separately for
products and services beginning in the first quarter of fiscal 2005. Product revenue includes sales of hardware and software data storage solutions, as well as installation and professional services related to these products. Service revenue is
derived from contracts for field support provided to our branded customers and not otherwise included in the base price of the product. Service does not include revenue or costs associated with basic warranty support on new branded or OEM products.
We classify expenses as costs of service revenue by estimating the portion of our total cost of revenue that relates to providing field support to our customers under contract. These estimates are based upon a variety of factors, including the
nature of the support activity, the cost of stocking and shipping service parts for maintenance and the level of infrastructure required to support the activities that comprise service revenue. In the event our service business changes, our
estimates of cost of service revenue may be impacted.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



We are exposed to foreign currency exchange rate risk. The assets and liabilities of our non-U.S. subsidiaries have functional currencies other than the
U.S. dollar and are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. A 10% appreciation in the U.S. dollar would
have resulted in an approximately $2.4 million decrease in income before provision for income taxes during the first six months of fiscal 2005. Such a change in income would have resulted from applying a different exchange rate to translate and
revalue the financial statements of our non-U.S. subsidiaries. To hedge this exposure, we may enter into forward-currency exchange contracts from time to time. Such contracts provide for the exchange of one currency for another at an agreed-upon
price at an agreed-upon settlement date. We had no such contracts outstanding as of April 30, 2005.



|Item 4. | Controls and Procedures
|------- | -----------------------



(a) Evaluation of Disclosure Controls and Procedures



Our chief executive officer and our chief financial officer have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report, and they have determined that as of April 30, 2005 our disclosure controls and procedures are effective to ensure that information required to be
disclosed in the reports that we file pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



25



---

(b) Changes in Internal Control over Financial Reporting



During the three months ended April 30, 2005, there were no significant
changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis
and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information
concerning our business. Future events affecting our business may cause us to modify our disclosure controls and procedures.



We are in the process of implementing the requirements of Section 404 of the Sarbanes-Oxley Act, which requires our management to assess the effectiveness
of our internal controls over financial reporting and include an assertion in our annual report as to the effectiveness of our controls. Subsequently, our independent registered public accountants, PricewaterhouseCoopers LLP, will be required to
attest to whether our assessment of the effectiveness of our internal controls over financial reporting is fairly stated in all material respects and separately report on whether they believe we maintained, in all material respects, effective
internal controls over financial reporting as of October 31, 2005. We are in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for the auditors to provide their
attestation report. We have not completed this process or our assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management or our independent registered public
accountants may identify deficiencies that will need to be addressed and remediated.



26



---

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



None.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



During the quarterly period ended April 30, 2005, ADIC repurchased shares of its common stock on the open market as set forth on the following table:



ISSUER PURCHASES OF EQUITY SECURITIES



|                         |  |                                |  |                            |      |                                                                              |           |                                                                                |          
|------------------------ |  | ------------------------------ |  | -------------------------- | ---- | ---------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------ | ---------
|Period                   |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |      | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plans orPrograms |           | Maximum Numberof Shares that MayYet Be PurchasedUnder the Plans orPrograms (1)
|Month #1 (February 2005) |  | 271,900                        |  | $                          | 8.05 |                                                                              | 271,900   |                                                                                | 3,717,707
|Month #2 (March 2005)    |  | 744,063                        |  | $                          | 8.46 |                                                                              | 744,063   |                                                                                | 2,973,644
|Month #3 (April 2005)    |  | 0                              |  | $                          |     |                                                                              | 0         |                                                                                | 2,973,644
|                         |  |                                |  |                            |      |                                                                              |           |                                                                                |          
|Total                    |  | 1,015,963                      |  | $                          | 8.35 |                                                                              | 1,015,963 |                                                                                | 5,000,000
|                         |  |                                |  |                            |      |                                                                              |           |                                                                                |          



(1) Under ADICs
stock repurchase program, ADICs management is authorized to determine, based on market conditions and other factors, whether it is advisable to repurchase ADIC common stock on the open market, and if so, to repurchase up to an authorized
number of shares at the price determined by ADICs management. On May 12, 2004, the ADIC Board of Directors authorized ADIC to repurchase up to 5,000,000 shares of ADIC common stock. Under this authorization ADIC repurchased 2,026,356 shares,
leaving the maximum number of additional shares that could have been repurchased at 2,973,644 shares. On May 18, 2005, the ADIC Board of Directors authorized increasing the repurchase authorization back up to 5,000,000 shares. Neither of the
authorizations included an expiration date.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



At our annual shareholders meeting on March 10, 2005, two directors were reelected to the Board, each to hold office for three-year terms. The nominees
received the following votes (there were no broker non-votes):



|                   |  |                    |  |                        
|------------------ |  | ------------------ |  | -----------------------
|Nominee            |  | Number of VotesFor |  | Number of VotesWithheld
|John W. Stanton    |  | 55,206,282         |  | 5,695,079              
|Peter H. van Oppen |  | 54,913,435         |  | 5,987,926              



27



---

|Item 5. | Other Information
|------- | -----------------



None.



|Item 6. | Exhibits
|------- | --------



See Exhibit Index on page [29] below.



28



---

EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibits                                                                                                                                                                                                                                           
|31.1          |  | Certification of Peter H. van Oppen, Chair and Chief Executive Officer of Advanced Digital Information Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                    
|              | 
|31.2          |  | Certification of Jon W. Gacek, Chief Financial Officer and Executive Vice President, Finance and Operations of Advanced Digital Information Corporation, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                               
|              | 
|32.1          |  | Certification of Peter H. van Oppen, Chair and Chief Executive Officer of Advanced Digital Information Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                     
|              | 
|32.2          |  | Certification of Jon W. Gacek, Chief Financial Officer and Executive Vice President, Finance and Operations of Advanced Digital Information Corporation, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



29



---

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                    |  |  |  |                                                                                                                                        
|------------------- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                    |  |  |  | ADVANCED DIGITAL INFORMATION CORPORATION                                                                                               
|                    |  | 
|Dated: June 8, 2005 |  |  |  | /s/ PETER H. VAN OPPEN                                                                                                                 
|                    |  |  |  | Peter H. van Oppen, Chair and Chief Executive Officer (Principal Executive Officer)                                                    
|                    |  | 
|Dated: June 8, 2005 |  |  |  | /s/ JON W. GACEK                                                                                                                       
|                    |  |  |  | Jon W. Gacek, Chief Financial Officer and Executive Vice President, Finance and Operations (Principal Financial and Accounting
Officer)



30