ADVANCED DIGITAL INFORMATION CORP, 10-K, 2000-01-18

ADVANCED DIGITAL INFORMATION CORP
10-K, 2000-01-18
COMPUTER PERIPHERAL EQUIPMENT, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ________________ TO ________________

COMMISSION FILE NUMBER 0-21103

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ADVANCED DIGITAL INFORMATION CORPORATION

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
WASHINGTON 91-1618616
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

P.O. BOX 97057
11431 WILLOWS ROAD N.E.
REDMOND, WASHINGTON 98073-9757
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (425) 881-8004

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

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
(None) (None)
</TABLE>

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

COMMON STOCK
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)

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

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

The aggregate market value of voting stock held by nonaffiliates of the
registrant is $1,197,464,730 as of December 31, 1999, based on the closing sale
price of such stock on the Nasdaq National Market on that date.

There were 25,683,648 shares of common stock outstanding as of December 31,
1999.

The Index to Exhibits appears on page 59.

Part III is incorporated by reference from the proxy statement to be filed
in connection with the 2000 Annual Meeting of Shareholders.

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PART I

ITEM 1. BUSINESS

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

OVERVIEW

We provide hardware and software-based data storage solutions to the open
systems marketplace. We offer a broad range of products designed to enable
organizations to effectively capture, protect, manage and archive the increasing
amount of complex mission-critical data. We incorporate our proprietary
hardware, software and interconnectivity products, as well as our service and
support expertise, with third-party hardware and software products to deliver
flexible, reliable and scalable storage solutions. Our storage solutions are
market-driven, and we do not rely on a single technology or device to deliver
them. We continue to increase our investments in developing innovative and
effective storage products. In order to broaden access to complementary
products, we make direct equity investments and initiate licensing and
co-development agreements with companies developing innovative technologies for
the data storage market. Our sales channels include a global network of
resellers developed over the last 15 years and original equipment manufacturers,
or OEMs, including Dell Computer, as well as IBM and Fujitsu Siemens Computers,
with whom we have recently signed agreements.

INDUSTRY BACKGROUND

In an increasingly information-based economy, information and databases are
central to a company's value, and managing the increase in data is one of the
most important challenges that a company must address. The volume of
mission-critical data generated, processed, stored and manipulated in the
business environment has grown dramatically over the last decade. International
Data Corporation, an independent industry research company, estimates that the
amount of disk storage capacity sold annually grew from 10,000 terabytes in
1994, each terabyte representing one trillion bytes of information, to 116,000
terabytes in 1998, and is expected to increase to 1,400,000 terabytes in 2002.
This represents an expected compound annual growth rate of 86% from 1998 to
2002. We believe this growth rate is reflective of the overall growth in
electronic data in our increasingly information-based economy. Several factors
are driving the increased volume and value of data:

- GROWTH IN BUSINESS CRITICAL DATA. Stored data is growing in size and
complexity from the proliferation of different types of stored data,
including graphics, video, text and audio, as well as the implementation
of enterprise-wide databases containing both traditional and
nontraditional business management information. Organizations in all
industries, including technology, telecommunications, manufacturing,
financial services, entertainment and broadcast, are increasingly
dependent on their ability to collect, access, mine, use and transfer
these new types of stored data.

- RISE OF NETWORK SERVER COMPUTING. Within organizations, there has been a
fundamental shift from mainframe computers to networked, server-based
computing. This development has shifted critical information from the
mainframe to network servers, allowing more people to gain access to
stored data as well as create new data, which in turn needs to be stored
and backed up.

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- RISE OF THE INTERNET AND E-COMMERCE BASED BUSINESSES. The growth in the
Internet as a means of commerce has created a class of companies whose
businesses depend on the access, creation and archiving of stored data. In
addition, the growth in the use of the Internet has created wide access to
vast amounts of data. The need for high-volume, high-speed access to large
databases will continue to experience rapid growth as individuals and
businesses increase their reliance on the Internet for transactions and
data retrieval.

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

Traditionally, storage architectures were mainly targeted at backup
applications and focused on limiting the high costs associated with lost data
that primarily stemmed from human error, viruses, equipment failure, data
corruption and man-made and natural disasters. As a result, tape storage
systems, which because of their larger storage surface area offer the
lowest-cost medium for storing and protecting large quantities of data,
historically had comprised a central piece of a business's storage solution.

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

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

- FIBRE CHANNEL. Fibre Channel is a defined technology that allows users to
connect multiple storage devices with one gigabit per second throughput.
Fibre Channel provides the bandwidth, reliability, scalability and
transmission distances that allow companies to create storage area
networks, or SANs.

- STORAGE AREA NETWORKS. A SAN-based architecture applies the inherent
benefits of a networked approach to data storage applications, which
allows data to move efficiently and reliably between multiple storage
devices and servers. The benefits of SAN architecture also include
increasing the scalability of existing storage solutions and providing a
higher level of connectivity than currently exists with traditional
technologies. Additionally, SANs are able to provide these benefits across
multiple operating systems.

- NETWORK ATTACH STORAGE APPLIANCES. Network Attach Storage, or NAS,
appliances allow users to add plug-and-play storage capacity to networks
without having to disable or increase demands on the network server. This
allows users to maintain, or even enhance, system performance while saving
on both time and cost.

- INTERNET-BASED STORAGE BACKUP. This solution allows home users, remote
portable computer users and enterprises to outsource their storage or back
up of data on a cost-efficient basis through

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the services provided by Internet-based storage backup companies.
Increased availability of high-bandwidth Internet connections is a key
enabler of this approach.

- STORAGE MANAGEMENT SOFTWARE SOLUTIONS. Software innovations continue to
enhance storage management capabilities. For example, byte-level storage
management reduces the amount of total data storage by recording only
incremental changes to files and facilitates real-time, or continuous
backup, capability. Hierarchical storage management automatically moves
less frequently accessed data to less expensive tape storage, ensuring
that higher-cost disk space is available.

- MULTIPLE STORAGE FORMATS. Data centers have evolved to incorporate
multiple forms of storage media, including optical disks, hard disk
drives, higher capacity tapes and broadcast media. Software and hardware
products have been developed that allow users to optimize these multiple
storage formats.

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

THE ADIC SOLUTION

In addition to our current products, we continue to increase investments in
research and development to produce innovative and effective storage products.
In order to access complementary products, we make direct equity investments and
initiate license agreements or enter into co-development arrangements. We
believe such research and development and third-party relationships will better
position us to continue to provide advanced storage solutions.

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

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

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ADIC STRATEGY

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

PROVIDE A BROAD ARRAY OF DEVICE-INDEPENDENT STORAGE SOLUTIONS. We believe
that our independence from any single device technology is a key advantage. We
provide end users with effective storage solutions comprised of competitive data
recording device technology, automation hardware, interconnectivity products,
state-of-the-art software and technical service and support. Our strategy
employs a device-independent and open systems approach that allows us or our OEM
or VAR partners to provide storage solutions incorporating the optimal
combination of our proprietary products and available third-party hardware and
software products. Depending on the specific requirements of a particular
application, such as cost, transfer rate or access time, our products may
include a variety of tape formats, optical, disk or emerging technologies.

AGGRESSIVELY DEVELOP TECHNOLOGY. We believe that focused expenditures on
differentiated technologies are critical to our success and are accelerating our
expenditures on technology development in order to offer more complete storage
solutions. We have built multiple generations of existing products on a
foundation of technology and know-how, including operating systems software,
programming languages and structure, file management systems, communications
protocols, electronic hardware and electro-mechanical hardware. Building on this
experience, we have made storage management software and library control
software the largest components of our growing research and development program.
In addition to internal investment, we may seek to develop or acquire technology
by acquisitions, minority investments or outsourced development. In each case,
the objective is to obtain exclusive or preferential access to proprietary
technology that complements our products.

CAPITALIZE ON WORLDWIDE BRANDED RESELLER AND OEM CHANNELS. Over the past
15 years, we believe we have established the strongest branded worldwide
distribution channels in our market. During the last two years, we have
increased our focus on OEM relationships, resulting in a significant increase in
our OEM business. Long-standing relationships with national and international
distributors, integrators and individual resellers provide an experienced
broad-based channel that allows us to cost-effectively offer our branded
products to multiple market segments. Our leading channel partners include
Ingram Micro and Tech Data, and we also have a sales relationship with Fujitsu
Siemens Computers. We have established OEM relationships with Dell Computer,
Unisys, Exabyte, Tandberg Data, Benchmark Tape Systems and Plasmon. In addition,
in the past year IBM selected us as the automation supplier for their
StorageSmart Ultrium Linear Tape-Open drives. We have also entered into an
expanded relationship with Fujitsu Siemens that will include a broad range of
storage management products for mainframe and open computer systems. Through
these OEM supply arrangements, we are able to benefit from our OEMs' extensive
direct and indirect distribution networks. In addition, our close ties with
software vendors can be critical in reseller sales situations where an effective
solution requires pairing compatible hardware and software products.

BUILD AND EXPAND RELATIONSHIPS WITH STRATEGIC PARTNERS. It is our strategy
to capitalize on products, technologies and channels that may be available
through partners. We believe that continued growth of the open systems storage
solutions market will create opportunities beyond those we can meet alone. Our
relationships take the form of supplier, customer, licensor, co-developer or
equity partner. For example, we market Fibre Channel interconnection solution
products developed by Crossroads Systems under the ADIC brand name. Our
relationship with Crossroads allows us to offer products to integrate a wide
variety of storage devices with Fibre Channel connectivity in SANs. We sometimes
partner with key suppliers, including Quantum, to address developing markets. We
intend to continue to seek out related markets which leverage our strengths and
have partnerships with VERITAS Software, Network Integrity, Computer Associates
and Legato Systems. Additionally, we recently made an investment in @Backup to
develop our position in the online, Internet-based storage market.

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PRODUCTS

We believe we offer the industry's broadest range of automated storage
libraries that feature varying data storage capacities and transfer rates. In
addition, we offer storage management software that can be used with our
libraries or those of other manufacturers. Currently, we receive substantially
all of our revenue from the sales and servicing of automated storage libraries.
We continuously refine our products, as well as develop new products, to be used
with a variety of emerging storage technologies, such as Fibre Channel, SANs and
NAS.

OPEN SYSTEMS STORAGE PRODUCTS

The core component of our storage solution is typically an automated storage
library. An automated tape library, directed by storage management software, can
perform sophisticated backup of a network's data without human intervention,
automatically backing up specific network data to specific tapes at specific
times. Access to multiple tape cartridges enables the library to automatically
store much more data than a standalone drive, which eliminates the need for a
system administrator to swap tapes in order to backup all the data.

Within the library, tape cartridges or other removable media are typically
organized in magazines. In some cases, these tape magazines are removable,
easing storage and offsite transfer of the tapes. A library with multiple tape
drives can back up data with all drives simultaneously, significantly speeding
up the backup process. We design certain large libraries to allow for the
incorporation of more than one type of tape or optical media, as well as mixed
media capability.

We integrate third-party storage devices into our automated libraries. While
a large majority of our libraries currently use tape drives and media, we also
offer libraries using optical and other storage technologies. When operated in
combination with third-party storage management software and our own software,
our libraries provide a complete solution for systematically and
cost-effectively automating data storage backup and archiving in open systems
network computing environments. We design our products for a spectrum of storage
needs. Our products vary by device technology, number of drives, and number of
cartridges, with suggested retail prices typically ranging from approximately
$1,800 to over $1.5 million. The following table summarizes our open systems
storage hardware products.

<TABLE>
<CAPTION>
SUGGESTED RETAIL
PRODUCT FAMILY CAPACITY/PERFORMANCE(1) PRICE RANGE(2)
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<S> <C> <C>
Standalone tape drives......................... 4-100 gigabytes $1,800-$7,300
VLS-TM- libraries.............................. 48-490 gigabytes $6,800-$17,000
FastStor-TM- libraries......................... 280-1,760 gigabytes $5,500-$13,000
Scalar-Registered Trademark- libraries......... 360-8,000 gigabytes $12,500-$80,000
Scalar-Registered Trademark- 1000 libraries.... 5,630-118,200 gigabytes $50,000-$150,000
AML libraries.................................. 300-6,700,000 gigabytes $150,000-$1,500,000
FCR-TM- Fibre Channel routers.................. 1 gigabit per second $4,700-$8,300
</TABLE>

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(1) Capacity and performance of our storage library products vary by type of
drives, quantity of drives and unit configuration.

(2) Prices represent typical installations.

In addition to our automated storage library and standalone drive products,
we supply our channels and end users with a range of complementary products,
including tape cartridge media, tape magazines, rackmount kits and cables.

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OPEN SYSTEMS STORAGE MANAGEMENT SOFTWARE

Advanced software is a key component of a sophisticated data storage system.
The majority of our hardware products are installed in open systems computer
networks in conjunction with third-party storage management software.

OUR SOFTWARE

A key objective of our acquisition of EMASS, Inc. in August 1998 was to
develop a storage software business. Through this acquisition, we acquired
proprietary software designed to intelligently organize and manage data in open
systems environments. This was enhanced by the addition of CentraVision software
from our acquisition of MountainGate Imaging Systems Corporation in
September 1999. Currently, our software sales represent a very small percentage
of our total revenue. However, we believe that software offers a number of
opportunities for us to increase sales to existing and new customers and are
devoting the greatest portion of our increased research and development
expenditures to further software development.

Our software products include:

AMASS. The AMASS Storage Management System is an integrated family of
products for data-intensive computing environments and is usable with removable
media products. It is presently available and installed in UNIX and Windows NT
environments worldwide. AMASS software makes data stored in libraries accessible
with the look and feel of a hard disk and helps optimize capacity of the
library. Under AMASS, all of the storage capacity in the library appears as a
single, large hard disk drive on the server. Users manage files from the library
the same way they currently do with hard drives. The product also includes
numerous additional features that are application-specific.

FILESERV AND DATA MANAGER. FileServ and Data Manager are hierarchical
storage management products. These products manage data migration from disk to
tape or optical storage devices by allocating high-use data to disk and low-use
data to tape, which assures efficient use of higher-cost disk drive space.

CENTRAVISION. CentraVision software enables high-speed simultaneous use of
a single file by UNIX and Windows NT systems in Fibre Channel Storage Area
Networks. The CentraVision file sharing system provides value by improving
workflow efficiency, enabling collaborative workgroups and delivering
high-performance file sharing in network environments.

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

THIRD-PARTY SOFTWARE

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

We work closely with storage management software companies in a number of
ways. We periodically engage in discussions with developers at these companies
regarding the marketplace, end-user needs and potential solutions to these needs
combining our products and the developer's storage management software. We
partner with storage management software companies to offer

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promotional product bundles, offering customers a special price on the
combination of one of our products and a storage management software product. In
addition, our field sales force strives to maintain relationships with
counterparts from each of the storage management software companies and
frequently participates in joint sales calls and seminars. We also maintain
technical relationships with developers at these companies, in most cases
providing our products for their use in developing software for our products. In
addition, our systems engineering lab performs ongoing compatibility testing
with a variety of storage management software products.

FIBRE CHANNEL, SAN, NAS AND OTHER EMERGING TECHNOLOGIES

In meeting the needs of data-intensive open systems computing environments,
we have combined our solutions expertise with strategic investments and key
partnerships to integrate our products with SAN, NAS and other emerging
technologies.

We partner with Crossroads Systems, a developer of high-performance Fibre
Channel storage area network connectivity tools. Through this relationship, we
introduced our FibreReady-TM- line of native Fibre Channel tape libraries, the
first in the industry. We also offer standalone Fibre Channel routers, which
allow all our hardware products to be integrated into SANs.

StorNext is a Network Attach Storage archiving solution developed by us that
provides a network archiving resource for storage of data that can not be
deleted. As opposed to storage devices which are disk based, StorNext utilizes
the high-density and low cost of tape to deliver a cost-effective network attach
solution. StorNext is the first all-purpose NAS product available on the market,
and is compatible with all ADIC Scalar series libraries.

We intend to continue building relationships with technology companies in
order to further enhance the breadth and depth of our product line and introduce
new products in areas such as Fibre Channel, SAN and NAS.

STRATEGIC INVESTMENTS

In the past two years, we have invested an aggregate of $15.0 million in
three companies that are developing innovative technologies for the data storage
market. We intend to make similar investments in the future as more
opportunities arise.

In August 1997, we invested $4.0 million in, and signed an OEM distribution
agreement with, Crossroads Systems, a developer of high-performance Fibre
Channel SAN connectivity tools. Through this investment, we gained early access
to Fibre Channel technology, which allowed us to be the first in the industry to
integrate this technology into our automated libraries.

In December 1998, we invested $4.0 million in Network Integrity, a software
company that develops and markets real-time data distribution and continuous
data protection solutions for Windows NT environments. Network Integrity's
products minimize network traffic and reduce the total amount of data storage by
recording byte-level changes to files. We offer Network Integrity's Windows NT-
based data protection software products through our distribution channels.

In July 1999, we invested $7.0 million in @Backup, an Internet-based backup
and data access service company. @Backup offers secure, off-site, automatic
backup of computer data for mobile users, small enterprises and individuals.

We believe we benefit from these investments in a variety of ways,
including:

- gaining access to compelling products, which may be integrated in or
paired with our own products;

- working with technology innovators to gain valuable training and insight
into emerging markets;

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- accessing additional distribution channels for our products; and

- potentially realizing future investment gains.

SALES AND MARKETING

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

DISTRIBUTORS AND VARS

We sell our products to large regional and national distributors which in
turn resell our products to national, regional or local VARs with expertise in
integrating network solutions for end users. We support these VARs through our
authorized reseller programs. In the case of larger, more complex sales
situations, our field sales force may work in conjunction with a VAR to support
the sales process. We currently have relationships with several major North
American distributors, including GE IT Distribution Group, Arrow Electronics,
Bell Microproducts, Ingram Micro and Tech Data. In fiscal 1999 Ingram Micro and
Tech Data represented 12% and 8%, respectively, of our net sales.

Similar to North America, we also have relationships with a number of large
regional and national distributors internationally. We believe international
markets represent an attractive growth opportunity and intend to expand the
scope of our international sales efforts by continuing to actively pursue
additional international distributors and resellers. International sales
represented 40% of our net sales in fiscal 1999, the majority of which occurred
in Europe.

We have direct sales relationships with "Premier VARs" throughout North
America and Europe. These Premier VARs are typically larger VARs specializing in
data storage and network solutions for client/server networks. Premier VARs
assume increased levels of responsibility for sales and support, although they
are still occasionally assisted by our field sales force in certain large,
complex sales situations.

OEMS

We sell our products to several companies under private label or OEM
relationships. Private labelers and OEMs generally resell our products under
their own brand name and typically assume responsibility for product sales,
service and support. These relationships enable us to reach end users not served
by our other reseller distribution channels and to serve select geographic or
vertical markets where specific OEMs have exceptional strength. We maintain
ongoing discussions with private labelers and OEMs, including leading systems
suppliers, regarding opportunities for our products. Our existing OEM
relationships include Dell Computer, Unisys, Exabyte, Tandberg Data, Benchmark
Tape Systems and Plasmon. In addition, in the past year, IBM selected us as the
automation supplier for its StorageSmart Ultrium Linear Tape-Open drives. We
have also entered into an expanded relationship with Fujitsu Siemens Computers
that will include a broad range of storage management products for mainframe and
open computer systems. For fiscal 1999, sales to Dell Computer represented 13%
of our net sales.

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DIRECT CORPORATE SALES

We maintain direct corporate sales relationships with a moderate number of
large national and multinational companies in various industries, including
technology, industrial, telecom, financial and service firms. We typically work
with the company's central information services organization to assess data
storage backup and archival needs and then recommend a data storage solution.
The successful culmination of this recommendation may be the creation of a
corporate standard, including a selection of our products for the company's
ongoing storage needs. In these direct selling situations, we attempt to avoid
conflict with existing reseller and OEM channels.

We also maintain direct sales relationships with a number of large
government and private entities where the complexity or confidentiality of
required storage solutions is such that the customer's needs are best served by
working directly with us.

MARKETING

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

In addition to these activities, our marketing organization's product
management team is responsible for initiating development of new products and
product line extensions. In order to create a product development plan, our
product management team combines its assessment of end-user needs, channel
requirements, technology developments and competitive factors with input from
the engineering, sales and manufacturing organizations.

END USERS

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

<TABLE>
<CAPTION>
INDUSTRIAL/
TECHNOLOGY ENTERTAINMENT TELECOM FINANCIAL SERVICES
- --------------------- ----------------- ----------------- ---------------- ------------------------------
<S> <C> <C> <C> <C>
Adobe Chevron AT&T Abbey National Andersen Consulting
Cisco Disney Bell Atlantic Bank of America Arthur Andersen LLP
Dell Ford British Telecom Chase Manhattan Ernst & Young LLP
Excite@Home Rolls Royce Deutsche Telekom Deutsche Bank PricewaterhouseCoopers LLP
Homegrocer.com Shell Oil MCI Worldcom Fidelity Survivors of the Shoah Project
Microsoft Sony Nokia HypoVereinsbank
Peoplesoft Volvo Prudential
SAP
Yahoo!
</TABLE>

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CUSTOMER SERVICE AND SUPPORT

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

- TECHNICAL SUPPORT. Our ADIC Technical Assistance Center, or ATAC, provides
24-hour-a-day, seven-day-a-week technical support for our products. Our
multilingual staff is trained not only with respect to our products, but
is also experienced with storage management and network operating system
software. Our staff is located principally in Washington, Colorado and
France, with phone calls being routed to the location with the most timely
available expertise. Smaller library products with problems not resolved
via telephone support may be returned to us for repair or replacement
during the warranty period. We make a number of service alternatives
available for a nominal fee, including in-house repair, loaner units and
advanced exchange service.

- SALES AND SYSTEMS ENGINEERING. Sales and systems engineers provide both
pre- and post-sales technical support to resellers and end users. Systems
engineers typically become involved in more complex problem-solving
situations involving interactions among our products, third-party storage
management software, the network server hardware and the network operating
system. System engineers work with resellers and end users both over the
telephone and on-site. We view this capability as an opportunity for
growth as it allows us to provide and support storage solutions with the
highest level of complexity and value to the customer.

- ON-SITE SERVICE. Our field service team and third-party service providers
offer on-site service for our products. A wide variety of programs are
available, including an on-site service response time of four hours, seven
days a week. Most of the mid-range and larger automated libraries that we
sell include at least a one-year service warranty. As our installed base
of products has grown, post-warranty service has become an increasingly
important source of customer loyalty and revenue.

- TRAINING. We offer a comprehensive training program to resellers and end
users. Training classes are conducted at locations worldwide.

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

MANUFACTURING AND SUPPLIERS

We have manufacturing facilities in Washington, Colorado and Germany.
Several existing and potential OEM customers, including Dell Computer, have
audited the Washington facility. Our Washington and Germany facilities are ISO
9001 certified, and our Colorado facility is in the process of obtaining ISO
9001 certification. Certification is expected in April 2000.

Our Washington facility is responsible for building all mid-range to
lower-capacity libraries, including our FastStor-TM- product line. Our Colorado
facility is responsible for building the Scalar-Registered Trademark- 1000 tape
libraries, and our highest-capacity libraries are built in our Germany facility.
All these facilities have processes that entail manufacturing electro-mechanical
robotic devices, integrating third-party recording devices and performing tests
on the completed device. Our manufacturing strategy is to perform product
assembly, integration and testing, leaving component and piece-part
manufacturing to our supplier partners.

We work closely with a group of regional, national and international
suppliers to obtain parts and components meeting our specifications. Though our
designs are proprietary, the various components,

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other than data storage recording devices, are available off the shelf or are
manufactured using standard, readily available techniques, which limit supplier
base risk and facilitate volume increases.

We depend on third-party manufacturers to supply us with magnetic tape
drives, optical disks or other storage devices that we incorporate into our
products. We do not have long-term contracts with any of our significant
suppliers. We carefully coordinate our inventory planning and management with
our suppliers and customers to match our production to market demand. Product
orders are confirmed and, in most cases, shipped to the customer within one
week. Larger libraries often have longer lead times and include on-site
integration and customer acceptance. Since we fill the majority of our orders as
they are received, we do not believe that our backlog levels are indicative of
future sales.

RESEARCH AND DEVELOPMENT

Our research and development team has developed multiple product generations
of automated tape library and software products. Our research and development
efforts rely on the integration of multiple engineering disciplines to generate
products that competitively meet market needs in a timely fashion. Successful
development of automated tape libraries requires the melding of firmware design,
electro-mechanical design, electronic design and engineering packaging into a
single, integrated product. Product success also relies on the engineering
team's thorough knowledge of each of the different tape, optical and other
recording devices, as well as communication protocols. Software products rely on
a comprehensive understanding of multiple operating system environments,
programming techniques, file management structures, communication protocols and
user applications and needs.

Our new product development is frequently stimulated by the availability of
an enhanced tape device or other storage technology. As device manufacturers
compete in the marketplace, they continually invest in research and development
to gain performance leadership either by offering increasingly enhanced versions
of their current device products or by introducing an entirely new technology.
We continually monitor progress in developing alternative removable media
technologies which may be incorporated into our products. We also identify and
define new products based on the more traditional identification of a market
need which we believe we can successfully fill. Our sales, marketing, product
development and engineering organizations all contribute to this identification
process.

With these product development efforts, time and investment requirements
tend to be significant, both in terms of engineering and tooling for
manufacturing. However, we have found that we have, in many instances, been able
to leverage our previous engineering investments into new products. For example,
the firmware, or operating system, of the Scalar library product is based on
successive generations of the operating system developed for our first library.
Our engineers also have been able to leverage electro-mechanical and electronic
hardware designs from previous products into next-generation designs. In some
cases, entire subassemblies are transferable, leveraging not only engineering
time but also tooling investments, materials purchasing, inventory stocking,
manufacturing and after-sale service. Our newest product, the Scalar 100, was
designed to accommodate versions utilizing AIT, DLT and LTO storage devices by
switching only four components. This type of design leveraging helps control
inventory and cost while still offering our customers the broadest range of
storage products in the industry. Similarly, the AMASS NT storage management
system is entirely new software, but its logic and structure are based heavily
on AMASS UNIX products which have been through multiple generations of
development over the past several years.

Our research and development expenses were $13.4 million, $4.5 million and
$2.9 million for fiscal 1999, 1998, and 1997, respectively. We intend to
maintain the higher level of research and development spending we experienced in
fiscal 1999 as we continue investing in software development and new hardware
products.

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COMPETITION

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

INTELLECTUAL PROPERTY

We rely predominately on our full product line, strong channel structure,
and over a decade of library and software development experience to compete in
our marketplace. However, our success also depends on our proprietary
technology. We attempt to protect our technology through a combination of
patents, copyrights, trade secret laws, trademarks, confidentiality procedures
and contractual obligations. We hold patents on various design elements of our
automated storage library products in the United States and in international
jurisdictions, and we are pursuing several additional patent applications. Our
software products are copyrighted with our banners and notices. There can be no
assurance that our intellectual property protection measures will be sufficient
to prevent misappropriation of our technology, and these measures may not
preclude competitors from independently developing products or technologies that
are substantially equivalent or superior to our products and technology. Our
failure to protect our proprietary information could have a material adverse
effect on our business, financial condition and operating results.

TEAM MEMBERS (EMPLOYEES)

As of October 31, 1999, we had 690 full-time team members, including 130 in
sales and marketing, 112 in engineering and research and development, 155 in
systems engineering, customer service and technical support, 221 in
manufacturing and operations, and 72 in finance, general administration and
management. None of our North American team members is covered by collective
bargaining agreements. We consider our relations with our team members to be
good.

Our future success depends in large part on our ability to attract and
retain key team members. Competition for highly skilled technical, sales and
management personnel is intense. In the future we may not be successful in
retaining our existing team members or in attracting additional qualified team
members.

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RISK FACTORS

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH IS
SUBJECT TO MANY RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE
FOLLOWING RISK FACTORS.

OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE FOR A NUMBER OF
REASONS, WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE

Our quarterly operating results have varied in the past and are likely to
vary significantly in the future due to several factors, including:

- size and timing of significant customer orders;

- shifts in product or distribution channel mix;

- increased competition and pricing pressure;

- timing of new product announcements and releases by us or our competitors;

- new product developments by storage device manufacturers;

- recognition of losses or gains from our strategic investments;

- the rate of growth in the data storage market;

- market acceptance of new and enhanced versions of our products;

- timing and levels of our operating expenses;

- gain or loss of significant customers or distributors;

- currency fluctuations; and

- personnel changes.

Our quarterly revenue and operating results have been affected by seasonal
trends. These trends often result in lower revenue in the first quarter of each
fiscal year compared to the fourth quarter of the previous fiscal year due to
customer purchasing and budgetary practices and our sales commission and
budgetary structure.

Operating results in any period should not be considered indicative of the
results investors can expect for any future period. We cannot assure you that we
will be able to sustain our recent levels of quarterly revenue and net income,
as normalized for unusual or one-time items, or that we will maintain
profitability in any future period. Any unfavorable change in the factors
described above or any other factors could adversely affect our operating
results for a particular quarter. In addition, it is likely that in some future
quarter our operating results will be below the expectations of public market
analysts and investors. In any of these events, the price of our common stock
would likely decline.

BECAUSE WE OPERATE WITH LITTLE BACKLOG, OUR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED IF WE DO NOT ACCURATELY ANTICIPATE FUTURE SALES LEVELS

Historically, we have operated with little order backlog and, due to the
nature of our business, do not anticipate that we will have significant backlog
in the future. Consequently, a large portion of our revenue in each quarter
results from orders placed during that quarter. Because of the relatively large
dollar size of orders from our distributors and original equipment
manufacturers, or OEMs, delay in the placing of a small number of orders by a
small number of purchasers could negatively affect our operating results for a
particular period. In addition, our operating expense levels are, in the short

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term, largely fixed and are based, in part, on expectations regarding future
revenue. Thus, our operating results could be disproportionately affected if we
do not receive the expected number of orders in a given quarter and our revenue
falls below our expectations.

COMPETITION IN THE OPEN SYSTEMS STORAGE SOLUTIONS MARKET MAY LEAD TO REDUCED
MARKET SHARE, DECLINING PRICES FOR OUR PRODUCTS AND REDUCED PROFITS

The markets for data storage solutions in general, and automated tape
libraries and storage management software in particular, are intensely
competitive, fragmented and characterized by rapidly changing technology and
evolving standards. These conditions could render our products less competitive
or obsolete and could harm our business, financial condition and ability to
market our products as currently contemplated. Because we offer and are
developing a range of open systems storage solutions, including automated tape
libraries, software and storage peripherals, our competitors differ depending on
the product format and performance level. Some of our competitors have
significantly more financial, technical, manufacturing, marketing and other
resources than we have. As a result, our competitors may be able to respond more
quickly than we can to new or changing opportunities, technologies, standards or
customer requirements. Competitors may develop products and technologies that
are less expensive or technologically superior to our products. In addition, our
competitors may manufacture and market their products more successfully than we
do our products.

There is significant price competition in the markets in which we compete,
and we believe that pricing pressures are likely to continue. Certain
competitors may reduce prices in order to preserve or gain market share. To
successfully compete in this market, we must be able to manage our component and
product design costs. This pricing pressure, and our potential inability to
manage our component and product design costs, could result in significant price
erosion, reduced gross profit margins and loss of market share, which could
negatively affect our business, financial condition and operating results.

THE STORAGE DEVICE MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL EVOLUTION, AND
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS

The market for our products is characterized by rapidly changing technology
and evolving industry standards and is highly competitive with respect to timely
innovation. At this time, the data storage market is particularly subject to
change with the emergence of Fibre Channel protocol and new storage solutions
such as storage area networks, or SANs, and network attached storage, or NAS,
devices. The introduction of new products embodying new or alternative
technology or the emergence of new industry standards could render our existing
products obsolete or unmarketable. Our future success will depend in part on our
ability to anticipate changes in technology, to gain access to such technology
for incorporation into our products and to develop new and enhanced products on
a timely and cost-effective basis. Risks inherent in the development and
introduction of new products include:

- the difficulty in forecasting customer demand accurately;

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

- the possibility that new products may cannibalize our current products;

- delays in our initial shipments of new products;

- competitors' responses to our introduction of new products; and

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

In addition, we must be able to maintain the compatibility of our products
with significant future device technologies, and we must rely on producers of
new device technologies to achieve and sustain

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market acceptance of those technologies. Development schedules for
high-technology products are subject to uncertainty, and we may not meet our
product development schedules.

If we are unable, for technological or other reasons, to develop products in
a timely manner or if the products or product enhancements that we develop do
not achieve market acceptance, our business will be harmed.

WE RELY ON TAPE TECHNOLOGY FOR A SUBSTANTIAL PORTION OF OUR REVENUE

We derive a significant majority of our revenue from products that
incorporate some form of tape technology, including digital linear tape, or DLT.
Most often, these tape drive products are available from only a single
manufacturer, and we expect to continue to derive a substantial amount of
revenue from these products for the foreseeable future. As a result, our future
operating results significantly depend on the continued availability and market
acceptance of products employing tape drive technology. If products
incorporating other technologies gain comparable or superior market acceptance,
our business, financial condition and operating results would be adversely
affected unless we successfully develop and market products incorporating the
new technology.

WE DEPEND ON CERTAIN KEY SUPPLIERS, SOME OF WHICH ARE ALSO OUR COMPETITORS

We do not possess proprietary magnetic tape drive, optical disk,
high-density disk or other storage technologies and, consequently, we depend on
a limited number of third-party manufacturers to supply us with the devices that
we incorporate into our products. In some cases, these manufacturers are
sole-source providers of the device technology. Some of these sole-source
manufacturers market their own tape library products, and are thus also our
competitors. Quantum is the primary supplier of DLT drives and has, in the past,
allocated quantities of drives among its customers. It is possible that Quantum
will again resort to allocation and, as a result, we may not be able to meet our
future DLT drive requirements. It is likely that we will also depend on a small
number of suppliers in the event other device technologies supplement or
supplant DLT devices in any of our products.

In September 1998, Quantum acquired ATL Products. ATL designs, manufactures,
markets and services automated tape libraries that compete with our small and
mid-range library products. ATL may be able to manufacture and market these
competitive products more successfully than we can manufacture and market our
products, especially since ATL now has access to Quantum's financial and other
resources. Furthermore, because Quantum is now competing directly with us in
certain markets through ATL, Quantum may be unable to meet our demand for DLT
drives or may provide these products to us at less competitive prices.

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

WE HAVE A CONCENTRATED CUSTOMER BASE, AND THEREFORE THE LOSS OF A SINGLE
CUSTOMER COULD
NEGATIVELY AFFECT OUR OPERATING RESULTS

The majority of our end users purchase our products from value-added
resellers, or VARs. For the small and mid-range libraries, many of these VARs
purchase our products from large distributors such as Ingram Micro and others.
In fiscal 1999, Ingram Micro represented 12% and Tech Data represented 8% of our
net sales. We have no long-term orders with any of our significant customers or
distributors.

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Generally we sell products pursuant to purchase orders. In addition, our
distributors carry competing product lines which they may promote over our
products. A distributor may not continue to purchase our products or market them
effectively. Moreover, certain of our contracts with our distributors contain
"most favored nation" pricing provisions which mandate that we offer our
products to these customers at the lowest price offered to other similarly
situated customers.

Our operating results could be adversely affected if any of the following
factors were to occur relating to one or more of our significant resellers:

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

- the loss of one or more of such resellers; or

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

WE EXPECT TO INCREASE OUR FOCUS ON OEM SALES AND COULD BE ADVERSELY AFFECTED IF
OUR OEM SALES EFFORTS ARE NOT SUCCESSFUL

We rely on OEMs such as Dell Computer, Unisys, Exabyte, Tandberg Data,
Benchmark Tape Systems and Plasmon for the sale of our products, and are
increasing our focus on sales to OEMs. Sales to Dell Computer represented 13% of
sales in fiscal 1999; sales to all OEMs represented 16% of sales in fiscal 1999.
OEMs typically conduct substantial and lengthy evaluation programs before
certifying a new product for inclusion in their product line. We may be required
to devote significant amounts of financial and human resources to these
evaluation programs with no assurance that our products will ever be selected.
In addition, even if selected by the OEM, there generally is no requirement that
the OEM will purchase any particular amount of product or that it will refrain
from purchasing competing products. Further, OEM sales typically feature lower
margins than we have obtained in the past through our other distribution
channels.

In addition, in the past year, IBM selected us as the automation supplier
for their StorageSmart Ultrium Linear Tape-Open drives. We have also entered
into an expanded relationship with Fujitsu Siemens Computers that will include a
broad range of storage management products for mainframe and open computer
systems.

Sales of our large libraries, and the revenue associated with the on-site
service of those libraries, are somewhat concentrated in specific customers,
including government agencies and Raytheon Company, the former parent company of
our subsidiary formerly known as EMASS, Inc. If any of the resellers, OEMs or
other large customers decide not to continue to purchase our products, our
business, financial condition and operating results may be harmed.

OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED BY A SIGNIFICANT AMOUNT OF
PRODUCT RETURNS

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

WE MAY MAKE ACQUISITIONS THAT ARE NOT SUCCESSFUL

We have in the past acquired businesses, and we may do so in the future.
Acquisitions present a number of risks, including:

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

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- our ability to retain key customers and employees;

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

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

- the diversion of management's attention from our core business during the
acquisition process;

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

- charges and write-offs incurred in connection with acquisitions.

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

WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT GROWTH OR EFFECTIVELY MANAGE ANY
FUTURE GROWTH

We are experiencing rapid growth. This growth has resulted in, and may
possibly create in the future, additional capacity requirements, new and
increased responsibilities for management personnel, and added pressures on our
operating and financial systems. Our facilities, personnel and operating and
financial systems may not be sufficient to manage and sustain our current or
future growth, and additional growth may detract from our ability to respond to
new opportunities and challenges quickly. Our ability to manage any future
growth effectively will also depend on our ability to hire and retain qualified
management, sales and technical personnel. If we are unable to manage growth
effectively or hire and retain qualified personnel, our business, financial
condition and operating results could be materially negatively affected. In
addition, to the extent expected revenue growth does not materialize, increases
in our selling and administrative costs that are based on anticipated revenue
growth could harm our operating results.

ANY INABILITY TO MEET OUR FUTURE CAPITAL REQUIREMENTS WOULD LIMIT OUR ABILITY TO
GROW

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

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS

Net sales to customers outside the United States accounted for 33% of net
sales in fiscal 1998 and 40% in fiscal 1999. We believe that international sales
will continue to represent a significant portion of our net sales. Our
international operations and sales to customers outside the United States
subject us to a number of risks, including:

- the imposition of governmental controls;

- exposure to foreign exchange risk;

- the need to comply with a wide variety of foreign and U.S. export laws;

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- political and economic instability in certain international markets;

- trade restrictions and protectionist laws and business practices that
favor local competition;

- changes in tariffs and tax laws;

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

- potentially lower level of protection of our intellectual property than in
the United States;

- greater difficulty of administering business overseas;

- the need to support multiple languages;

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

- potential severance exposure related to our employee agreements with our
European employees; and

- dependence on local vendors.

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

WE MAY BE SUED BY OUR CUSTOMERS FOR PRODUCT LIABILITY CLAIMS AS A RESULT OF
FAILURES IN OUR DATA STORAGE PRODUCTS

We face potential liability for performance problems of our products because
our end users employ our storage technologies for the storage and backup of
important data. Although we maintain general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of our insurance coverage could harm
our business.

WE MAY FACE CURRENCY RISKS ASSOCIATED WITH FLUCTUATING FOREIGN CURRENCY
VALUATIONS

Currently, over one-half of our international sales are denominated in U.S.
dollars, and fluctuations in the value of foreign currencies relative to the
U.S. dollar could therefore make our products less price competitive. The
remaining portion of our international sales are denominated in foreign
currencies, primarily the German mark, British pound sterling and French franc.
A decrease in the value of a relevant foreign currency in relation to the U.S.
dollar after establishing prices and before our receipt of payment and
conversion of such payment to U.S. dollars would have an adverse effect on our
operating results. Furthermore, the expenses of our international subsidiaries
are denominated in their local currencies. Because we currently engage in only
limited foreign currency hedging transactions, our operating results could be
adversely affected by movement in foreign currency exchange rates.

WE MAY NEED TO UPGRADE OUR FINANCIAL AND OTHER SOFTWARE TO ACCOUNT FOR THE
EUROPEAN ECONOMIC COMMUNITY'S ADOPTION OF THE EURO

On January 1, 1999, certain member states of the European Economic Community
fixed their respective currencies to a new currency, commonly known as the Euro.
During the three years beginning January 1, 1999, business in these countries
will be conducted both in the existing national currency, such as the French
franc or the German mark, as well as the Euro. Thereafter, all transactions must
be recorded in Euros. We will need to ensure that our financial and other
software

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systems are capable of processing transactions and properly handling both the
existing currencies and the Euro. We are still assessing the impact that the
introduction and use of the Euro will have on our internal systems. We do not
currently expect the introduction and use of the Euro will materially affect our
business; however, if we encounter unexpected difficulties, our business could
be harmed.

A NUMBER OF KEY PERSONNEL ARE CRITICAL TO THE SUCCESS OF OUR BUSINESS

Our future success depends in large part on our ability to retain certain
key executives and other personnel, some of whom have been instrumental in
establishing and maintaining strategic relationships with key suppliers and
customers. We do not have any employment agreements with our U.S. employees,
except for change of control agreements with our executive officers. Our future
growth and success will depend in large part on our ability to hire, motivate
and retain highly qualified management, technical, operations and sales and
marketing personnel. Competition for such personnel is intense in the
high-technology industry, particularly in the Seattle and Denver areas. We may
not be able to retain our existing personnel or attract additional qualified
personnel in the future. In addition, companies in our industry whose employees
accept positions with competitors frequently claim that the competitors have
engaged in unfair hiring practices. We may receive such claims in the future as
we seek to hire qualified personnel, and such claims could result in litigation.
Regardless of the merits of these claims, we could incur substantial costs in
defending ourselves against these claims.

A FAILURE TO DEVELOP AND MAINTAIN PROPRIETARY TECHNOLOGY WILL NEGATIVELY AFFECT
OUR BUSINESS

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

While we are not currently engaged in any intellectual property litigation
or proceedings, we may become so involved in the future. We are now, and we may
in the future be, subject to claims or inquiries regarding our alleged
unauthorized use of a third party's intellectual property. An adverse outcome in
litigation could subject us to significant liabilities to third parties, require
us to license technology from others or require us to cease marketing or using
certain products, any of which could negatively affect our business, financial
condition and operating results. If we are required to seek licenses under
patents or proprietary rights of others, we may not be able to acquire these
licenses on acceptable terms, if at all. In addition, the cost of responding to
an intellectual property infringement claim, in terms of legal fees and expenses
and the diversion of management resources, whether or not the claim is valid,
could harm our business, financial condition and operating results.

OUR INCREASED RESEARCH AND DEVELOPMENT SPENDING MAY NOT YIELD RESULTS THAT
JUSTIFY THE COSTS INCURRED

We have substantially increased our research and development spending over
that of prior periods. Our products and markets are technologically advanced and
rapidly evolving, and we cannot be assured that these efforts will successfully
provide us with new or upgraded products that will be competitive. If these
programs are not successful, our increased investment in research and
development will not yield corresponding benefits to us.

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UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUE

We may not be able to adequately control and eliminate manufacturing flaws.
Our products operate near the limits of electronic and physical performance and
are designed and manufactured with relatively small tolerances. If flaws in
design, production, assembly or testing were to occur in our products or those
of our vendors, we could experience a rate of failure in our products that would
result in substantial repair or replacement costs and potential damage to our
reputation. Continued improvement in manufacturing capabilities and control of
material and manufacturing quality and costs are critical factors in our future
growth. We frequently revise and update manufacturing and test processes to
address engineering and component changes to our products and evaluate the
reallocation of manufacturing resources among our facilities. We cannot assure
you that our efforts to monitor, develop and implement appropriate test and
manufacturing processes for our products will be sufficient to permit us to
avoid a rate of failure in our products that results in substantial shipment
delays, significant repair or replacement costs and damage to our reputation. In
addition, our products are combined with products from other vendors. As a
result, when problems occur, it is difficult to identify the source of the
problem. These problems may cause us to incur significant warranty and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems.

WE FACE SUBSTANTIAL WARRANTY EXPOSURE

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

WE HAVE ANTITAKEOVER PROVISIONS IN PLACE THAT MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US

Our Board of Directors has the authority, without any action by the
shareholders, to issue up to 2,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. In addition, we have adopted a
shareholder rights plan involving the issuance of preferred stock purchase
rights designed to protect our shareholders from abusive takeover tactics by
causing substantial dilution to a person or group that attempts to acquire us on
terms not approved by our board. Certain provisions in our articles of
incorporation, bylaws and shareholder rights plan, as well as Washington law,
and the ability of our board to issue preferred stock, may have the effect of
delaying, deferring or preventing a change in control, may discourage bids for
our common stock at a premium over its market price and may adversely affect the
market price, and the voting and other rights of the holders, of common stock.

OUR STOCK PRICE MAY BE EXTREMELY VOLATILE

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

- announcements about us or our competitors;

- quarterly variations in operating results;

- the introduction of new technology or products or changes in product
pricing policies by us or our competitors;

- comments regarding us and the data storage market made on Internet
bulletin boards; and

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

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In addition, stock markets have experienced extreme price and volume
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
frequently unrelated or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock.

RISKS ASSOCIATED WITH YEAR 2000 NONCOMPLIANCE MAY ADVERSELY AFFECT OUR BUSINESS

Our customers and potential customers may defer information technology
purchases generally until the extent of year 2000 related problems, if any,
actually experienced after December 31, 1999, become clear. Any such deferral of
purchases by our customers or potential customers could harm our business,
financial condition and operating results. See additional year 2000 risk factors
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure."

ITEM 2. FACILITIES

We lease facilities in Washington and Colorado of approximately 65,000
square feet and approximately 86,000 square feet, respectively. The Washington
facility houses our primary executive offices; both facilities house marketing,
sales, customer support, research and development, systems engineering, and
manufacturing organizations. A 5,000 square facility is leased in Nevada where
MountainGate is currently located. We also own a manufacturing facility in
Germany where we produce our large libraries. We lease additional facilities
throughout the United States and Europe for our regional sales offices and
customer service and support personnel. An additional leased facility in
Washington serves certain warehouse needs. Finally, we lease regional sales
offices in France, Germany and the United Kingdom for the sales, marketing and
customer support organizations serving Europe, the Middle East and Africa.

ITEM 3. LEGAL PROCEEDINGS

We are not aware of any pending or threatened litigation against us that we
expect will have a material adverse effect on our business, financial condition,
liquidity or operating results. However, legal claims are inherently uncertain,
and we cannot assure you that we will not be adversely affected in the future by
legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 1999.

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PART II

ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol
"ADIC". As of October 31, 1999, there were approximately 248 shareholders of
record. The following table shows the high and low sales prices for our common
stock for the periods indicated, as reported by the Nasdaq National Market. The
prices included in the table have been adjusted to reflect the two-for-one split
of our outstanding stock that was effected on August 12, 1999.

<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
Fiscal Year 1998:
1(st) Quarter.......................................... $10 1/4 $ 6 25/32
2(nd) Quarter.......................................... $ 9 31/32 $ 7
3(rd) Quarter.......................................... $10 1/4 $ 4 3/8
4(th) Quarter.......................................... $ 6 15/16 $ 3 1/16

Fiscal Year 1999:
1(st) Quarter.......................................... $10 3/8 $ 6 9/16
2(nd) Quarter.......................................... $11 3/4 $ 6 19/32
3(rd) Quarter.......................................... $24 15/16 $10 3/8
4(th) Quarter.......................................... $41 $15 7/8
</TABLE>

It is not anticipated that cash dividends will be paid on shares of our
common stock in the foreseeable future.

Information relating to our issuance of unregistered shares of common stock
in connection with our acquisition of MountainGate Imaging Systems Corporation
is incorporated by reference to the Form 8-K we filed on September 20, 1999, the
relevant portion of which is included as Exhibit 99.1 to this Annual Report on
Form 10-K. Those shares were subsequently registered for resale under a
registration statement on Form S-3 that we filed on November 3, 1999 and the SEC
declared effective on November 12, 1999.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

In the table below, we provide our selected historical consolidated
financial data. We have prepared this information using our consolidated
financial statements for the five years ended October 31, 1999. The information
below reflects our operation as a subsidiary of Interpoint Corporation from
February 11, 1994 to October 15, 1996. On October 15, 1996, Interpoint spun us
off into a separate company. It is important that you read this selected
historical consolidated financial data along with our historical annual
financial statements and related notes included in this Report, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------------
1995 1996 1997 1998(1) 1999(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME:
Net sales.................................... $31,716 $58,957 $93,204 $114,557 $223,367
Cost of sales................................ 22,107 41,887 65,556 81,389 146,627
------- ------- ------- -------- --------
Gross profit............................... 9,609 17,070 27,648 33,168 76,740

Operating expenses:
Selling and administrative................. 8,001 9,846 13,556 20,793 37,922
Acquired in-process technology............. -- -- -- 4,492 2,054
Research and development................... 1,097 1,542 2,910 4,483 13,356
------- ------- ------- -------- --------
Operating profit............................. 511 5,682 11,182 3,400 23,408
Other income(expense)........................ (296) (394) 1,481 1,329 1,026
------- ------- ------- -------- --------
Income before provision for income taxes..... 215 5,288 12,663 4,729 24,434
Provision (benefit) for income taxes......... (77) 1,858 4,166 3,174 8,917
Minority interest............................ -- -- -- 25 299
------- ------- ------- -------- --------
Net income................................... $ 292 $ 3,430 $ 8,497 $ 1,530 $ 15,218
======= ======= ======= ======== ========
Basic net income per share(2)................ $ 0.02 $ 0.21 $ 0.47 $ 0.08 $ 0.75
======= ======= ======= ======== ========
Diluted net income per share(2).............. $ 0.02 $ 0.21 $ 0.46 $ 0.08 $ 0.73
======= ======= ======= ======== ========

CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents.................... $ 624 $10,437 $32,807 $ 28,226 $156,548
Working capital.............................. 7,249 24,596 53,358 66,581 194,365
Total assets................................. 13,943 36,710 75,194 112,407 452,974
Long-term debt and loan from Interpoint,
excluding current portion.................. 5,434 -- -- 18,368 1,507
Shareholders' equity......................... 3,387 26,387 60,110 63,003 338,958
</TABLE>

- ------------------------

(1) The Consolidated Statements of Income data for periods ending after
August 19, 1998 reflect the acquisition of EMASS, Inc. on that date. The
Consolidated Statement of Income data for fiscal 1998 reflects a $513,000
charge to cost sales as a result of purchase accounting adjustments and an
expense of $380,000 of acquired duplicative assets relating to that
acquisition. The Consolidated Statements of Income data for periods ending
after September 17, 1999 reflect the acquisition of MountainGate on that
date.

(2) Earnings per share data have been restated to conform with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" and to reflect
a two-for-one split of our common stock effected on August 12, 1999.

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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THIS DISCUSSION
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. THE CAUTIONARY STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-K SHOULD
BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. WE
UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE REQUIRED TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.

GENERAL

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

Since 1997, our general trends include growth in sales of library products,
growth in international sales, a reduction in sales of standalone digital linear
tape (DLT) drives and growth in our OEM business. Gross profit margins depend on
a number of factors, including customer and product mix, price competition and
tape drive costs. We cannot assure you that we can maintain our gross margin
levels.

In August 1998, we acquired EMASS, Inc. for $25.0 million in cash and the
assumption of $2.0 million in indebtedness, and expensed $4.5 million of
acquired in-process research and development. EMASS established our presence in
Denver and expanded our operations in Europe. This acquisition brought with it
certain product offerings, including large-scale libraries and proprietary
software products designed to operate in conjunction with our hardware products
and the hardware products of our competitors. Additionally, we gained a field
service organization which now serves our combined business. The acquisition of
EMASS resulted in increases in our net sales, selling and administrative
expenses and research and development expenses. However, as a result of the
complete integration of the EMASS business into our existing business, we do not
separately track the operating results of the former EMASS business.

On September 17, 1999, we acquired MountainGate Imaging Systems Corporation.
In connection with the acquisition, we issued an aggregate of 110,000 shares of
common stock, paid $200,000 cash and assumed approximately $2.0 million of
MountainGate's debt. This acquisition brought with it CentraVision, a Storage
Area Network (SAN) software technology. We expensed $2.1 million of acquired
in-process research and development associated with CentraVision software.

Foreign currency gains or losses arise as a result of our operation of
European subsidiaries, the functional currencies of which are the French franc,
German mark and British pound sterling. All monetary assets are translated into
the functional currencies on the financial statements of these subsidiaries.
Some U.S. dollar receivables and payables in these subsidiaries offset each
other to reduce our exposure to transaction gains and losses. To the extent that
these monetary assets and liabilities do

25
<PAGE>
not fully offset each other and the U.S. dollar exchange rate changes with
respect to these currencies, transaction gains or losses may result. For large
sales denominated in other currencies, we attempt to implement appropriate
hedging strategies.

FISCAL YEAR 1999 COMPARED TO 1998

NET SALES. Net sales in fiscal 1999 increased 95% to $223.4 million
compared with net sales of $114.6 million in fiscal 1998. This increase reflects
the recognition of revenue associated with the EMASS business for all of fiscal
1999 compared with recognition for two months of fiscal 1998, as well as strong
sales growth across our major product lines in both our branded products and OEM
business. Revenue from branded products increased in fiscal 1999 to
$187.7 million. Revenue from OEMs was $35.7 million or 16% of total revenue for
fiscal 1999 and $6.8 million or 6% of total revenue for fiscal 1998. Revenue
from a single OEM was 13% in fiscal 1999. These OEM sales consisted primarily of
the small library FastStor products. Net sales outside the United States
accounted for 40% of our net sales in fiscal 1999 and 33% of our net sales in
fiscal 1998.

GROSS PROFIT. Gross profit was $76.7 million or 34% of net sales for fiscal
1999 compared to $33.2 million or 29% of net sales for fiscal 1998. The increase
was due to a shift in product mix toward higher-margin tape libraries, software
and service, and away from lower-margin standalone tape drives and media, as
well as the effects of overall volume increases. Gross profit in fiscal 1998 was
adversely impacted by higher overhead with our new Washington facility,
increases in personnel to support our OEM business, and lower than anticipated
product revenues. The cost of direct material, including tape drives, comprised
a substantial majority of cost of sales in fiscal 1999 and 1998.

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $37.9 million or 17% of net sales for fiscal 1999 compared to
$20.8 million or 18% of net sales for fiscal 1998. The dollar increase in
selling and administrative expenses was due to increased sales and
administrative personnel both in the headquarters office and in regional offices
throughout the United States and increased advertising and promotion costs. The
slight percentage decrease in selling and administrative expenses was due to the
increase in net sales.

ACQUIRED IN-PROCESS TECHNOLOGY. In connection with the acquisitions of
MountainGate in fiscal 1999 and EMASS in fiscal 1998, acquired in-process
technology was identified and valued by an independent third party and was
expensed immediately. In each case, the value of acquired in-process technology
was determined by estimating the stage of development of each in-process
research and development project at the date of acquisition and estimating cash
flows resulting from anticipated revenues generated from such projects, and then
discounting the projected net cash flow.

In the case of MountainGate, the acquired in-process technology was valued
at $2.1 million, approximately 23% of the total assets acquired. The project we
are currently pursuing is an NT version of the CentraVision product that will
also include many new features required to function in the enterprise open
solutions market. We expect to incur significant costs to develop the acquired
in-process technology into a commercially viable product. Costs include
engineering time and material, in addition to costs associated with beta
versions and testing. The valuation of the in-process technology included
estimates of the costs to complete the NT version of CentraVision of
approximately $1.8 million. We expect that this product will be released in the
third quarter of fiscal 2000. Approximately $100,000 of costs were incurred from
the date of acquisition through October 31, 1999, and as of October 31, 1999 the
costs and timing of the project were consistent with the initial estimates of
MountainGate management. Development expenses incurred subsequent to
September 17, 1999, the date of acquisition, are included in research and
development expenses. We believe that this project will be successfully
developed; however, if it is not, our sales and profitability may be adversely
affected in future periods. In addition, the failure of the project could impair
the value of other intangible assets acquired and adversely affect our sales and
profitability in future periods.

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<PAGE>
Acquired in-process technology of EMASS was valued at $4.5 million,
approximately 12% of the total assets acquired. Projects we are currently
pursuing include a new large library storage product and associated software, as
well as separate software products using UNIX and Windows NT platforms. Of the
total value of acquired in-process technology, 49% was associated with the
in-process library products and 51% with the in-process software products. We
expect that these products, if successfully developed, will replace existing
large library and software products. We expect that customer service and
maintenance contracts will, however, continue to provide revenue associated with
the older products.

We expect to continue to incur costs to develop the acquired in-process
technology into commercially viable products. Costs include engineering time and
material, in addition to costs associated with prototype and test systems. The
valuation of the in-process technology included estimates of the costs to
complete the new large library storage product and associated software of
approximately $3.5 million. We expect that these products will be released in
the fourth quarter of fiscal 2000. Approximately $1.5 million and $300,000 of
costs were incurred from the date of acquisition through October 31, 1999 and
1998, respectively. Estimates of the costs to complete the separate software
AMASS products utilizing UNIX and NT platforms were approximately $900,000.
Approximately $1.0 million of costs have been incurred through October 31, 1999.
AMASS NT was released in the third quarter of fiscal 1999, and the other
software products are expected to be released in the second and third quarters
of fiscal 2000. We will continue to incur development costs through such dates.
Expenses incurred subsequent to August 1998 are included in research and
development expenses. We believe that each of these projects will be
successfully developed; however, if they are not, our sales and profitability
may be adversely affected in future periods. In addition, the failure of any
particular project could impair the value of other intangible assets acquired
and adversely affect our sales and profitability in future periods.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$13.4 million or 6% of net sales for fiscal 1999 compared to $4.5 million or 4%
of net sales for fiscal 1998. Much of this increase relates to an emphasis on
software-based products. Approximately 50% of the fiscal 1999 research and
development spending was related to software-based products. We intend to
maintain this level of research and development spending, relative to net sales,
as we continue investing heavily in software development and new hardware
products.

OTHER INCOME (EXPENSE). Interest income for fiscal 1999 was $1.4 million
compared to $1.0 million for fiscal 1998. This increase in interest income is
the result of higher cash balances reflecting our follow-on offering which was
completed in September. Interest expense of $915,000 in fiscal 1999 relates to
interest on a bank loan primarily used to finance the acquisition of EMASS and
to operating credit lines through a German bank. All U.S. bank debt was paid off
at October 31, 1999. The gain on sale of marketable equity securities relates to
investments in certain securities made during fiscal 1998 and sold during fiscal
1999.

PROVISION FOR INCOME TAXES. Income tax expense for fiscal 1999 was
$8.9 million compared to $3.2 million for fiscal 1998. The 36% effective tax
rate for fiscal 1999 includes taxes paid in various federal, state and
international jurisdictions. Our effective income tax rate for fiscal 1999 was
negatively impacted by certain, one time, non-deductible expense associated with
the MountainGate acquisition. There are significant deferred tax assets for net
operating loss carryforwards and other temporary differences associated with
subsidiaries acquired in the EMASS transaction. At October 31, 1998 a full
valuation allowance had been established on these deferred tax assets. During
fiscal 1999 we determined that it was more likely than not that we could realize
the deferred tax assets and consequently reduced the previously established
valuation allowance by $1.8 million. We reduced the valuation of certain
noncurrent intangible assets related to the acquisition by the same amount. At

27
<PAGE>
October 31, 1999 we had a valuation allowance of $3.3 million, which if reduced
will lower our effective income tax rate in future years.

FISCAL YEAR 1998 COMPARED TO 1997

NET SALES. Net sales in fiscal 1998 increased 23% to $114.6 million
compared with net sales of $93.2 million in fiscal 1997. The increase in net
sales relates both to an increase in sales of small libraries and to the
inclusion of EMASS sales in the fourth quarter of the year, offset by a
significant decrease in standalone tape drive and media sales between fiscal
1998 and 1997. The increase in small library sales is due to market growth as
well as to OEM sales under agreements entered into during fiscal 1998. These OEM
sales consisted primarily of the FastStor products introduced in the final
quarter of fiscal 1997. The transition during fiscal 1998 of DLT tape drives,
supplied by Quantum, from a condition of supply constraint to one of general
availability was a major factor in the reduction in the sales of standalone DLT
tape drives and a reduction in sales to distributors and resellers as they
reduced their inventories of these products. Tape drives purchased from
third-party manufacturers, primarily DLT drives, involve rapidly changing
technology. To remain competitive, we sometimes reduce prices on our library
products in response to the decreases in purchased tape drive cost. Primarily
due to declining tape drive prices, in fiscal 1998, we lowered prices on certain
library and other products. Sales to our top two customers were 37% of net sales
in fiscal 1998 compared to 47% in fiscal year 1997. International sales were
$37.9 million in fiscal 1998 and $30.6 million in fiscal 1997, accounting for
33% of net sales in both fiscal years.

GROSS PROFIT. Gross profit decreased to 29% in fiscal 1998 from 30% in
fiscal 1997. The decrease is the result of many factors including higher
overhead associated with the new Washington facility, increases in personnel to
support our OEM business, and lower than anticipated product revenues,
particularly in the third quarter. Gross profit margins decreased further due to
certain product price reductions. These factors more than offset the benefit of
a shift in product mix toward higher-margin libraries and away from lower-margin
standalone products. The gross profit percentage in the fourth quarter benefited
from the larger libraries and software sales of EMASS but was reduced by a
$513,000 charge to cost of goods sold as a result of purchase accounting
adjustments to record EMASS inventory at its fair market value.

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses in
fiscal 1998 were $20.8 million or 18% of sales, compared with $13.6 million or
15% of sales in fiscal 1997. The increase both in absolute dollars and as a
percentage of net sales is due to increased sales personnel in our headquarters,
regional and international sales offices, increased advertising and promotion
costs and increased costs associated with our new headquarters facility. In
addition, with the purchase of EMASS we acquired duplicative assets consisting
of computer systems to track product serial numbers and customer service
information. These assets totaled $380,000 and were expensed subsequent to the
acquisition.

ACQUIRED IN-PROCESS TECHNOLOGY. In connection with the purchase of EMASS in
August 1998, the existence of acquired in-process technology was determined and
valued by an independent third-party appraisal. As discussed in more detail
above, the value associated with this intangible asset of $4.5 million,
approximately 12% of the total purchase price, was expensed immediately.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$4.5 million or 4% of net sales for the year ended October 31, 1998 compared to
$2.9 million or 3% of net sales for fiscal 1997. The dollar and percentage
increases are both related to our significant expenditures associated with both
hardware and software in-process technology.

OTHER INCOME (EXPENSE). Interest income of $1.0 million for fiscal 1998 was
comparable to fiscal 1997 interest income of $1.1 million. Interest expense
incurred in fiscal 1998 of $311,000 represented

28
<PAGE>
interest from August 19 to October 31, 1998 on a bank loan, the proceeds of
which were used to partially finance the acquisition of EMASS. The gain on sale
of marketable securities relates to investments in certain equity securities
that were sold in fiscal 1998. Foreign currency gains or losses arise as a
result of the operation of our European subsidiaries, ADIC Europe and Grau.

PROVISION FOR INCOME TAXES. The provision for income taxes in fiscal 1998
was $3.2 million, which represented an effective tax rate of 67% of pre-tax
income. The expense associated with the write-off of acquired in-process
technology is not deductible for state or federal income tax purposes. Without
this expense, the effective tax rate would have been 34%. The effective tax rate
for fiscal 1997 was 33%, which reflected our investment in certain nontaxable
bonds as well as the utilization of certain credits for increasing research
activities.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows provided by operating activities were $17.5 million for fiscal
1999, $4.4 million for fiscal 1998 and $2.7 million for fiscal 1997. In each of
these periods, operating cash was primarily used to fund increases in accounts
receivable and inventories and was offset by net income, depreciation and other
allowances and accounts payable growth. Additionally, in fiscal 1999 and 1998,
net income was reduced by the expensing of acquired in-process technology, a
noncash item. Other noncash items in fiscal 1999 include an increase in the
allowance for inventory obsolescence of $5.0 million. As our installed base of
library products has increased, the need for service and warranty repair
inventory, especially inventory at regional locations to support on-site
service, has also increased. We have provided an allowance against these
inventories, as well as for inventories used for demonstration purposes, in
addition to our allowance for excess and obsolescence. Because these inventories
can remain in the field for an extended time, the amount of this allowance has
increased substantially over the past two years.

Cash flows used in investing activities were $16.6 million for fiscal 1999,
$28.7 million for fiscal 1998 and $5.8 million for fiscal 1997. Fiscal 1999
includes a $4.0 million investment in Network Integrity, Inc., a $7.0 million
investment in @Backup, an Internet-based backup and data access service company,
ongoing investments in property, plant, equipment and marketable equity
securities, proceeds from the sales of marketable equity securities and
approximately $432,000 for cash related to acquisitions. Our investing
activities in fiscal 1998 were primarily associated with the acquisition of
EMASS in August 1998. In connection with this acquisition, we acquired assets
with a fair value of $38.9 million and assumed $13.9 million of liabilities.
Included with EMASS's assets was $1.6 million in cash. Additionally, we invested
in property, plant and equipment, primarily associated with our new headquarters
facility and various technology additions and upgrades, and also invested in
certain marketable equity securities, some of which were sold later in the year.
In August 1997, we used $4.0 million to acquire a minority equity position in
Crossroads Systems, Inc., a provider of Fibre Channel interconnection products.
We used an additional $1.8 million to purchase plant and equipment in fiscal
1997.

Cash flows provided by financing activities were $128.0 million for fiscal
1999 compared to $19.6 million for fiscal 1998 and $25.5 million for fiscal
1997. In September 1999 we completed our follow-on stock offering of
$135.6 million and repaid substantially all our long-term debt. In June 1999, we
finalized two operating lines provided by German banks totaling approximately
$8.9 million in German marks and borrowed the entire amount. These short-term
loans are scheduled to be repaid May 2003 and bear interest at each bank's rate,
approximately 3.2% through November 1999. Additionally, in June 1999 we
refinanced our mortgage loan collateralized by our German facility totaling
approximately $1.8 million in German marks. In August 1998, we received proceeds
from long-term borrowings of $20.0 million. In March 1997, we completed a public
offering of stock that provided cash of $23.7 million.

29
<PAGE>
At October 31, 1999, our cash and cash equivalents totaled $156.5 million,
up from $28.2 million at October 31, 1998. Our working capital, the difference
between current assets and current liabilities, was $194.4 million at
October 31, 1999, with a ratio of current assets to current liabilities of 5.0
to 1.

We have a $10.0 million bank line of credit that expires in February 2001,
all of which was available as of October 31, 1999. Borrowings under this line of
credit bear interest at the bank's reference rate or an adjusted LIBOR rate. A
credit agreement covers the line of credit and long-term note payable and
requires that we maintain certain financial ratios and levels of working
capital, tangible net worth and profitability. We had no material or unusual
commitments as of October 31, 1999 other than annual rental commitments.
Additionally, at October 31, 1999, our investment in Crossroads Systems, Inc.
had a market value of $185,544,000. The market for technology stocks is
extremely volatile and there is no assurance that we will realize this value
when and if we liquidate our investment in Crossroads.

We believe that our existing cash and cash equivalents, bank line of credit,
and anticipated cash flow from our operating activities, will be sufficient to
fund our working capital and capital expenditure needs for at least the next
12 months. We may utilize cash to acquire or invest in businesses, products or
technologies that we believe are strategic. We regularly evaluate other
companies and technologies for possible acquisition by us. In addition, we have
made and expect to continue to make substantial investments in companies with
whom we have identified potential synergies. However, we have no present
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." FAS 130 establishes standards for
reporting and displaying comprehensive income and its components with the same
prominence as other financial statements and has been implemented.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
FAS 131 establishes new disclosure requirements for operating segments,
including products, services, geographic area and major customers. FAS 131 has
been implemented.

In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued.
FAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. In July 1999, the FASB issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." FAS 137 defers the effective date until the fiscal year
ending October 31, 2001. We will adopt FAS 133 in our quarter ending
January 31, 2001 and do not expect such adoption to have an impact on our
results of operations, financial position or cash flows.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." This
pronouncement summarizes certain of the SEC staff's views on applying generally
accepted accounting principles to revenue recognition. We are required to adopt
SAB 101 for our fiscal year ending October 31, 2001. We are currently reviewing
the requirements of SAB 101, but do not expect such adoption to have an impact
on our results of operations, financial position or cash flows.

30
<PAGE>
MARKET RISK MANAGEMENT

We are exposed to various market risks, including changes in foreign
currency rates and interest rates. We may enter into various derivative
transactions to manage certain of these exposures. We do not hold or issue
derivative instruments for trading purposes.

The assets and liabilities of our non-U.S. subsidiaries have functional
currencies other than the U.S. dollar, and are translated in U.S. dollars at
exchange rates in effect at the balance sheet date. Income and expense items are
translated at the average exchange rates prevailing during the period. A 10%
depreciation in the U.S. dollar would result in an approximately $347,000
decrease in income before provision for income taxes for fiscal 1999.

At October 31, 1999, we had variable rate debt of approximately
$8.6 million provided by German banks, and fixed rate debt of $1.7 million, also
provided by a German bank. The fair value of such debt approximates the carrying
amount on the consolidated balance sheet at October 31, 1999. Market risk is
estimated as the potential for interest rates to increase 10% on the variable
rate debt. Any such increase would be immaterial to the consolidated financial
position and results of operations and cash flows. We have entered into an
interest rate swap agreement on the variable rate debt, which beginning in
December 1999 fixes the interest rate at 4.3%.

IMPACT OF EUROPEAN MONETARY CONVERSION

We are aware of the issues associated with the changes in Europe resulting
from the formation of a European economic and monetary union. One change
resulting from this union required European Monetary Union, or EMU, member
states to irrevocably fix their respective currencies to a new currency, the
Euro, as of January 1, 1999, at which date the Euro became a functional legal
currency of these countries. During the next three years, business in the EMU
member states will be conducted in both the existing national currency, such as
the French franc or the German mark, and the Euro. As a result, companies
operating or conducting business in EMU member states will need to ensure that
their financial and other software systems are capable of processing
transactions and properly handling these currencies, including the Euro. We are
still assessing the impact that the conversion to the Euro will have on our
internal systems, the sale of our products and the European and global
economies. We will take appropriate corrective actions based on the results of
such assessment. We have not yet determined the cost related to addressing this
issue.

YEAR 2000 READINESS DISCLOSURE

Many computers, software and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result, some of these
systems could fail to operate or fail to produce correct results if "00" is
interpreted to mean 1900, rather than 2000. This error could result in system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

PRODUCTS. We believe the current versions of our hardware and software
products are year 2000 compliant. All new products are being designed to be year
2000 compliant. While most of our internally manufactured library products have
no date functionality built into them, this is not true for certain software and
large library products. Year 2000 compliant upgrades are currently available for
all of these products, and our service personnel are able to install these
upgrades in conjunction with routine maintenance. In addition, we reviewed
hardware used in connection with certain large library products, replaced
certain systems that could not be made compliant and upgraded those that could.
We estimate that the total costs to replace this hardware approximate $275,000,
all of which has been expended. These costs were partially reimbursed by
customers.

31
<PAGE>
We cannot be assured that all of our existing products will contain all
necessary date codes. Further, use of our products in connection with other
products that are not year 2000 compliant, including noncompliant hardware,
software and firmware, may result in the inaccurate exchange of dates and result
in performance problems or system failure. Any failure of our products to
perform could result in claims against us. The cost of defending any such claim
which may arise, as well as any liability for year 2000 related damages, could
have a material adverse effect on our business, financial condition and
operating results.

INTERNAL INFORMATION TECHNOLOGY SYSTEMS. Our business depends on numerous
systems potentially vulnerable to year 2000 related problems. We modified such
systems as needed, and replaced several network servers and various other pieces
of equipment and software at a cost of approximately $100,000. Based on our
assessments, software vendor certification and our experience to date, we
believe that the enterprise resource planning computer systems at our various
manufacturing sites are year 2000 compliant.

SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices,
could be affected by year 2000 problems. We assessed the potential effect and
costs of remediating the year 2000 problem on our office equipment and
facilities and replaced certain equipment at an immaterial cost. To date, we
have not experienced significant year 2000 problems in operational systems,
equipment and facilities.

SUPPLIERS. Our reliance on key suppliers, and therefore on the proper
function of their information systems and software, means that their failure to
address year 2000 issues could have a material impact on our operations and
financial results. We asked key suppliers to provide information regarding their
readiness for year 2000 related issues, received responses from substantially
all of them, reviewed the responses and believe no further actions are required
to mitigate vulnerability to problems with suppliers and other third parties'
systems. We made provisions to carry approximately one month of inventory of
certain critical and custom parts to help us mitigate any supplier risk.

YEAR 2000 COSTS. We incurred primarily internal staff cost and other
expenses related to infrastructure and facilities enhancements necessary to
prepare our systems for the year 2000. We also utilized a third party to do
additional testing of our enterprise resource planning computer system in
Redmond. There were no material direct out-of-pocket costs in these areas.

CONTINGENCY PLANS. We developed contingency plans to be implemented in the
event of critical year 2000 problems. The extent of existing but undetected year
2000 problems remains unknown, but to date, there has been no need to implement
our contingency plans.

WORST-CASE SCENARIO. We believe that the most likely worst-case scenario
related to the year 2000 issue that we could experience would be either an
inability to obtain inventory components from suppliers or delays in receiving
orders or payments from customers due to year 2000 problems experienced by these
third parties. If either of these events transpires, we could experience
decreased revenue due to our inability to produce and ship our products or our
inability to collect payments due to us in a timely fashion.

DISCLAIMER. The discussion of our efforts and ongoing expectations relating
to year 2000 compliance include some forward-looking statements. We cannot be
certain that we will not incur additional, unanticipated costs, losses or
liabilities related to internal or third-party year 2000 problems not yet known
to us. Such costs, losses and liabilities could have a material adverse effect
on our business, financial condition and operating results.

32
<PAGE>
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... 34

Consolidated Balance Sheets at October 31, 1998 and 1999.... 35

Consolidated Statements of Income for each of the three
years in the period ended
October 31, 1999.......................................... 36

Consolidated Statements of Changes in Shareholders' Equity
for each of the three years in the period ended
October 31, 1999.......................................... 37

Consolidated Statements of Cash Flows for each of the three
years in the period ended October 31, 1999................ 38

Notes to Consolidated Financial Statements.................. 40
</TABLE>

33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Advanced Digital Information Corporation

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Advanced Digital Information Corporation and its
subsidiaries at October 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended
October 31, 1999, in conformity with accounting principles generally accepted in
the United States. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Seattle, Washington
December 7, 1999

34
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT FOR SHARE DATA)

<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 28,226 $156,548
Accounts receivable, net of allowances of $476 in 1998 and
$1,004 in 1999.......................................... 31,797 44,568
Inventories, net.......................................... 32,294 33,317
Marketable equity securities.............................. 2,135 2,222
Prepaid expenses and other................................ 1,500 1,063
Deferred income taxes..................................... 1,340 4,664
-------- --------
Total current assets.................................. 97,292 242,382
Property, plant and equipment, net.......................... 7,351 8,712
Deferred income taxes....................................... 63 --
Investment in Crossroads Systems, Inc....................... 4,000 185,544
Intangible and other assets and investments in common
stock..................................................... 3,701 16,336
-------- --------
$112,407 $452,974
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 16,987 $ 20,582
Accrued liabilities....................................... 7,902 11,439
Income taxes payable...................................... 398 3,138
Deferred revenue.......................................... 2,252 4,105
Current portion of long-term debt......................... 3,172 8,753
-------- --------
Total current liabilities............................. 30,711 48,017
Long-term debt.............................................. 18,368 1,507
Other long-term liabilities................................. 300 --
Deferred income taxes....................................... -- 64,168
Minority interest........................................... 25 324
Commitments (Note 15)....................................... -- --
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, no par value; 80,000,000 shares authorized,
25,465,767 issued and outstanding at October 31, 1999
(19,532,322 in 1998).................................... 46,231 191,155
Retained earnings......................................... 16,009 31,227
Accumulated other comprehensive income:
Cumulative translation adjustment....................... 763 (963)
Unrealized investment gains............................. -- 117,539
-------- --------
Total shareholders' equity............................ 63,003 338,958
-------- --------
$112,407 $452,974
======== ========
</TABLE>

See the accompanying notes to these consolidated financial statements.

35
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $93,204 $114,557 $223,367
Cost of sales............................................... 65,556 81,389 146,627
------- -------- --------
Gross profit.............................................. 27,648 33,168 76,740
------- -------- --------
Operating expenses:
Selling and administrative................................ 13,556 20,793 37,922
Acquired in-process technology............................ -- 4,492 2,054
Research and development.................................. 2,910 4,483 13,356
------- -------- --------
16,466 29,768 53,332
------- -------- --------
Operating profit............................................ 11,182 3,400 23,408
------- -------- --------
Other income (expense):
Interest income........................................... 1,096 1,028 1,406
Interest expense.......................................... -- (311) (915)
Gain on sale of marketable equity securities.............. -- 248 571
Foreign currency transaction gains, net................... 385 364 100
Other..................................................... -- -- (136)
------- -------- --------
1,481 1,329 1,026
------- -------- --------
Income before provision for income taxes.................... 12,663 4,729 24,434
------- -------- --------
Provision (benefit) for income taxes:
Current................................................... 4,538 3,719 9,112
Deferred.................................................. (372) (545) (195)
------- -------- --------
4,166 3,174 8,917
------- -------- --------
Minority interest........................................... -- 25 299
------- -------- --------
Net income.................................................. $ 8,497 $ 1,530 $ 15,218
======= ======== ========
Basic net income per share.................................. $ 0.47 $ 0.08 $ 0.75
======= ======== ========
Diluted net income per share................................ $ 0.46 $ 0.08 $ 0.73
======= ======== ========
</TABLE>

See the accompanying notes to these consolidated financial statements.

36
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999

(IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
-------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1996................. 16,004 $ 20,330 $ 5,982 $ 75 $ 26,387
Shares issued in public offering, net of
costs..................................... 3,000 23,709 -- -- 23,709
Contribution of capital..................... -- 266 -- -- 266
Exercise of stock options, including tax
benefit of $1,064......................... 396 1,503 -- -- 1,503
Comprehensive income:
Net income................................ -- -- 8,497 -- --
Foreign currency translation adjustment... -- -- -- (253) --
Total comprehensive income.............. -- -- -- -- 8,244
------ -------- ------- -------- --------
Balance at October 31, 1997................. 19,400 45,808 14,479 (178) 60,109
Shares repurchased.......................... (59) (200) -- -- (200)
Purchases under Stock Purchase Plan......... 45 142 -- -- 142
Exercise of stock options, including tax
benefit of $317........................... 146 481 -- -- 481
Comprehensive income:
Net income................................ -- -- 1,530 -- --
Foreign currency translation adjustment... -- -- -- 941 --
Total comprehensive income.............. -- -- -- -- 2,471
------ -------- ------- -------- --------
Balance at October 31, 1998................. 19,532 46,231 16,009 763 63,003
Shares issued in public offering, net of
costs..................................... 5,000 135,567 -- -- 135,567
Shares issued to acquire MountainGate....... 110 3,598 -- -- 3,598
Purchases under Stock Purchase Plan......... 162 724 -- -- 724
Exercise of stock options, including tax
benefit of $2,287......................... 662 5,035 -- -- 5,035
Comprehensive income:
Net income................................ -- -- 15,218 -- --
Unrealized investment gains............... -- -- -- 117,539 --
Foreign currency translation adjustment... -- -- -- (1,726) --
Total comprehensive income.............. -- -- -- -- 131,031
------ -------- ------- -------- --------
Balance at October 31, 1999................. 25,466 $191,155 $31,227 $116,576 $338,958
====== ======== ======= ======== ========
</TABLE>

See the accompanying notes to these consolidated financial statements.

37
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,497 $ 1,530 $ 15,218
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest....................................... -- 25 299
Depreciation and amortization........................... 847 1,614 3,676
Allowance for doubtful accounts receivable.............. 167 391 817
Allowance for inventory obsolescence.................... 651 1,166 4,955
Acquired in-process technology.......................... -- 4,492 2,054
Gain on sale of marketable equity securities............ -- (248) (571)
Deferred income taxes................................... (372) 1 (2,161)
Assets retired.......................................... -- 89 262
Change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable..................................... (5,592) (3,466) (14,181)
Inventories............................................. (5,929) (2,127) (6,421)
Prepaid expenses and other.............................. (443) 225 343
Other assets............................................ 39 (71) (29)
Accounts payable........................................ 2,824 2,711 1,274
Accrued liabilities..................................... 1,052 (1,679) 2,877
Income taxes payable.................................... 1,007 (489) 7,109
Deferred revenue........................................ -- 195 1,984
------- -------- --------
Net cash provided by operating activities................... 2,748 4,359 17,505
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (1,831) (3,362) (5,138)
Investment in marketable equity securities................ -- (3,004) (2,736)
Proceeds from sale of marketable equity securities........ -- 1,116 2,756
Acquisitions, net of cash acquired........................ -- (23,473) (432)
Investment in common stock................................ (4,000) -- (11,000)
------- -------- --------
Net cash used in investing activities....................... (5,831) (28,723) (16,550)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings........................ -- 20,000 10,650
Repayment of long-term debt............................... -- (545) (21,731)
Proceeds from issuance of common stock, net............... 23,709 -- 135,567
Repurchase of common stock................................ -- (200) --
Capital contribution from former parent company........... 266 -- --
Proceeds from issuance of common stock for stock options
and stock purchase plan................................. 1,503 306 3,472
------- -------- --------
Net cash provided by financing activities................... 25,478 19,561 127,958
------- -------- --------
Effect of exchange rate changes on cash..................... (25) 222 (591)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 22,370 (4,581) 128,322
Cash and cash equivalents at beginning of period............ 10,437 32,807 28,226
------- -------- --------
Cash and cash equivalents at end of period.................. $32,807 $ 28,226 $156,548
======= ======== ========
</TABLE>

See the accompanying notes to these consolidated financial statements.

38
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest.................................................. $ -- $ 196 $ 966
Income taxes.............................................. $ 2,467 $ 3,722 $ 4,023
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Our investment in Crossroads Systems, Inc. and other marketable equity
securities are recorded at their fair value. The difference between the cost and
fair value represents an unrealized investment gain, net of tax, of $117,539,000
which is included as a separate component of shareholders' equity at
October 31, 1999.

We purchased all of the outstanding stock of MountainGate in September 1999
and EMASS in August 1998 (Note 2). In conjunction with the acquisitions,
liabilities were assumed as follows:

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Fair value of assets acquired.............................. $38,909 $8,764
Cash paid.................................................. 25,057 287
Issuance of stock for acquisition.......................... -- 3,598
------- ------
Liabilities assumed........................................ $13,852 $4,879
======= ======
</TABLE>

See the accompanying notes to these consolidated financial statements.

39
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The financial statements consolidate the accounts of Advanced Digital
Information Corporation, our wholly owned subsidiaries ADIC Europe SARL (ADE)
and MountainGate Imaging Systems Corporation (MountainGate), and our 80% owned
subsidiaries ADIC/GRAU Storage Systems GmbH & Co. KG (Grau) and ADIC Grau
Limited (Grau UK). Grau and Grau UK were subsidiaries of EMASS, Inc. which has
been merged into ADIC. The companies are collectively hereinafter referred to as
"ADIC," "we," "our" and "us." The companies acquired in fiscal 1998 which
include EMASS, Inc., Grau and Grau UK, are generally referred to as EMASS. All
intercompany transactions have been eliminated.

STOCK SPLIT

On August 12, 1999, we effected a two-for-one split of our common stock for
shareholders of record as of July 31, 1999. All share and per share amounts in
the accompanying consolidated financial statements have been restated to give
effect to the stock split.

NATURE OF OPERATIONS

We provide hardware and software data storage solutions to the open systems
marketplace. Along with our value-added resellers, original equipment
manufacturer (OEM) partners and customers, we incorporate our products and our
service and support operations with third-party hardware and software products
to deliver reliable, flexible and scalable storage solutions. Our storage
solutions are designed to enable organizations to organize, protect and retrieve
complex mission-critical data. Our storage management software is an integrated
family of software products. We sell our products on an international basis.

USE OF ESTIMATES

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

Estimates that are particularly susceptible to significant change in the
near term are the adequacy of the allowances for sales returns, inventory
obsolescence, warranty costs and the allocation of purchase price and estimated
valuation of acquired, developed and in-process technology.

REVENUE RECOGNITION

We rely on multiple distribution channels; our customers may be
distributors, resellers, OEMs or end-users. We record revenue from sales of
small libraries when the products are shipped to customers, net of a provision
for anticipated returns. Revenue from large library product sales generally is
recognized upon end-user customer acceptance, which occurs after delivery and
installation are completed. Revenue from software sales is recognized when the
criteria of Statement of Position No. 97-2, "Software Revenue Recognition" have
been met. These criteria include, but are not limited to, software delivery, our
lack of other significant obligations to the customer and a determination that

40
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

collectability of the amount due is probable. Our software products do not
require significant production, modification, or customization by us or by the
customer. Revenue from sales of services is recognized when services are
performed and billable, except for extended service agreements. Revenue under
extended service agreements is deferred and recognized ratably over the life of
the service agreement. Large libraries, software and maintenance services may be
sold separately or together. If sold together, total revenue is allocated to the
various elements based upon the price of that item sold on a separate basis. We
estimate and accrue rebates and other reductions of sales due to promotional
activities at the time of the sale.

Certain distributors of small libraries have the right, on a quarterly
basis, to return products according to a stock rotation policy. Typically, the
value of the products returned can not exceed 15% of the previous quarter's
purchases, the returns must be accompanied by offsetting orders of commensurate
value, and the products returned must be new and in sealed cartons. We accrue a
provision for the estimated sales returns, allowances and discounts in the
period the products are shipped to customers.

WARRANTY EXPENSE

For our standard products, parts and labor are covered under warranty for
periods between three months and three years. With respect to drives and tapes
used in our products but manufactured by a third party, we pass on to the
customer the warranty on such drives and tapes provided by the manufacturer. A
provision for costs related to warranty expense is recorded when revenue is
recognized.

ADVERTISING EXPENSE

We have co-operative advertising agreements with certain of our domestic and
international distributors for the promotion of sales of our products. These
agreements allow us to reimburse the distributors for approved promotional
activities. The amounts available for reimbursement are related to a percentage
of the distributor's eligible purchases from us. We accrue for co-operative
advertising as the related revenue is recognized. All other advertising costs
are expensed as incurred. Advertising expense for the years ended October 31,
1997, 1998 and 1999, was $2,849,000, $4,827,000 and $5,044,000, respectively.

RESEARCH AND DEVELOPMENT COSTS

Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the short-term nature of these instruments. The carrying value
of our long-term debt approximates fair value as the debt bears interest that
adjusts based upon market interest rates. Our investments in marketable equity
securities are stated at fair value which exceeds cost at October 31, 1999.

41
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK

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

We sell a significant portion of our products through third-party resellers
and, as a result, experience individually significant annual sales volumes with
major distributors and OEMs. In fiscal 1999, $29,618,000 (13%) and $26,988,000
(12%) were sold to an OEM customer and distributor, respectively. $25,566,000
(22%) and $16,945,000 (15%) of our fiscal 1998 revenues were to two
distributors. The same two distributors accounted for fiscal 1997 revenues of
$25,707,000 (28%) and $18,101,000 (19%), respectively. At October 31, 1999, the
two customers that exceeded 10% of sales represented 19% of accounts receivable.
The two customers that exceeded 10% of sales in fiscal 1998 represented 20% of
the accounts receivable balance at October 31, 1998.

CASH AND CASH EQUIVALENTS

Cash equivalents are short-term, highly liquid investments and consist of
investments in commercial paper and marketable debt securities which are readily
convertible to cash without penalty and subject to insignificant risk of changes
in value. Our cash and cash equivalents balance consists of the following:

<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash................................................... $18,999 $ 29,396
Commercial paper....................................... 7,973 120,558
Marketable debt securities............................. 1,254 6,594
------- --------
$28,226 $156,548
======= ========
</TABLE>

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost, except for property,
plant and equipment of EMASS which has been reduced for certain negative
goodwill associated with its acquisition in fiscal 1998. Depreciation and
amortization are computed on the straight-line method over the estimated useful
lives of the assets as follows: machinery and equipment and office equipment, 3
to 10 years; leasehold improvements, the life of the lease. Expenditures for
maintenance and repairs are charged to income as incurred.

INTANGIBLE ASSETS

Intangible assets resulting from the acquisition of MountainGate include
developed technology, core technology, assembled workforce and goodwill which
were recorded at their fair value. These

42
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

assets are amortized over the periods estimated to be benefited as follows:
developed technology and assembled workforce, 2 years; core technology and
goodwill, 7 years. Intangible assets resulting from the acquisition of EMASS
were eliminated as the valuation allowance associated with certain deferred tax
assets was reduced.

INCOME TAXES

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

Deferred taxes result from the difference between the tax basis and fair
value of assets of acquired entities, the use of accelerated depreciation for
tax purposes and from the timing of tax deductions for allowances and accrued
expenses.

FOREIGN CURRENCY TRANSLATIONS

The financial statements of ADE, Grau and Grau UK have been translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation." Under the provisions of this statement,
all assets and liabilities in the balance sheets of these subsidiaries, whose
functional currency is the French franc, German mark and British pound sterling,
respectively, are translated at year-end exchange rates, and translation gains
and losses are accumulated in a separate component of shareholders' equity.

FOREIGN CURRENCY TRANSACTIONS AND FORWARD CONTRACTS

Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency, including U.S. dollars. Gains and losses on those foreign
currency transactions are included in determining net income or loss for the
period in which exchange rates change. The effect of exchange rate fluctuations
on the results of operations is minimized by the offsetting nature of ADE and
Grau foreign currency transactions. In addition, we may enter into foreign
currency forward contracts to hedge transactions which are not otherwise offset.
Foreign currency forward exchange contracts represent agreements to exchange the
currency of one country for the currency of another country at an agreed-upon
price, on an agreed-upon settlement date. Foreign currency forward exchange
contracts are accounted for by the fair value method, and are typically three
months or less in length. There were no outstanding contracts at October 31,
1999 or 1998.

STOCK-BASED COMPENSATION

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."

43
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE

We adopted Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" in the first quarter of fiscal 1998. Basic earnings per share is computed
based on the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed based on the weighted
average number of shares of common stock outstanding during the period increased
by the weighted average number of common stock equivalents outstanding during
the period, using the treasury stock method.

RECENT ACCOUNTING PRONOUNCEMENTS

2. BUSINESS COMBINATIONS

In September 1999, we acquired all of the outstanding stock of MountainGate
Imaging Systems Corporation. MountainGate provides software that enables very
high bandwidth cross-platform file sharing in Storage Area Networks. Its
CentraVision file system provides value by improving workflow efficiency,
enabling collaborative workgroups and delivering high-performance file sharing
in network environments. In connection with the acquisition, ADIC issued 110,000
shares and paid $200,000 in cash to the previous MountainGate shareholders. This
acquisition was accounted for by the purchase method of accounting for business
combinations and results of operations are included in the

44
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BUSINESS COMBINATIONS (CONTINUED)

consolidated operating results since the date of the acquisition. Acquired
in-process technology purchased as a component of this acquisition totaled
$2,054,000 and was expensed immediately.

In July 1998, we entered into a Stock Purchase Agreement with Raytheon
E-Systems, Inc. to purchase all of the outstanding stock of EMASS, Inc., its
wholly owned subsidiary. EMASS and its subsidiaries, Grau and Grau UK, are
providers of large-scale libraries and open systems storage software. The
acquisition was accounted for as a purchase; accordingly, the operating results
of the acquired group have been included in the consolidated operating results
since the date of the acquisition, August 19, 1998. Acquired in-process
technology of $4,492,000 was expensed immediately. Pursuant to the terms of the
purchase agreement, we made a cash payment of $24,766,000 to Raytheon and
assumed approximately $2,000,000 in mortgage indebtedness. The acquisition was
funded through a combination of cash and debt.

A summary of assets acquired and liabilities assumed at the date of the each
of the acquisitions is presented in the table below. Accounts payable and other
current liabilities of EMASS includes approximately $600,000 of costs associated
with the termination of an employee. In each acquisition, the acquired
in-process technology had not reached technological feasibility as of the date
of the acquisition and had no alternative future use. In the EMASS acquisition,
the fair value of the net assets exceeded the purchase price, consequently, no
goodwill was recorded and the excess was allocated to reduce proportionately the
initial values assigned to noncurrent assets.

<TABLE>
<CAPTION>
MOUNTAINGATE EMASS
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Cash................................................. $ 29 $ 1,584
Accounts receivable.................................. 263 10,493
Inventories.......................................... 580 14,632
Prepaid expenses and other........................... -- 1,523
Property, plant and equipment........................ 103 2,518
Acquired in-process technology....................... 2,054 4,492
Intangible and other assets.......................... 5,735 3,667
Accounts payable and other current liabilities....... (2,688) (11,913)
Long-term debt....................................... -- (1,639)
Other long-term liabilities.......................... (2,191) (300)
Minority interest of 80% owned subsidiary............ -- --
------- --------
Net assets acquired................................ $ 3,885 $ 25,057
======= ========
</TABLE>

The valuations of the acquired in-process technologies are based upon our
estimates and valuations by a third-party appraiser. Given that the valuations
of the acquired in-process technologies are estimates, actual results may
change.

45
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. BUSINESS COMBINATIONS (CONTINUED)

The following summary (unaudited), prepared on a pro forma basis, combines
the consolidated results of operations for the fiscal years ended October 31,
1998 and 1999 as if the CentraVision operations of MountainGate had been
acquired at November 1, 1997 and 1998, respectively.

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Net sales............................................... $115,294 $223,575
Net income.............................................. $ 366 $ 14,189
Basic net income per share.............................. $ 0.02 $ 0.70
Diluted net income per share............................ $ 0.02 $ 0.68
</TABLE>

The following summary (unaudited), prepared on a pro forma basis, combines
the consolidated results of operations for the fiscal years ended October 31,
1997 and 1998 as if EMASS had been acquired at November 1, 1996 and 1997,
respectively.

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
1997 1998
----------- -----------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Net sales............................................... $157,675 $167,777
Net loss................................................ $ (1,614) $ (3,055)
Basic net loss per share................................ $ (0.09) $ (0.16)
Diluted net loss per share.............................. $ (0.09) $ (0.16)
</TABLE>

The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the periods presented.
In addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from consolidated operations.

3. MARKETABLE EQUITY SECURITIES

In January 1998, we began investing in certain equity securities. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" these investments are
classified as available-for-sale. Under FAS 115, unrealized holding gains and
losses, net of taxes, are reflected as a net amount in a separate component of
shareholders' equity until realized. For the purpose of computing realized gains
and losses, costs are identified on a specific identification basis.

At October 31, 1998, there was no significant difference between the cost
basis and fair value of these securities. At October 31, 1999, the cost basis of
these securities was $2,686,000, the fair value was $2,222,000 and the
unrealized loss was $464,000. During each of the fiscal years ended October 31,
1998 and 1999, we sold certain marketable equity securities and realized gains
of $248,000 and $571,000, respectively.

46
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INVENTORIES

Inventories are comprised of the following:

<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods......................................... $13,104 $13,871
Work-in-process........................................ 3,383 3,892
Raw materials.......................................... 17,952 22,133
------- -------
34,439 39,896
Allowance for inventory obsolescence................... (2,145) (6,579)
------- -------
$32,294 $33,317
======= =======
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land and building...................................... $ 1,490 $ 912
Machinery and equipment................................ 6,923 10,752
Office equipment....................................... 3,315 2,540
Leasehold improvements................................. 619 1,350
------- -------
12,347 15,554
Accumulated depreciation and amortization.............. (4,996) (6,842)
------- -------
$ 7,351 $ 8,712
======= =======
</TABLE>

Depreciation and amortization expense was $848,000, $1,445,000 and
$2,983,000 in fiscal 1997, 1998 and 1999, respectively.

6. INTANGIBLE AND OTHER ASSETS AND INVESTMENTS IN COMMON STOCK

INTANGIBLE ASSETS

Intangible assets consists of the following:

<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Developed technology................................... $3,016 $ 413
Core technology........................................ -- 3,804
Assembled workforce.................................... 627 287
Goodwill............................................... -- 768
------ ------
3,643 5,272
Accumulated amortization............................... (169) (84)
------ ------
$3,474 $5,188
====== ======
</TABLE>

47
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ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INTANGIBLE AND OTHER ASSETS AND INVESTMENTS IN COMMON STOCK (CONTINUED)

Certain intangible assets acquired in connection with the acquisition of
EMASS in fiscal 1998 were reduced to zero in fiscal 1999 as a valuation
allowance on certain deferred tax assets of these subsidiaries was relieved.

INVESTMENTS IN COMMON STOCK

In fiscal 1999, we purchased common stock in Network Integrity, Inc. for an
aggregate purchase price of $4,000,000 and in @Backup, Inc., for an aggregate
purchase price of $7,000,000. Network Integrity is a developer of specialized
data protection software products, @Backup, Inc. is an Internet-based backup and
data service company. These investments are accounted for under the cost method.

7. INVESTMENT IN CROSSROADS SYSTEMS, INC.

In August 1997, we purchased an approximately 15% interest in Crossroads for
a purchase price of $4,000,000. In October 1999, Crossroads completed an initial
public offering and in accordance with FAS 115, this investment is currently
classified as available-for sale. Accordingly, the difference between the cost
basis and fair value of $185,544,000, net of taxes of $63,540,000, is recorded
as an unrealized investment gain. This unrealized gain is included as a separate
component of shareholders' equity at October 31, 1999. Crossroads develops
products that provide interconnectivity between various network protocols and
Fibre Channel networks. We do not exercise influence over, or participate in the
management or board of directors of Crossroads.

8. ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:

<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related liabilities................ $4,548 $ 6,586
Allowance for warranty returns......................... 763 1,017
Taxes, other than income............................... 329 375
Interest............................................... 115 64
Other.................................................. 2,147 3,397
------ -------
$7,902 $11,439
====== =======
</TABLE>

9. CREDIT AGREEMENT AND LONG-TERM DEBT

CREDIT AGREEMENT

We have a $10 million unsecured line of credit with a bank expiring
February 28, 2001. All of this line was available at October 31, 1999.
Borrowings against the line of credit will bear interest at the bank's prime
rate or adjusted LIBOR rate.

Additionally, we have two operating lines provided by German banks totaling
approximately $8,611,000 in German marks all of which was utilized. These loans
are due May 2003 and bear interest

48
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. CREDIT AGREEMENT AND LONG-TERM DEBT (CONTINUED)

at each bank's rate, approximately 3.2% through November 1999. Beginning
December 1999, the interest rate varies; we have entered into a hedging contract
to fix the interest rate at 4.3%.

LONG-TERM DEBT

Long-term debt at October 31, 1999 represents a loan payable to a German
bank and collateralized by the German manufacturing facility. It bears interest
at 4.4% and is payable in monthly installments of approximately $17,500,
including interest, through June 2009.

As of October 31, 1999, the maturities of long-term debt were as follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AMOUNT
- ---------------------- --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 142
2001........................................................ 148
2002........................................................ 154
2003........................................................ 161
2004........................................................ 169
Thereafter.................................................. 875
------
1,649
Less: current maturities.................................... (142)
------
$1,507
======
</TABLE>

10. FEDERAL INCOME TAXES

Income before provision for income taxes was taxed under the following
jurisdictions:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax:
U.S. Federal...................................... $3,692 $2,640 $6,439
Foreign........................................... 832 1,069 2,473
State and local................................... 14 10 200
------ ------ ------
Total current..................................... 4,538 3,719 9,112
------ ------ ------
Deferred income tax:
U.S. Federal...................................... (372) (545) (195)
Foreign........................................... -- -- --
------ ------ ------
Total deferred.................................... (372) (545) (195)
------ ------ ------
Total provision for income taxes.................... $4,166 $3,174 $8,917
====== ====== ======
</TABLE>

49
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. FEDERAL INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax at statutory rate of 34%......... $4,306 $1,608 $8,308
Change in valuation allowance....................... -- 68 --
Non-deductible acquired in-process technology....... -- 1,527 698
Tax exempt interest income.......................... (131) (123) (4)
Research and development tax credits................ (128) (68) (678)
Activity of foreign subsidiaries.................... 127 61 70
State income taxes.................................. 14 10 200
Other............................................... (22) 91 323
------ ------ ------
$4,166 $3,174 $8,917
====== ====== ======
</TABLE>

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at October 31, 1998 and 1999 are:

<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for inventory obsolescence................. $ 3,555 $ 2,705
Team member compensated absences..................... 25 120
Allowance for warranty returns....................... 134 238
Allowances for bad debt and sales returns............ 654 1,143
Plant and equipment.................................. 1,305 1,538
Net operating and built-in loss carryforwards........ 969 3,199
Other................................................ 239 90
------- --------
Gross deferred tax assets.......................... 6,881 9,033
Deferred tax assets valuation allowance.............. (4,785) (3,256)
------- --------
Net deferred tax assets............................ 2,096 5,777
Deferred tax liabilities:
Intangible and other assets.......................... (693) (1,506)
Unrealized investment gains.......................... -- (63,540)
Other................................................ -- (235)
------- --------
Gross deferred tax liabilities..................... (693) (65,281)
------- --------
Net deferred income taxes.......................... $ 1,403 $(59,504)
======= ========
</TABLE>

The net valuation allowance relates to certain temporary differences and net
operating and built-in loss carryforwards for EMASS and MountainGate. A
valuation allowance was in place at October 31, 1998 to reflect our belief that
it was more likely than not that certain deferred tax assets would not be

50
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. FEDERAL INCOME TAXES (CONTINUED)

realized. In fiscal 1999, the allowance was reduced by approximately $1,822,000,
leaving an allowance of $2,963,000 on built-in loss carryforwards and other
deferred tax assets. Additionally in fiscal 1999, we recorded certain deferred
tax assets in connection with the acquisition of MountainGate. A valuation
allowance of $293,000 has been provided on a portion of these assets. The relief
of the valuation allowance in fiscal 1999 reduced certain noncurrent intangible
assets of EMASS. It is reasonably possible that a material adjustment to the
valuation allowance may occur within one year.

Deferred U.S. income taxes are not provided for the earnings of our foreign
subsidiaries because we expect those earnings will be permanently reinvested.
Net pretax operating income from the foreign subsidiaries are $7,089,000,
$2,075,000 and $2,428,000 for fiscal 1997, 1998 and 1999, respectively.

EMASS has built-in loss carryforwards of approximately $7,688,000 which have
no expiration date. MountainGate has net operating loss carryforwards of
approximately $1,722,000 which expire in 20 years.

11. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net
income per share.

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR
PER SHARE DATA)
Numerator:
Net income..................................... $ 8,497 $ 1,530 $15,218
Denominator:
Denominator for basic net income per share--
weighted average shares...................... 18,168 19,485 20,337
Dilutive potential common shares from Team
Member (employee) stock options.............. 402 245 541
------- ------- -------
Denominator for diluted net income per share--
adjusted weighted average shares and assumed
conversions.................................. 18,570 19,730 20,878
======= ======= =======
Basic net income per share....................... $ 0.47 $ 0.08 $ 0.75
======= ======= =======
Diluted net income per share..................... $ 0.46 $ 0.08 $ 0.73
======= ======= =======
</TABLE>

12. CAPITAL STOCK

STOCK ISSUANCE

On September 29, 1999, we completed a follow-on public offering of 5,000,000
shares of common stock. Net proceeds of $135,567,000 were received and will be
used for working capital and general corporate purposes. On March 12, 1997, we
completed a public offering of 3,050,000 shares of common stock. Of the total,
3,000,000 were sold by us and 50,000 shares were sold by a selling shareholder.
Net proceeds of $23,709,000 were received.

51
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. CAPITAL STOCK (CONTINUED)

SHAREHOLDER RIGHTS PLAN

In July 1996, our Board of Directors adopted a shareholder rights plan in
which preferred stock purchase rights were distributed as a dividend at the rate
of one right for each share of ADIC common stock. The shareholder rights plan is
designed to deter coercive takeover tactics and ensure that the Board of
Directors can adequately protect the interests of the shareholders in the event
of a takeover attempt.

13. STOCK-BASED COMPENSATION PLANS

At October 31, 1999, we had four stock option plans. The 1996 Transition
Plan comprises the stock options held by ADIC Team Members and directors which
were converted in connection with the spin-off from our former parent company.
There were 952,184 options issued under this plan at exercise prices ranging
from $.21985 to $2.6164. No further options may be issued under this plan. In
addition, 3,265,000 shares are reserved under our 1996 and Director Stock Option
Plans for our Team Members, directors, officers, consultants, agents, advisors
and independent contractors and 230,000 shares are reserved under the
MountainGate Transition Plan for new grants to Team Members who were previously
employed by MountainGate. Terms of the plans require the option price to be
equal to the fair market value of our common stock on the date of grant. Options
may be exerciseable for all or part of the shares as determined by the option
and the majority of the options issued under these plans vest 25% per year for
four years and expire five years from the date of grant.

During fiscal year 1998, certain non-executive Team Members were given the
opportunity to cancel existing grants and receive new grants. In each case, the
new option price was equal to or greater than the fair market value on the date
of grant and the vesting and expiration schedules were the same as for any new
grant, i.e. any vesting associated with the canceled grant was forfeited.

In February 1998, the shareholders approved a Stock Purchase Plan to provide
eligible Team Members to purchase shares of common stock on favorable terms
through payroll deductions. The Stock Purchase Plan provides that the purchase
price of the stock must not be less than 85% of the fair market value of the
common stock on the first or last day of the offering period, whichever is
lower. In accordance with this plan, 44,998 shares and 162,127 shares of stock
were issued during fiscal 1998 and fiscal 1999, respectively.

We account for the above described stock option and stock purchase plans
following the guidelines of APB 25 and related interpretations. No compensation
cost has been recognized for stock options granted and stock purchased under
these Plans. 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

52
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ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. STOCK-BASED COMPENSATION PLANS (CONTINUED)

FAS 123, our net income and basic and diluted net income per share would have
been reduced to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR
PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $8,497 $1,530 $15,218
Pro forma........................................ $7,563 $ (345) $12,168
Basic net income (loss) per share:
As reported...................................... $ 0.47 $ 0.08 $ 0.75
Pro forma........................................ $ 0.42 $(0.02) $ 0.60
Diluted net income (loss) per share:
As reported...................................... $ 0.46 $ 0.08 $ 0.73
Pro forma........................................ $ 0.41 $(0.02) $ 0.58
</TABLE>

The value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions:

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average risk free interest rates............... 6.00% 4.98% 5.27%
Expected dividend yield................................. 0% 0% 0%
Expected volatility..................................... 65% 65% 84%
Expected lives (in years)............................... 4 4 4
</TABLE>

The Black-Scholes option pricing model requires the input of highly
subjective assumptions and does not necessarily provide a reliable measure of
fair value.

Options granted, exercised and canceled under the Plans are summarized as
follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at October 31, 1996..................... 1,689 $3.66
Options granted............................... 510 8.69
Options exercised............................. (396) 1.11
Options canceled.............................. (33) 5.92
-----
Balance at October 31, 1997..................... 1,770 5.63
Options granted............................... 1,516 6.03
Options exercised............................. (146) 1.13
Options canceled.............................. (829) 8.29
-----
Balance at October 31, 1998..................... 2,311 5.23
Options granted............................... 1,152 13.06
Options exercised............................. (662) 5.98
Options canceled.............................. (359) 4.16
-----
Balance at October 31, 1999..................... 2,442 9.10
=====
</TABLE>

53
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. STOCK-BASED COMPENSATION PLANS (CONTINUED)

At October 31, 1999 a total of 499,149 options were exercisable, the
weighted average exercise price of these options was $6.0363. The weighted
average grant date fair value of options granted in fiscal years 1997, 1998 and
1999 was $4.74, $3.09 and $8.37, respectively.

The following table summarizes information about stock options outstanding
at October 31, 1999.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISEABLE EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.8091 - $ 2.6164......... 89 18 mos. $ 1.9987 57 $1.7319
$ 4.3750 - $ 5.9065......... 616 46 mos. $ 4.3907 133 $4.4245
$ 6.3125 - $ 9.7813......... 1,324 42 mos. $ 7.3842 310 $7.5170
$12.4688 - $32.8750......... 413 57 mos. $23.1924 -- --
</TABLE>

14. PROFIT INCENTIVE AND BONUS PLANS

We currently have a non-contributory bonus plan for certain high-level Team
Members and a non-contributory profit sharing plan for all other domestic Team
Members. These plans are generally based upon a combination of Team Member
salaries and performance. No distributions are made under the bonus plan if
financial targets are not achieved. Contributions to both plans combined totaled
$740,000, $291,000 and $2,121,000 for fiscal 1997, 1998 and 1999, respectively.

15. COMMITMENTS

LEASE COMMITMENTS

We currently lease facilities in Redmond, Washington; Englewood, Colorado;
and Reno, Nevada for administrative, sales and marketing, research and
development, operations and warehouse activities. Sales and service offices are
leased at various sites in the United States and Europe.

Minimum annual rental commitments at October 31, 1999, for noncancelable
operating leases, are shown in the following table:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AMOUNT
- ---------------------- --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $2,908
2001........................................................ $2,615
2002........................................................ $2,294
2003........................................................ $1,917
2004........................................................ $1,888
</TABLE>

Rent expense aggregated $571,000 in fiscal 1997, $1,255,000 in fiscal 1998
and $2,941,000 in fiscal 1999.

54
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. COMMITMENTS (CONTINUED)

OTHER COMMITMENTS

In connection with the purchase of Grau by EMASS, Inc. in 1994, EMASS, Inc.
entered into an agreement with the minority shareholder of Grau whereby the
minority shareholder has the option to "put" his 20% interest in Grau to us for
an amount based on Grau profitability, but not to be less than $2,000,000. This
option is effective for the period January 1, 2000 to March 31, 2000.

16. GEOGRAPHIC SEGMENT INFORMATION

Major operations outside the United States consist of ADE, our wholly owned
subsidiary in France, and Grau, a subsidiary in Germany, which has a further
subsidiary operating in the United Kingdom. Certain information regarding
operations in this geographic segment is presented in the table below. Transfers
between geographic segments are made at arms-length prices consistent with rules
and regulations of governing tax authorities. The profits on these transfers are
not recognized until sales are made to non-affiliated customers.

Excluded from U.S. net sales are transfers from the U.S. to ADE and Grau of
$14,488,000, $14,794,000 and $38,328,000 in 1997, 1998 and 1999, respectively.
Included in U.S. sales are export sales to unaffiliated customers of $7,329,000,
$7,404,000 and $11,290,000 in 1997, 1998 and 1999, respectively. Included in
U.S. operating profit is the expense associated with the acquired in-process
technology.

Total international sales were $30,611,000, $37,929,000 and $89,992,000 in
fiscal 1997, 1998 and 1999, respectively.

<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
United States................................ $69,921 $ 84,032 $144,665
Europe....................................... 23,283 30,525 78,702
------- -------- --------
$93,204 $114,557 $223,367
======= ======== ========
Long-lived assets:
United States................................ $ 2,177 $ 7,520 $ 21,846
Europe....................................... 485 3,532 3,202
------- -------- --------
$ 2,662 $ 11,052 $ 25,048
======= ======== ========
</TABLE>

55
<PAGE>
ADVANCED DIGITAL INFORMATION CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
1998
-----------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................... $22,866 $24,806 $25,314 $41,571
Gross profit............................ $ 7,415 $ 7,010 $ 6,770 $11,973
Net income (loss)....................... $ 2,361 $ 1,934 $ 752 $(3,517)
Basic net income (loss) per share....... $ 0.12 $ 0.10 $ 0.04 $ (0.18)
Diluted net income (loss) per share..... $ 0.12 $ 0.10 $ 0.04 $ (0.18)
</TABLE>

<TABLE>
<CAPTION>
1999
-----------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................... $49,144 $54,044 $57,191 $62,988
Gross profit............................ $16,394 $18,039 $20,116 $22,191
Net income.............................. $ 3,052 $ 3,545 $ 4,547 $ 4,074
Basic net income per share.............. $ 0.16 $ 0.18 $ 0.23 $ 0.18
Diluted net income per share............ $ 0.15 $ 0.18 $ 0.22 $ 0.18
</TABLE>

56
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

The information called for by Part III (Item 10, 11, 12 and 13) will be
included in our Proxy Statement and is incorporated herein by reference. Such
Proxy Statement will be filed within 120 days of our fiscal year end,
October 31, 1999.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE
- ---------------------------------------------------------------------------- --------
<S> <C> <C> <C>
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

(1) Financial Statements:

Report of Independent Accountants........................... 34

Consolidated Balance Sheets at October 31, 1998 and 1999.... 35

Consolidated Statements of Income for each of the three years 36
in the period ended October 31, 1999......................

Consolidated Statements of Changes in Shareholders' Equity 37
for each of the three years in the period ended October 31,
1999......................................................

Consolidated Statements of Cash Flows for each of the three 38
years in the period ended October 31, 1999................

Notes to Consolidated Financial Statements.................. 40

(2) Supplemental Financial Statement Schedule for each of the
three years in the period ended October 31, 1999:

VIII--Valuation and Qualifying Accounts..................... 58
</TABLE>

All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.

B. REPORTS ON FORM 8-K.

We filed a Form 8-K dated September 17, 1999 under Item 5 "Other Events"
associated with the acquisition of MountainGate Imaging Systems Corporation.

C. EXHIBITS.

See page 59 for index to exhibits.

57
<PAGE>
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR INCOME DEDUCTIONS* END OF YEAR
---------- ---------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLE:
1997......................... $ 187 $ 167 $30 $ 324
1998......................... 324 391 239 476
1999......................... 476 817 289 1,004

ALLOWANCE FOR INVENTORY
OBSOLESCENCE:
1997......................... 859 651 379 1,131
1998......................... 1,131 1,166 152 2,145
1999......................... 2,145 4,955 521 6,579
</TABLE>

- ------------------------

*Deductions represent amounts written off against the allowance, net of
recoveries.

58
<PAGE>
INDEX TO EXHIBITS
(ITEM 14c)

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------------------- ----------- --------
<C> <S> <C>
3.1 Restated Articles of Incorporation of ADIC (Exhibit 3.1).... (A)

3.2 Restated Bylaws of ADIC (Exhibit 3.2)....................... (A)

4.1 Rights Agreement, dated as of August 12, 1996, between ADIC
and ChaseMellon Shareholders Services, L.L.C., as Rights
Agent (Exhibit 4.2)....................................... (A)

10.1 Credit Agreement between Advanced Digital Information
Corporation and Seafirst Bank, dated August 17, 1998...... (B)

10.2 Lease Agreement and Work Letter Agreement between The
Quadrant Corporation and ADIC, dated as of November 5,
1997 (Exhibit 10.1)....................................... (C)

10.3* ADIC Bonus Plan (Exhibit 10.2).............................. (C)

10.4* Amended 1997 Stock Purchase Plan (Appendix A)............... (D)

10.5* ADIC 1996 Stock Option Plan (Appendix B).................... (D)

10.6* ADIC 1996 Transition Plan (Exhibit 10.4).................... (A)

10.7 Form of Indemnification Agreement, together with schedule of
agreements................................................ (E)

10.8* Form of Change of Control Agreement, together with schedule
of agreements............................................. (F)

21.1 Subsidiaries of the Registrant..............................

23.1 Consent of Independent Accountants..........................

27.1 Financial Data Schedule.....................................

99.1 Excerpt from the Current Report on Form 8-K filed
September 20, 1999........................................
</TABLE>

- ------------------------

* Management contract or compensatory plan or arrangement.

(A) Incorporated by reference to designated exhibit to Form 10 Information
Statement filed September 10, 1996.

(B) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarterly period July 31, 1998.

(C) Incorporated by reference to designated exhibit of the Annual Report on
Form 10-K for the fiscal year ended October 31, 1997.

(D) Incorporated by reference to designated appendix of the proxy statement
filed in connection with the 1998 Annual Meeting of Shareholders.

(E) Incorporated by reference to Exhibit 10.5 of the Annual Report on Form 10-K
for the fiscal year ended October 31, 1996.

(F) Incorporated by reference to Exhibit 10.1 of the Quarterly Report on
Form 10-Q for the quarterly period ended July 31, 1999.

59
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

<TABLE>
<S> <C> <C>
ADVANCED DIGITAL INFORMATION CORPORATION

By /s/ PETER H. VAN OPPEN
------------------------------------------
Peter H. van Oppen
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>

Dated: January 15, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C> <C>
By /s/ PETER H. VAN OPPEN
------------------------------------------- Chairman of the Board and January 15, 2000
Peter H. van Oppen Chief Executive Officer

Senior Vice President and
By /s/ JON W. GACEK Chief Financial Officer
------------------------------------------- (Principal Financial and January 15, 2000
Jon W. Gacek Accounting Officer)

By /s/ TOM A. ALBERG
------------------------------------------- Director January 15, 2000
Tom A. Alberg

By /s/ CHRISTOPHER T. BAYLEY
------------------------------------------- Director January 15, 2000
Christopher T. Bayley

By /s/ RUSSELL F. MCNEILL
------------------------------------------- Director January 15, 2000
Russell F. McNeill

By /s/ JOHN W. STANTON
------------------------------------------- Director January 15, 2000
John W. Stanton

By /s/ WALTER F. WALKER
------------------------------------------- Director January 15, 2000
Walter F. Walker
</TABLE>

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF ADVANCED DIGITAL INFORMATION
CORPORATION

ADIC Technical Assistance Center GmbH, a German corporation

ADIC/GRAU Storage Systems GmbH & Co. KG, a German limited partnership

ADIC/GRAU Storage Systems Beteiligungs GmbH, a German partnership

ADIC/Grau Storage Systems Ltd., a UK corporation

ADIC Europe SARL, a French corporation

ADIC Trade Corp., a Barbados foreign sales corporation

MountainGate Imaging Systems Corporation

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-15111, 333-34103, 333-61907 and 333-93429)
of Advanced Digital Information Corporation of our report dated December 7,
1999 relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Seattle, Washington

January 18, 2000

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 156,548
<SECURITIES> 2,222
<RECEIVABLES> 45,572
<ALLOWANCES> 1,004
<INVENTORY> 33,317
<CURRENT-ASSETS> 242,382
<PP&E> 15,554
<DEPRECIATION> 6,842
<TOTAL-ASSETS> 452,974
<CURRENT-LIABILITIES> 48,017
<BONDS> 1,507
0
0
<COMMON> 0
<OTHER-SE> 338,958
<TOTAL-LIABILITY-AND-EQUITY> 452,974
<SALES> 223,367
<TOTAL-REVENUES> 223,367
<CGS> 146,627
<TOTAL-COSTS> 146,627
<OTHER-EXPENSES> 15,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 915
<INCOME-PRETAX> 24,434
<INCOME-TAX> 8,917
<INCOME-CONTINUING> 15,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,218
<EPS-BASIC> .75
<EPS-DILUTED> .73

</TABLE>

<PAGE>

EXHIBIT 99.1

The following is an excerpt from the Current Report on Form 8-K filed by
Advanced Digital Information Corporation on September 20, 1999:

Item 5: Other Events

On September 17, 1999, Advanced Digital Information Corporation (the
"Company") acquired MountainGate Imaging Systems Corporation ("MountainGate")
through a merger of a wholly owned subsidiary of the Company with and into
MountainGate. MountainGate provides software that enables very high bandwidth
cross-platform file sharing in Storage Area Networks (SAN). Its CentraVision
file system provides value by improving workflow efficiency, enabling
collaborative workgroups and delivering high-performance file sharing in
network environments.

An aggregate of 110,000 shares of the Company's unregistered common
stock (the "Common Stock") were issued to the two shareholders of
MountainGate in the merger. In addition, the Company paid $200,000 cash to
the MountainGate shareholders, and assumed outstanding MountainGate debt of
approximately $2 million, which debt was repaid on the closing date.

The shares issued in the merger were not registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to the exemption set
forth in Section 4(2) thereof. Both recipients of shares of the Company's
common stock in the merger were executive officers of MountainGate and had
access to information about the Company. The shares issued in the
transaction are subject to restrictions on transfer absent registration under
the Securities Act, and no offers to sell the securities were made by any
form of general solicitation or general advertisement.