UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 30, ~~2005~~2006

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

For the transition period from to

Commission file number 0-21103

ADVANCED DIGITAL INFORMATION CORPORATION

Incorporated under the laws

of the State of Washington

I.R.S. Employer Identification

No. 91-1618616

11431 Willows Road N.E.

P.O. Box 97057

Redmond, Washington 98073-9757

(425) 881-8004

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

~~Yes~~Indicate ~~x No~~by ¨check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act

~~Indicate~~Large accelerated byfiler ~~check~~¨ Accelerated ~~mark~~filer ~~whether the Registrant is an~~ x Non-accelerated filer ~~(as~~¨ ~~defined in Exchange Act Rule 12b-2)~~

~~Yes~~Indicate ~~x No~~by check mark whether the Registrant is a shell company (as ¨defined in Rule 12b-2 of the Exchange Act)

~~The~~Yes ¨ No x ~~total shares of common stock without par value outstanding at the end of the quarter reported is 63,020,788.~~

The total shares of common stock without par value outstanding as of April 30, 2006 is 62,049,179.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Advanced Digital Information Corporation

Condensed Consolidated Balance Sheets

(In thousands, except for share data)

(Unaudited)

	April 30, 2005				October 31,2004
	April 30,2006			October 31,2005
Assets
Current assets:
Cash and cash equivalents	$	47261,~~705~~328		$	$131,554	~~94,695~~
Accounts receivable, net of allowances of $1,726 in 2005 and $1,319 in 2004		85,029				93,025
Accounts receivable, net of allowances of $1,675 in 2006 and $1,929 in 2005		90,092			105,879
Inventories, net		3026,~~462~~270			26,218	~~38,728~~
Short-term marketable securities		~~192~~2,~~729~~661			121,025	~~138,238~~
Assets held for sale		1,364				—
Note receivable		5,046			—
Prepaid expenses and other		47,~~833~~802			4,577	~~2,845~~
Deferred income taxes		1011,~~526~~569			11,318	~~10,757~~
Total current assets		~~372~~404,~~648~~768			400,571	~~378,288~~
Property, plant and equipment, net of accumulated depreciation of $38,482 in 2005 and $31,201 in 2004		44,228				45,913
Property, plant and equipment, net of accumulated depreciation of $52,856 in 2006 and $44,781 in 2005		42,293			42,499
Service parts for maintenance, net of accumulated amortization of $34,752 in 2005 and $30,042 in 2004		29,309				29,993
Service parts for maintenance, net of accumulated amortization of $40,313 in 2006 and $37,688 in 2005		24,967			26,491
Deferred income taxes		1321,~~509~~201			19,227	~~13,461~~
Investments		32,~~196~~930			3,485	~~2,769~~
Goodwill		2,596			2,596	~~2,596~~
Intangible and other assets, net of accumulated amortization of $3,269 in 2005 and $2,879 in 2004		1,628				2,010
Intangible and other assets, net of accumulated amortization of $4,048 in 2006 and $3,658 in 2005		833			1,218
	$	~~467~~499,~~114~~588		$	$496,087	~~475,030~~
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	4247,~~899~~581		$	$56,991	~~47,991~~
Accrued liabilities		1617,~~483~~362			19,230	~~17,035~~
Income taxes payable		~~359~~1,648			1,416	~~174~~
Current portion of deferred revenue		3340,~~618~~641			39,910	~~31,727~~
Total current liabilities		93107,~~359~~232			117,547	~~96,927~~
Long-term deferred revenue		1519,~~546~~266			18,242	~~13,605~~
Other long-term liabilities		~~400~~200			400	~~600~~
Commitments and contingencies (Note 10)
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 4,000,000 shares authorized; none issued and outstanding		—			—	—
Common stock, no par value; 160,000,000 shares authorized, 63,020,788 issued and outstanding (63,758,716 in 2004)		228,064				234,724
Common stock, no par value; 160,000,000 shares authorized, 62,049,179 issued and outstanding (61,455,694 in 2005)		223,735			216,268
Retained earnings		~~128~~147,~~340~~811			142,150	~~127,877~~
Accumulated other comprehensive income (loss):
Accumulated other comprehensive income:
Cumulative translation adjustment		1,~~413~~121			770	~~1,301~~
Unrealized investment losses		(8	)			(4	)
Unrealized investment gains		223			710
Total shareholders’ equity		~~357~~372,~~809~~890			359,898	~~363,898~~
	$	~~467~~499,~~114~~588		$	$496,087	~~475,030~~

See the accompanying notes to these condensed consolidated financial statements.

Advanced Digital Information Corporation

Condensed Consolidated Statements of Operations

(In thousands, except for per share data)

(Unaudited)

	Three months endedApril 30,						Six months ~~ended~~endedApril ~~April~~ 30,
	2005			2004			2005			2004
	2006			2005			2006			2005
				(Restated)						(Restated)
Revenue:
Product	$	92101,~~047~~568		$	9992,~~828~~047		$	~~189~~206,~~677~~910		$	~~207~~189,~~762~~677
Service		14,~~124~~828			1114,~~239~~124			2728,~~314~~727			2127,~~610~~314
		106,171			111,067			216,991			229,372
		116,396			106,171			235,637			216,991
Cost of revenue:
Product		63,268			70,999			131,803			146,453
Product ($153 and $330 in stock-based compensation in the respective periods of 2006, $0 in 2005)		72,312			63,268			145,395			131,803
Service		10,167			8,743			19,659			17,275
Service ($112 and $216 in stock-based compensation in the respective periods of 2006, $0 in 2005)		11,872			10,167			22,978			19,659
		73,435			79,742			151,462			163,728
		84,184			73,435			168,373			151,462
Gross profit		32,~~736~~212			3132,~~325~~736			6567,~~529~~264			65,~~644~~529
Operating expenses:
Sales and marketing		16,227			17,345			32,909			31,417
Sales and marketing ($423 and $801 in stock-based compensation in the respective periods of 2006, $0 in 2005)		17,935			16,227			35,382			32,909
General and administrative		6,418			6,080			12,691			12,284
General and administrative ($267 and $595 in stock- based compensation in the respective periods of 2006, $0 in 2005)		6,218			6,418			13,107			12,691
Research and development		10,050			9,320			21,307			18,700
Research and development ($344 and $752 in stock- based compensation in the respective periods of 2006, $0 in 2005)		8,975			10,050			18,824			21,307
		32,695			32,745			66,907			62,401
		33,128			32,695			67,313			66,907
Operating profit (loss)		41(916	)		~~(1,420~~41	)		(~~1,378~~49	)		3(1,~~243~~378	)
Other income (expense):
Interest income		12,~~270~~079			~~519~~1,270			24,~~315~~084			12,~~061~~315
Gain (loss) on securities and investment transactions, net		~~(36~~46	)		(2536	)		(255	)		~~636~~(2	)
Foreign currency transaction losses, net		(225	)		(961	)		(132	)		(87	)
Foreign currency transaction gains (losses), net		2,330			(225	)		2,439			(132	)
Other		~~(202~~55	)		(94202	)		~~(287~~132	)		(~~180~~287	)
		807			(561	)		1,894			1,430
		4,510			807			6,710			1,894
Income (loss) before provision (benefit) for income taxes		848			(1,981	)		516			4,673
Income before provision for income taxes		3,594			848			6,661			516
Provision (benefit) for income taxes		115			(661	)		53			1,225
Provision for income taxes		1,400			115			1,000			53
Net income (loss)	$	733		$	(1,320	)	$	463		$	3,448
Net income	$	2,194		$	733		$	5,661		$	463
Basic net income (loss) per share	$	0.01		$	(0.02	)	$	0.01		$	0.05
Basic net income per share	$	0.04		$	0.01		$	0.09		$	0.01
Diluted net income (loss) per share	$	0.01		$	(0.02	)	$	0.01		$	0.05
Diluted net income per share	$	0.04		$	0.01		$	0.09		$	0.01

See the accompanying notes to these condensed consolidated financial statements.

Advanced Digital Information Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six months ended April 30,
	2005			2004
	2006			2005
				(Restated)
Cash flows from operating activities:
Net income	$	~~463~~5,661		$	~~3,448~~463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1213,~~901~~673			12,~~108~~901
Bad debt expense		~~454~~(172	)		39454
Inventory obsolescence		~~924~~2,120			~~1,473~~924
(Gain) loss on securities and investment transactions		2(55	)		~~(636~~2	)
Deferred income taxes		185			(83	)
Gain on foreign exchange option contract		(1,098	)		—
Tax benefit from exercise of stock options		72			1,693
Accrued interest on note receivable		(46	)		—
Other		32			39
Stock-based compensation		2,694			—
Deferred income taxes		(1,846	)		185
Tax benefit from exercise of stock options		—			72
Excess tax benefit from exercise of stock options		(443	)		—
Other		(54	)		32
Change in assets and liabilities:
Accounts receivable		815,~~257~~342			48,~~940~~257
Inventories		7(1,~~364~~126	)		(57,~~934~~364	)
Prepaid expenses and other assets		(21,~~028~~940	)		(~~228~~2,028	)
Service parts for maintenance		(43,~~326~~747	)		(54,~~886~~326	)
Accounts payable		(510,~~708~~435	)		(15,~~559~~708	)
Accrued liabilities		(~~589~~2,005	)		(~~4,283~~589	)
Income taxes		~~153~~666			~~(787~~153	)
Deferred revenue		31,~~757~~218			73,~~158~~757
Net cash provided by operating activities		2118,~~913~~407			1121,~~502~~913
Cash flows from investing activities:
Purchase of property, plant and equipment		(7,~~057~~883	)		(87,~~950~~057	)
Proceeds from assets held for sale		—			15,117
Purchase of marketable securities		(563,428	)		(163,022	)
Purchase of marketable securities		(163,022	)		(78,268	)
Proceeds from maturities of marketable securities		668,770			108,525
Proceeds from securities transactions		108,525			60,703
Proceeds from sales of marketable securities		13,465			—
Purchase of other investments		(429	)		(364	)
Issuance of note receivable		(5,000	)		—
Return of investment on other investments		—			71
Purchase of other investments		(582	)		(429	)
Net cash used in investing activities		(61,983	)		(11,691	)
Net cash provided by (used in) investing activities		105,342			(61,983	)
Cash flows from financing activities:
Repayment of short-term and long-term debt		—			(103	)
Proceeds from issuance of common stock for stock options and Stock Purchase Plan		4,330			1,784
Repurchase of common stock		~~(8,516~~—	)		—(8,516	)
Proceeds from issuance of common stock for stock options and Stock Purchase Plan		1,784			5,893
Excess tax benefit from exercise of stock options		443			—
Net cash provided by (used in) financing activities		(64,~~732~~773	)		5(6,~~790~~732	)
Effect of exchange rate changes on cash		(188	)		247
Effect of exchange rate changes on cash and cash equivalents		1,252			(188	)
Net increase (decrease) in cash and cash equivalents		~~(46~~129,~~990~~774	)		5(46,~~848~~990	)
Cash and cash equivalents at beginning of period		94131,~~695~~554			9194,~~451~~695
Cash and cash equivalents at end of period	$	47261,~~705~~328		$	9747,~~299~~705

See the accompanying notes to these condensed consolidated financial statements.

Advanced Digital Information Corporation

Condensed Consolidated Statements of Changes in Shareholders’ Equity

Six months ended April 30, ~~2005~~2006

(In thousands)

(Unaudited)

	Common Stock					RetainedEarnings		~~RetainedEarnings~~	AccumulatedOtherComprehensiveIncome (Loss)		~~AccumulatedOtherComprehensiveIncome (Loss)~~		Total		~~Total~~
	Shares		Amount	~~Amount~~
Balance at October 31, 2004	63,759			$	234,724			$	127,877		$	1,297			$	363,898
Balance at October 31, 2005	61,456		$	216,268		$	142,150		$	1,480			$	359,898
Shares repurchased	(1,016	)			(8,516	)										(8,516	)
Purchases under Stock Purchase Plan	157			1,180										1,180
Purchases under Stock Purchase Plan	177				1,252											1,252
Exercise of stock options, including tax benefit of $443	436			3,593			—			—				3,593
Exercise of stock options, including tax benefit of $72	101				604				—			—				604
Stock-based compensation				2,694			—			—				2,694
Comprehensive income:
Comprehensive income (loss):
Net income	—			—	—		5,661		~~463~~	—		—		—		—
Change in unrealized investment gains:
Unrealized investment losses, net of tax of $2	—				—				—			(4	)			—
Reclassification adjustment: gain included in net income, net of tax of $417	—			—			—			(775	)			—
Change in foreign currency translation adjustment, net of tax of $60	—				—				—			112				—
Unrealized investment gains, net of tax of $155	—			—			—			288				—
Total comprehensive income	—				—				—			—				571
Change in foreign currency translation adjustment	—			—			—			351				—
Balance at April 30, 2005	63,021			$	228,064			$	128,340		$	1,405			$	357,809
Total comprehensive income	—			—			—			—				5,525
Balance at April 30, 2006	62,049		$	223,735		$	147,811		$	1,344			$	372,890

See the accompanying notes to these condensed consolidated financial statements.

Advanced Digital Information Corporation

Notes to Interim Condensed Consolidated Financial Statements

April 30, ~~2005~~ 2006

(Unaudited)

Note 1. Financial statement presentation

~~Basis~~The accompanying condensed consolidated financial statements are unaudited and include the accounts of Advanced ~~presentation~~Digital Information Corporation and its subsidiaries (ADIC or the Company). All significant intercompany transactions, balances and profits have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements ~~are~~should ~~unaudited~~be read in conjunction with the financial statements included in our Annual ~~and~~Report on Form 10-K for the year ended October 31, 2005. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the ~~accounts~~United States of America. In our opinion all normal recurring adjustments which are necessary for the ~~Company~~fair ~~and~~presentation ~~its~~of ~~subsidiaries~~the results for the interim periods are reflected herein. ~~All~~Operating ~~significant~~results ~~intercompany~~for ~~transactions,~~the ~~balances~~three and ~~profits~~six ~~have~~month ~~been~~periods ~~eliminated~~ended April 30, in2006 ~~consolidation~~are not necessarily indicative of results to be expected for a full year.

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

Restatement of previously issued financial statements

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

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

Reclassifications

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

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

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

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

Note 2. Summary of significant accounting policies

The significant accounting policies used in the preparation of our consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended October 31, ~~2004~~2005. ~~New~~Additional significant accounting policies for fiscal ~~2005~~2006 are disclosed below.

6Stock-based Compensation

~~Product~~On November 1, 2005, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment (Revised 2004),” which requires the measurement and ~~service~~recognition ~~revenue~~of compensation for all stock-based awards made to employees and ~~cost~~directors including stock options and employee stock purchases under a stock purchase plan based on estimated fair values. FAS 123(R) supersedes previous accounting under FAS 123, “Accounting for Stock-Based Compensation” and Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” for fiscal years beginning after June 15, 2005. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 relating to application of ~~revenue~~FAS 123(R). We have applied the provisions of SAB 107 in our adoption of FAS 123(R).

We ~~have~~adopted ~~presented~~FAS ~~revenue~~123(R) ~~and~~using ~~cost~~the ofmodified ~~revenue~~prospective ~~separately~~transition ~~for~~method, ~~products~~which ~~and~~requires the ~~services~~application ~~beginning~~of in the ~~first~~accounting ~~quarter~~standard as of ~~fiscal~~November 1, 2005., ~~Product~~the ~~revenue~~first ~~includes~~day ~~sales~~ of ~~hardware~~our ~~and~~2006 ~~software~~fiscal ~~data~~year. ~~storage~~We ~~solutions,~~also aselected ~~well~~to asuse ~~installation~~the ~~and~~method ~~professional~~available ~~services~~under ~~related~~FASB toStaff ~~these~~Position ~~products~~FSP No. 123(R)-3, ~~Service~~“Transition ~~revenue~~Election isRelated ~~derived~~to ~~from~~Accounting ~~contracts~~ for ~~field~~the ~~support~~Tax ~~provided~~Effects toof ~~our~~Share-Based ~~branded~~Payment ~~customers~~Awards.” ~~and~~The ~~not~~FSP ~~otherwise~~provides ~~included~~an inalternative ~~the~~method ~~base price~~ of ~~the~~calculating ~~product.~~excess ~~Service~~tax ~~does~~benefits ~~not~~(the ~~include~~APIC ~~revenue~~pool) orfrom ~~costs~~the ~~associated~~method ~~with~~defined ~~basic~~in ~~warranty~~FAS ~~support~~123(R) onfor ~~new~~stock-based ~~branded~~payments. orIn ~~OEM~~accordance ~~products.~~with Wethe ~~classify~~modified ~~expenses~~prospective astransition ~~costs~~method, ofour ~~service~~condensed ~~revenue~~consolidated byfinancial ~~estimating~~statements ~~the~~for ~~portion~~periods ofprior ~~our~~to ~~total~~the ~~cost~~first quarter of ~~revenue~~fiscal ~~that~~2006 ~~relates~~have tonot ~~providing~~been ~~field~~restated ~~support~~ to ~~our~~reflect ~~customers~~this ~~under contract~~change. ~~These estimates are~~ Stock-based ~~upon~~compensation arecognized ~~variety~~during ofthe ~~factors,~~period ~~including~~is ~~the~~based ~~nature~~on of the ~~support~~value ~~activity,~~of the ~~cost~~portion of ~~stocking~~the ~~and~~stock-based ~~shipping~~award ~~service~~that ~~parts~~will ~~for~~vest ~~maintenance~~during ~~and~~ the ~~level~~period, ofadjusted ~~infrastructure~~for ~~required~~expected toforfeitures. ~~support~~Stock-based ~~the~~compensation ~~activities~~recognized ~~that~~in ~~comprise~~our ~~service~~condensed ~~revenue.~~consolidated Infinancial statements for the ~~event~~three ~~our~~and ~~service~~six ~~business~~months ~~changes~~ended April 30, ~~our~~2006 ~~estimates~~includes ofcompensation cost ~~of service~~for ~~revenue~~stock-based ~~may~~awards begranted ~~impacted.~~

~~Auction~~5 ~~rate securities~~

At prior ~~April 30~~to, ~~2005~~but ~~and~~not ~~October~~fully ~~31,~~vested ~~2004,~~as ~~we held $187.7 million and $132.2 million~~of, ~~respectively~~October 31, of2005 ~~investments~~and instock-based ~~auction~~awards ~~rate~~granted ~~marketable~~subsequent ~~securities.~~to ~~Our investments in these securities are recorded at fair value~~October 31, ~~which~~2005. ~~approximates~~The compensation cost ~~due to the variable interest rates of these securities,~~for ~~which~~awards ~~typically~~granted ~~reset~~prior ~~every 7~~ to ~~49 days. As a result~~October 31, we2005 ~~have~~is nobased ~~unrealized~~on orthe ~~realized~~grant ~~investment~~date ~~gains~~fair orvalue ~~losses~~estimated ~~from~~in ~~these~~accordance ~~auction~~with ~~rate~~the ~~securities.~~pro ~~Additionally,~~forma ~~despite~~provisions ~~the~~of ~~long-term~~FAS ~~nature~~123 ofwhile ~~their~~awards ~~stated~~granted ~~contractual~~after ~~maturities~~October 31, we2005 ~~have~~follow the ~~ability~~ toprovisions ~~quickly~~of ~~liquidate~~FAS ~~these~~123(R) ~~securities~~to ~~within~~ determine the ~~current~~grant ~~operating~~date ~~cycle~~fair value and ~~therefore~~compensation ~~have classified them as short-term marketable securities in the Condensed Consolidated Balance Sheet~~cost. ~~All~~Compensation ~~income~~cost ~~generated~~for ~~from~~all ~~these~~stock-based ~~auction~~awards ~~rate securities~~ is ~~recorded~~recognized asusing ~~interest~~the ~~income.~~straight-line method.

Upon adoption of FAS 123(R), we continued to use the Black-Scholes option pricing model as our method of valuation for stock-based awards. Our determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected life of the award, our expected stock price volatility over the term of the award and actual and projected exercise behaviors. Although the fair value of stock-based awards is determined in accordance with FAS 123(R) and SAB 107, the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

Note 3. Stock-based compensation plans

~~Stock-based~~Effective ~~compensation~~November 1, ~~plans~~2005, ~~are~~we ~~accounted~~adopted ~~for using~~FAS ~~the~~123(R), ~~intrinsic~~which ~~value~~establishes ~~method~~accounting ~~prescribed~~for instock-based ~~Accounting~~awards ~~Principles~~exchanged ~~Board Opinion No. 25, “Accounting~~ for ~~Stock~~employee ~~Issued to Employees” and by FASB Interpretation No. 44~~services, ~~“Accounting~~using ~~for Certain Transactions Involving Stock Compensation~~the –modified anprospective ~~Interpretation~~application oftransition ~~APB Opinion No~~method. ~~25.”~~Accordingly, No stock-based compensation cost is ~~reflected~~measured inat ~~net~~grant ~~income (loss)~~date, as all stock options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value atof the ~~grant~~award, ~~dates~~over ~~for awards under those plans consistent with~~ the ~~method~~requisite ofservice ~~Statement of Financial Accounting Standards No~~period. ~~123,~~ ~~“Accounting for Stock-Based Compensation~~Previously,” ~~our~~we ~~net~~applied ~~income~~APB ~~(loss)~~25 and ~~basic and diluted net income (loss) per share would have been changed to the pro forma amounts indicated below (in thousands~~related Interpretations, ~~except~~as ~~for~~permitted ~~per~~by ~~share~~FAS ~~data):~~123.

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

Determining Fair Value Under FAS 123(R)

7Valuation and Amortization Method. We estimate the fair value of stock-based awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

~~All~~Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. Stock options granted to team members during the three and six months ended April 30, ~~2005~~2006 and ~~2004~~2005 ~~expire~~vest ~~after~~25% per ~~ten~~ year over four years. ~~The~~and ~~fair~~have ~~value~~contractual terms of ~~each~~five ~~option~~and ~~grant~~ten isyears, ~~estimated~~respectively. onCertain options granted to the ~~date~~board of ~~grant~~directors ~~using~~during the ~~Black-Scholes~~three ~~option~~months ~~pricing~~ended ~~model~~April 30, ~~with~~2006 ~~the~~and ~~following~~2005 ~~weighted~~vest ~~average~~in ~~assumptions~~approximately one year and ~~results~~have ~~for~~contractual ~~options~~terms ~~granted~~of ~~during~~five and ten years, respectively. Stock purchases under our stock purchase plan have an expected life of six months, which is equal to the ~~periods~~offering ~~presented:~~period.

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

Expected Volatility. We estimate the volatility of our common stock based on the historical volatility of our common stock. The volatility factor we use in the Black-Scholes option valuation model is based on our historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. A summary of the weighted average assumptions and results for options granted during the periods presented is as follows:


	Three months ended April 30,						Six months ended April 30,
	2006			2005			2006			2005
Expected life (in years)		3.0			6.0			3.0			6.0
Expected volatility		46	%		75	%		48	%		76	%
Risk-free interest rate		4.72	%		4.11	%		4.50	%		3.95	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected forfeiture rate		13	%		13	%		26	%		23	%
Fair value	$	3.23		$	5.96		$	3.54		$	6.24

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

	Three months endedApril 30,						Six months endedApril 30,
	2005			2004			2005			2004
	2006			2005			2006			2005
Weighted average risk free interest rate		3.09	%		1.01	%		3.09	%		1.01	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		48	%		60	%		48	%		60	%
Expected life (in years)		0.5			0.5			0.5			0.5
Weighted average fair value	$	2.35		$	3.70		$	2.35		$	3.70
Expected volatility		29	%		48	%		29	%		48	%
Risk-free interest rate		4.79	%		3.09	%		4.79	%		3.09	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected forfeiture rate		0	%		0	%		0	%		0	%
Fair value	$	2.03		$	2.35		$	2.03		$	2.35

Stock-based Compensation Under FAS 123(R)

The following table summarizes stock-based compensation expense related to stock-based awards under FAS 123(R) for the three and six months ended April 30, 2006 which was incurred as follows (in thousands):


	Three months ended April 30, 2006		Six months ended April 30, 2006
Stock-based compensation:
Cost of revenue	$	265	$	546
Sales and marketing		423		801
General and administrative		267		595
Research and development		344		752

Total stock-based compensation	$	1,299	$	2,694

The following table presents the impact of our adoption of FAS 123(R) on selected line items from our condensed consolidated financial statements for the three and six months ended April 30, 2006 (in thousands, except per share amounts):


	Three months ended April 30, 2006					Six months ended April 30, 2006
	As Reported Following FAS 123 (R)			If Reported Following APB 25		As Reported Following FAS 123 (R)			If Reported Following APB 25
Condensed consolidated statement of operations:
Operating profit (loss)	$	(916	)	$	383	$	(49	)	$	2,645
Income before provision for income taxes		3,594			4,893		6,661			9,355
Net income		2,194			3,038		5,661			7,412
Net income per share
Basic		0.04			0.05		0.09			0.12
Diluted		0.04			0.05		0.09			0.12
Condensed consolidated statement of cash flows:
Net cash provided by operating activities		3,400			3,416		18,407			18,850
Net cash provided by financing activities		1,326			1,310		4,773			4,330

Stock Option Activity

At April 30, 2006, we had five stock option plans. Additional information regarding these plans is disclosed in our Annual Report on Form 10-K for the year ended October 31, 2005. As of April 30, 2006, under all of our plans, options to purchase an aggregate of 4.3 million shares were outstanding, and options to purchase an additional 5.6 million shares were authorized for future grants under the plans. We issue new shares for option exercises.

Options granted, exercised, canceled and expired under all of our stock option plans are summarized as follows (options in thousands):


	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at October 31, 2005	5,244		$	10.06
Options granted	151			9.69
Options exercised	(436	)		7.22
Options canceled	(190	)		8.71
Options expired	(464	)		15.36

Outstanding at April 30, 2006	4,305		$	9.82	4.0 years	$	1,736

Exercisable at April 30, 2006	2,289		$	10.87	2.7 years	$	1,043

At October 31, 2005, a total of 2.9 million options were exercisable at a weighted-average exercise price of $10.97. The aggregate intrinsic value of options outstanding at April 30, 2006 is calculated as the difference between the market price of the underlying common stock and the exercise price of the options for the 1.4 million options that had exercise prices that were lower than the $8.49

~~Note~~ closing 4market price of our common stock at April 30, 2006. ~~Assets~~The ~~held~~total ~~for~~intrinsic ~~sale~~value of options exercised during the three and six months ended April 30, 2006 was $53,000 and $1.3 million, respectively, determined as of the date of exercise.

InThe ~~May~~following ~~2005,~~table ~~we completed a sale-leaseback transaction for our facility in Böehmenkirch, Germany, where we manufacture~~summarizes ~~certain~~information ofabout ~~our~~stock ~~largest~~options ~~libraries~~outstanding ~~and perform service operations for several products. Assets held for sale~~ at April 30, ~~2005~~2006 ~~relate~~(options ~~to this transaction and are comprised of the land, building and leasehold improvements~~ in ~~Böehmenkirch.~~thousands): We sold the facility for 3.5 million euros, and the total gain on this sale is approximately $3.2 million, $2.5 million of which has been recorded on the date of sale in the third quarter of fiscal 2005. The remaining gain will be deferred and recognized over the term of our lease with the purchaser. Our lease ends in December 2007, though we have the option to extend the lease one year past the original expiration date.

Note 5. Benchmark outsourcing agreement


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$ 0.1230 - $ 3.4560	20	43 mos	$	2.1212	20	$	2.1212
$ 5.2550 - $ 7.7100	535	73 mos	$	5.7192	308	$	5.7052
$ 8.2600 - $ 11.5250	3,308	47 mos	$	9.5612	1,561	$	10.3057
$12.4400 - $18.0625	315	39 mos	$	14.6236	273	$	14.8638
$23.2050	127	1 mos	$	23.2050	127	$	23.2050

InA ~~November~~summary ~~2003, we expanded an existing outsource manufacturing relationship with Benchmark Electronics, Inc. to include final assembly and test~~ of ~~a significant~~the ~~portion~~changes ofin our ~~entry~~non-~~level~~vested ~~and~~options ~~workgroup~~during ~~tape~~the ~~automation~~three ~~product line. In connection with this expansion, we transferred to Benchmark approximately 150 team members associated with manufacturing, test~~ and ~~supply~~six ~~chain~~month ~~management. Benchmark~~periods ~~assumed the lease on our Redmond~~ended April 30, ~~Washington~~2006 ~~manufacturing~~is ~~facility~~presented ~~and~~below ~~purchased~~(in ~~inventory associated with the product line and property~~thousands, ~~plant~~except ~~and equipment related to the operation~~ for ~~$15.1~~per ~~million~~share indata): ~~cash. There was no gain or loss recorded on this transaction.~~

Note 6. Earnings per share


	Three months ended April 30, 2006				Six months ended April 30, 2006
	Option Activity		Weighted Average Grant Date Fair Value		Option Activity		Weighted Average Grant Date Fair Value
Non-vested at beginning of period	2,312		$	5.05	2,395		$	5.23
Options granted	49			3.20	151			3.54
Options canceled	(100	)		5.02	(190	)		5.07
Options vested	(245	)		7.19	(340	)		7.44

Non-vested at end of period	2,016		$	4.74	2,016		$	4.74

~~For~~As ~~the~~of ~~three months ended~~ April 30, ~~2004~~2006, ~~options~~we tohad ~~purchase~~$5.8 million ~~3,860,000 shares~~ of ~~common~~total ~~stock,~~unrecognized ~~which~~compensation ~~would~~cost related ~~be equal~~ to ~~857,000~~non-vested ~~adjusted~~stock-based ~~weighted~~awards ~~average~~granted ~~shares,~~under ~~were~~all ~~not~~equity ~~included~~compensation ~~in the computation of diluted net loss per share because they are antidilutive~~plans. ~~The~~Total ~~following~~unrecognized ~~table~~compensation ~~sets~~cost ~~forth~~will ~~the~~be ~~computation~~adjusted ~~of basic and diluted net income (loss) per share~~ for ~~the~~any ~~three~~future ~~and~~changes ~~six~~in ~~months~~estimated ~~ended~~forfeitures. ~~April~~We ~~30,~~expect ~~2005~~to ~~and~~recognize ~~2004~~this ~~(in~~cost ~~thousands,~~over ~~except~~a ~~for~~weighted ~~per~~average period ~~share~~of ~~data):~~2.2 years.

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

~~Note~~Pro 7.Forma ~~Inventories~~Information Under FAS 123 and APB 25

~~Inventories~~Prior ~~are~~to ~~comprised~~fiscal 2006, we accounted for our stock-based compensation plans using the intrinsic value method prescribed in APB 25 and related Interpretations. No stock-based compensation was reflected in net income in the three and six months ended April 30, 2005, as all stock options granted under those plans had an exercise price equal to or greater than the market value of the underlying ~~following~~common stock on the date of grant. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, our net income and basic and diluted net income per share would have been changed to the pro forma amounts indicated below (in thousands, except for per share data):

	April 30,2005			October 31,2004
	Three months ended April 30,						Six months ended April 30,
Finished goods	$	20,097		$	27,976
	2006			2005			2006			2005
Work-in-process		329			173
Net income, as reported	$	2,194		$	733		$	5,661		$	463
Raw materials		22,305			23,870
Add: stock-based compensation included in net income, net of tax		844			—			1,751			—
		42,731			52,019
Deduct: total stock-based compensation determined under fair value based method for all awards, net of tax		(844	)		(1,714	)		(1,751	)		(3,484	)
Allowance for inventory obsolescence		(12,269	)		(13,291	)
Pro forma net income (loss)	$	2,194		$	(981	)	$	5,661		$	(3,021	)
	$	30,462		$	38,728
Basic net income (loss) per share:
As reported	$	0.04		$	0.01		$	0.09		$	0.01
Pro forma	$	0.04		$	(0.02	)	$	0.09		$	(0.05	)
Diluted net income (loss) per share:
As reported	$	0.04		$	0.01		$	0.09		$	0.01
Pro forma	$	0.04		$	(0.02	)	$	0.09		$	(0.05	)

Note 8 4. ~~Investments~~Earnings inper ~~short-term marketable~~share ~~securities and other investments~~

AtFor ~~April 30, 2005,~~ the ~~cost~~three ~~basis~~months ofended ~~the~~April 30, ~~marketable~~2006 ~~securities~~and ~~we held was $192~~2005,~~741,000~~ ~~and~~options ~~the~~to ~~fair~~purchase ~~value was $192,729,000~~3.3 million ~~The difference between the cost basis~~ and ~~fair~~3.7 million ~~value~~shares of ~~$12,000,~~common ~~net of taxes of $4~~stock,~~000,~~ iswhich ~~recorded~~would asbe equal anto ~~unrealized investment loss~~1.2 million ~~At April 30, 2005, marketable securities comprised investment-grade government~~ and ~~commercial debt securities purchased in accordance with our investment policy to generate a higher yield than cash equivalents~~1.9 million ~~Consistent~~adjusted ~~with~~weighted ~~our~~average ~~investment~~shares, ~~policy~~respectively, ~~effective~~ ~~investment~~were ~~maturities do~~ not ~~exceed~~included 24in ~~months at~~ the ~~date~~computation of ~~purchase.~~diluted ~~The~~net ~~objectives~~income ofper ~~our~~share ~~investment~~because ~~policy~~they ~~are~~were ~~safety~~antidilutive. ~~and~~The ~~preservation~~following oftable ~~funds,~~sets ~~liquidity~~forth ~~sufficient~~the tocomputation ~~meet cash flow requirements and attainment~~ of ~~a market rate of~~ ~~return.~~basic Weand ~~did~~diluted ~~not~~net ~~sell~~income ~~any~~per ~~marketable~~share ~~securities~~for ~~during~~ the three orand six ~~month~~months ~~periods~~ ended April 30, ~~2005~~2006 orand ~~the~~2005 ~~three~~(in ~~month period ended April 30~~thousands, ~~2004.~~except ~~During~~for ~~the~~per ~~six~~share ~~month~~data): ~~period ended April 30, 2004, sales of marketable equity securities resulted in a gain of $48,000.~~

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


	Three months ended April 30,				Six months ended April 30,
	2006		2005		2006		2005
Numerator:
Net income	$	2,194	$	733	$	5,661	$	463

Denominator:
Denominator for basic net income per share—weighted average shares		61,997		63,313		61,808		63,556
Dilutive potential common shares from team member (employee) stock options		140		247		175		336

Denominator for diluted net income per share—adjusted weighted average shares and assumed conversions		62,137		63,560		61,983		63,892

Basic net income per share	$	0.04	$	0.01	$	0.09	$	0.01

Diluted net income per share	$	0.04	$	0.01	$	0.09	$	0.01

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

Note 9. Indemnifications and warranties

~~associated with the sale of products~~Note 5. ~~The~~Inventories duration of these indemnifications varies, and in certain cases, is indefinite. In each of these circumstances, payment by us depends upon the other party making an adverse claim according to the procedures outlined in the particular agreement, which procedures generally allow us to challenge the other party’s claims. In certain instances, we may have recourse against third parties for payments made by us.

Inventories are comprised of the following (in thousands):


	April 30, 2006			October 31, 2005
Finished goods	$	14,368		$	14,818
Work-in-process		567			74
Raw materials		23,347			21,498

		38,282			36,390
Allowance for inventory obsolescence		(12,012	)		(10,172	)

	$	26,270		$	26,218

Note 6. Investments in marketable securities and other investments

At April 30, 2006, marketable securities were comprised of equity securities. During the three and six months ended April 30, 2006, we also invested in investment-grade government and commercial debt securities purchased in accordance with our cash management policy to generate a higher yield than cash equivalents. The objectives of our cash management policy are safety and preservation of funds, liquidity sufficient to meet cash flow requirements and attainment of a market rate of return. Consistent with our investment policy, effective maturities of these investments did not exceed 24 months at the date of purchase. As of April 30, 2006 we did not hold any debt securities as these securities had all matured or been sold during the quarter. At April 30, 2006, the cost basis and the fair value of the marketable securities we held was $2.3 million and $2.7 million, respectively. The difference between the cost basis and fair value of $343,000, net of taxes of $120,000, is recorded as an unrealized investment gain. During the three and six months ended April 30, 2006, sales of marketable securities resulted in gains of $399,000 and $1.2 million, respectively. We did not sell any marketable securities during the three or six month periods ended April 30, 2005.

We also hold strategic investments in two private technology venture limited partnerships that are accounted for under the equity method. During the three months ended April 30, 2006 and 2005, we recorded losses of $353,000 and $36,000, respectively, reflecting our pro rata share of the limited partnerships’ net losses. During the six months ended April 30, 2006 and 2005, we recorded losses of $1.1 million and $2,000, respectively, reflecting our pro rata share of the limited partnerships’ net losses. These losses are primarily based on the general partners’ estimates of the fair value of non-marketable securities held by the partnerships and, to a lesser extent, realized gains and losses from the partnerships’ disposal of securities.

Note 7. Indemnifications and warranties

In the normal course of business, we are party to a variety of agreements under which we may be obligated to indemnify the other party for certain matters. These obligations typically arise in contracts where we customarily agree to hold the other party harmless against losses arising from a breach of representations or covenants for certain matters such as title to assets and intellectual property rights associated with the sale of products. The duration of these indemnifications varies, and in certain cases, is indefinite. In each of these circumstances, payment by us depends upon the other party making an adverse claim according to the procedures outlined in the particular agreement, which procedures generally allow us to challenge the other party’s claims. In certain instances, we may have recourse against third parties for payments made by us.

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

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

Changes in our accrued warranty balance for the six months ended April 30, ~~2005~~2006 are as follows (in thousands):

Balance at October 31, 2004	$	6,932
Balance at October 31, 2005	$	6,392
Accruals for warranties issued		5,~~430~~605
Settlements during the period		(5,~~834~~575	)
Balance at April 30, 2005	$	6,528
Balance at April 30, 2006	$	6,422

Note 108. Exit costs

~~Research~~European ~~and~~Shared ~~development~~Services ~~facility~~Reorganization ~~closures~~

In February 2005, we ~~announced~~began ~~plans~~a toreorganization ~~close~~of our ~~research and development~~ ~~facilities~~European inoperations ~~Ithaca,~~to ~~New~~create ~~York~~a ~~and~~shared ~~Santa~~services ~~Clara,~~center ~~California~~in Switzerland. The purpose of ~~these~~this ~~closures~~reorganization is to improve ~~customer~~our ~~service,~~ability ~~optimize~~to ~~efficiency~~meet our customers’ needs; centralize our administrative support functions and ~~lower~~operating and financial controls; streamline our reporting; and improve our operating cost ~~structure~~model by streamlining and integrating overhead from several acquisitions. ~~Both closures~~The ~~are~~reorganization ~~expected~~impacted toadministrative beteam ~~completed~~members, ~~during~~some ~~the~~of ~~fourth~~whom ~~quarter~~relocated ofwithin ~~fiscal~~our ~~2005~~European operations. The charges related to ~~these~~the ~~closures~~reorganization are recorded in ~~research~~general and ~~development~~administrative expense. We incurred workforce reduction and relocation costs and did not incur facilities-related or other costs in connection with the reorganization. The activity for the three and six months ended April 30, 2006 and 2005 is as follows (in thousands):

	Workforcereduction andrelocation costs			Facility-related costs		Other costs			Total
	Three months ended April 30,					Six months ended April 30,
Balance at October 31, 2004	$	—		$	—	$	—		$	—
	2006			2005		2006			2005
Charges		421			—		5			426
Balance at beginning of period	$	316		$	—	$	454		$	—
Cash payments		(189	)		—		(5	)		(194	)
Charges		88			104		159			104
Balance at April 30, 2005	$	232		$	—	$	—		$	232
Cash payments		(120	)		—		(326	)		—
Noncash adjustments		(24	)		—		(27	)		—
Balance at end of period	$	260		$	104	$	260		$	104

11Substantially all expected costs related to this reorganization were accrued as of April 30, 2006. We do not expect any significant additional costs in future quarters of fiscal 2006 or future years.

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

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

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

European shared services reorganization

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

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

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

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

Other

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

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

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

~~Note~~During 11fiscal 2001, we recorded a $2.3 million liability to reflect anticipated costs to exit a manufacturing and development site in Englewood, Colorado ~~Recent~~which ~~accounting~~was ~~pronouncements~~replaced by a larger facility in Englewood in fiscal 2002. These accrued costs represent our estimate of the net amount of lease payments related to unused capacity of the old facility.

InDuring ~~March~~fiscal ~~2004~~2005, ~~the~~we ~~EITF reached~~recorded a ~~consensus on Issue No~~$1.2 ~~03-1,~~million ~~“The~~liability ~~Meaning~~to ofreflect ~~Other-Than-Temporary~~anticipated ~~Impairment~~costs ~~and Its Application~~ to ~~Certain~~exit ~~Investments.”~~a ~~EITF~~research ~~03-1 provides guidance on other-than-temporary impairment models for marketable debt~~ and ~~equity securities~~development ~~accounted~~facility ~~for~~in ~~under~~Ithaca, ~~SFAS~~New 115 and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. In September 2004York, ~~the~~net ~~FASB approved the issuance~~ of ~~FASB~~anticipated ~~Staff~~sublease ~~Position~~income. ~~EITF~~These ~~03-1-1,~~accrued ~~which~~costs ~~delays~~represent ~~the~~our ~~effective~~estimate ~~date until additional guidance is issued for the application~~ of the ~~recognition~~net ~~and~~amount ~~measurement provisions~~ of ~~EITF~~lease ~~03-1~~and tosublease ~~investments~~payments inrelated ~~securities that are impaired. The adoption of this accounting principle is not expected~~ to ~~have~~abandonment ~~a significant impact on our financial position or results~~ of ~~operations~~the facility.

InThe ~~November~~activity ~~2004,~~for the ~~FASB~~three ~~issued~~and ~~Statement~~six ofmonths ~~Financial~~ended ~~Accounting Standards No. 151~~April 30, ~~“Inventory~~2006 ~~Costs~~and –2005 ~~an Amendment of ARB No. 43, Chapter 4.” This statement clarifies the accounting~~ for ~~abnormal~~these ~~amounts of idle~~ facility ~~expense,~~exits ~~freight,~~is ~~handling costs and spoilage, requiring these items be recognized~~ as ~~current-period~~follows charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and will become effective for ADIC beginning (in ~~fiscal~~thousands): ~~2006. The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of operations.~~

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


	Three months ended April 30,						Six months ended April 30,
	2006			2005			2006			2005
Balance at beginning of period	$	987		$	416		$	1,074		$	497
Cash payments		(51	)		(86	)		(138	)		(167	)

Balance at end of period	$	936		$	330		$	936		$	330

InWe ~~December~~believe ~~2004,~~ the ~~FASB~~remaining ~~issued~~accrual ~~Statement~~is ofadequate ~~Financial~~to ~~Accounting~~cover ~~Standards~~the ~~No.~~facility ~~153,~~costs ~~“Exchanges~~through ofthe ~~Nonmonetary~~end ~~Assets – an Amendment~~ of ~~APB~~the ~~Opinion~~lease ~~No.~~terms ~~29.”~~at ~~This statement amends APB 29 to eliminate an exception to~~ the ~~fair~~respective ~~value~~facilities. ~~measurement principle for nonmonetary exchanges of~~

Note 9. Bank guarantee

To improve the efficiencies of our European operations, we outsourced our logistics during 2005 to a third party in the Netherlands. In connection with this outsourcing arrangement, we provided a bank guarantee, with a restricted euro cash balance as collateral, to a third party agent in the Netherlands. As of April 30, 2006 the restricted cash balance was approximately $197,000. This third party agent has taken responsibility for fiscal representation of ADIC in the Netherlands. The agreement with the agent includes this bank guarantee since the agent has liability for our international value-added tax with the Dutch taxing authorities. The bank guarantee may be increased or decreased based on assessments of the Dutch taxing authorities to the third party agent. The bank guarantee is an off-balance sheet arrangement.

Note 10. Rocksoft acquisition

On March 14, 2006, we entered into an Implementation Agreement with Rocksoft Limited, Mr. N.J. Johnson and Mr. R.N. Williams (“Rocksoft”) to acquire all of the issued capital of Rocksoft for approximately $63 million in cash. Rocksoft is an Australian company based in Adelaide, Australia with offices in the U.S. Rocksoft’s patented data de-duplication software finds and eliminates redundant data, changing the fundamental economics of disk-based data protection and data transmission by improving the utilization of disk resources and data transport networks.

The acquisition is subject to a number of closing conditions, including approval by Rocksoft’s shareholders and an Australian court. We have obtained the option to acquire a source code and patent license if the transaction does not close under certain conditions. In addition, we secured an option from significant shareholders of Rocksoft to directly acquire up to 19.9% of outstanding shares at the same

~~similar~~price ~~productive~~per ~~assets~~share ~~and~~offered ~~replaces~~to itall ~~with~~shareholders aunder general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and will become effective for ADIC beginning in the ~~fourth~~Implementation ~~quarter of fiscal 2005~~Agreement. ~~The~~Exercise ~~adoption~~ of this ~~accounting~~option ~~principle~~would is not ~~expected~~require toRocksoft ~~have~~shareholder ~~a significant impact on our financial position~~ or ~~results of operations~~court approval.

In March 2006, we issued a $5 million note receivable to Rocksoft, which may be repaid or converted into Rocksoft shares. The note bears an interest rate of 7.5%, the prime rate as of the date the funds were advanced. The principal and accrued interest on the note is due June 30, 2007, although certain conditions enable us to require Rocksoft to repay the loan earlier. The note is recorded at book value on our Condensed Consolidated Balance Sheet and the $46,000 in accrued interest on the note is recorded in interest income on our Condensed Consolidated Statement of Operations.

The Implementation Agreement and other related documents were filed with the SEC on Form 8-K on March 15, 2006. We expect the transaction will be completed in July 2006.

Note 11. Foreign currency option

During the second quarter of fiscal 2006, we entered into a foreign currency option contract for Australian dollars that is a derivative as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activity.” The option was purchased to offset the currency risk of our acquisition of Rocksoft Limited. Since the option was entered into for a future business combination, it does not qualify for hedge accounting. We purchased the option for $1.3 million, and it had a fair value of $2.4 million at April 30, 2006. The option expires on the approximate date we anticipate completing the Rocksoft acquisition in July 2006. The foreign currency option is included at fair value in prepaid expenses and other assets on our Condensed Consolidated Balance Sheet, and $1.1 million in fair value gains on the option are recorded in foreign currency transaction gains (losses) on the Condensed Consolidated Statement of Operations.

Note 12. Subsequent events

On May 2, 2006, we entered into an Agreement and Plan of Merger (“Merger Agreement”) to be acquired by Quantum Corporation, a Delaware corporation (“Quantum”) for approximately $770 million in cash. Our shareholders have the option of electing up to 10% of the merger consideration in Quantum stock, subject to pro-rata limitations. The Merger Agreement and other related documents were filed with the SEC on Form 8-K by ADIC on May 5, 2006. The transaction is subject to customary closing conditions and regulatory approvals, as well as approval by ADIC shareholders. A proxy statement and prospectus and a registration statement on Form S-4 will be filed with the SEC containing additional information about the proposed merger. We expect the transaction to take approximately three to four months to close from the date the Merger Agreement was originally announced.

On May 18, 2006, a lawsuit was filed in King County Superior Court, Seattle, Washington, naming the Company and its directors as defendants. The lawsuit is a purported class action filed by Richard Carrigan on behalf of an alleged class of the Company’s shareholders. Plaintiff alleges, among other things, that the director defendants breached their fiduciary duties in approving the proposed acquisition of the Company by Quantum Corporation that was publicly announced on May 2, 2006. The suit seeks to enjoin the defendants from consummating the proposed acquisition and other relief.

Note 13. Recent accounting pronouncements

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB 20 cumulative effect accounting with retroactive restatement of comparative financial statements. It applies to all voluntary changes in accounting principle and defines “retrospective application” to differentiate it from

restatements due to incorrect accounting. The provisions of this statement are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and will become effective for ADIC in fiscal 2007. The adoption of this accounting principle is not expected to have a significant impact on our financial position or results of operations.

In September 2005, the EITF reached a consensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Under EITF 04-13, purchases and sales of inventory with the same counterparty should be considered a single nonmonetary transaction when transacted in contemplation of each other. Nonmonetary exchanges of inventory within the same line of business should be recognized at fair value when finished goods inventory is exchanged for the same or a different type of inventory within the same line of business. The EITF was effective for any transactions completed after March 15, 2006. Adoption of EITF 04-13 did not have a significant impact on our financial position or results of operations.

In November 2005, the FASB issued final FASB Staff Position FAS No. 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The FSP addresses when an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary. The FSP is effective for reporting periods beginning after December 15, 2005 with earlier application permitted. For ADIC, the FSP became effective in the second quarter of fiscal 2006. The adoption of this accounting principle did not have a significant impact on our financial position or results of operations.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133 and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006, and is effective for ADIC beginning in fiscal 2007. Adoption of this standard is not expected to have a significant impact on our financial position or results of operations.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

A number of ~~risks~~factors ~~and uncertainties~~ could cause our actual results to differ materially from those contained in the forward-looking statements. Risk factors are detailed in our Annual Report on Form 10-K for the year ended October 31, ~~2004~~2005 filed with the Securities and Exchange Commission (SEC) on January 17, 2006 and are incorporated herein by reference. They include ~~risks relating to~~ changes in global economic and political conditions; seasonal trends; our lack of backlog; increased competition and pricing pressures; our need to continually develop successful new products; uncertain results of research and development spending; reliance on tape technology for a substantial portion of our revenue; our strategy to extend products and services beyond the tape library market; our dependence on ~~key~~a limited number of global suppliers and contract manufacturers; our concentration of manufacturing in one location; our reliance on indirect sales channels and OEM sales; ~~litigation~~product liability risks; ~~product~~claims ~~liability~~of infringement or other risks relating to development and use of intellectual property; the performance of our investments in other entities; our ability to retain key personnel; ongoing service obligations; our expectation that the ~~volatility~~adoption of ~~our~~FAS ~~stock~~123(R) ~~price;~~will ~~antitakeover~~have ~~provisions~~a ~~that~~material ~~make~~impact iton ~~difficult~~our ~~for~~results usof tooperations; beinternational ~~acquired~~operations; successful acquisitions and ~~international~~ ~~expansion,~~integration of the acquired entity; regulatory compliance and foreign currency fluctuations. The foregoing list of factors is not exhaustive. You should carefully consider these factors and other uncertainties and potential events described in the Risk Factors section of our Annual Report on Form 10-K and other documents filed from time to time with the SEC.

General

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

~~Revenues~~On ~~for~~March 14, ~~the~~2006, ~~second~~we ~~quarter~~entered ofinto ~~fiscal~~an ~~2005~~agreement ~~declined~~with 4%Rocksoft ~~from~~Limited ~~both the same period a year ago and the first quarter of fiscal 2005. These decreases were primarily due to a drop in sales to OEM customers~~(“Rocksoft”), ~~resulting from~~ an ~~anticipated decrease~~Australian incompany ~~the~~based sale of certain entry-level products. We anticipate that our OEM revenues will resume growth after we begin making significant shipments of new OEM products that we expect to release later this fiscal year. Strong branded sales offset a portion of the decrease in ~~OEM revenues~~ Adelaide, ~~as service revenue and sales of enterprise-class products~~Australia, ~~which include tape and disk-based offerings as well software, increased compared~~ to ~~the~~acquire ~~same~~all ~~quarter last year. Branded sales represented 60%~~ of ~~revenue,~~ the ~~highest~~issued ~~level~~capital ~~since the third quarter~~ of ~~fiscal~~Rocksoft ~~2002.~~for ~~Despite~~approximately ~~the~~$63 ~~decrease~~million in ~~revenue, operating income improved $1~~cash.5 ~~million~~Rocksoft’s ~~compared~~patented todata ~~both~~de-duplication ~~the~~software ~~second~~finds ~~quarter of fiscal 2004~~ and ~~the~~eliminates ~~first~~redundant ~~quarter~~data, ofchanging ~~fiscal 2005. Gross profit for~~ the ~~quarter~~fundamental ~~was~~economics ~~at its highest level since the end~~ of ~~fiscal 2003 primarily as a result of improved sales channel and product mix consisting of higher branded and enterprise~~disk-~~class~~based data ~~product~~protection ~~sales~~ and ~~increasing~~data ~~utilization~~transmission ~~rates~~by ~~for~~improving ~~our global services personnel and parts infrastructure,~~ the ~~effects~~utilization of ~~which~~disk ~~were~~resources ~~partially~~and ~~offset~~data bytransport ~~lower product sales volumes~~networks. ~~During~~This ~~the~~strategic ~~quarter,~~acquisition ~~sales~~is ~~and~~expected ~~marketing expenses decreased compared~~ to ~~the~~allow ~~same~~us ~~quarter a year ago primarily due~~ to ahelp ~~decline~~customers ~~in sales~~make ~~promotion~~more ~~costs~~efficient ~~related~~and tocost-effective ~~the~~use ~~timing~~ of ~~product~~both ~~introductions.~~disk ~~Research~~ and ~~development~~tape storage ~~expenses~~as ~~increased~~well ~~during~~as ~~the~~providing ~~second~~advantages ~~quarter~~in ofdata ~~fiscal~~transmission, ~~2005~~including ~~compared~~remote toreplication ~~2004 due to a combination of severance, relocation~~ and ~~other~~wide ~~exit~~area ~~costs~~networking. ~~related to the planned fourth quarter~~

15The acquisition is subject to a number of closing conditions, including approval by Rocksoft’s shareholders and an Australian court. We have obtained the option to acquire a source code and patent license if the transaction does not close under certain conditions. In addition, we secured an option from

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

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

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

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

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

~~During the first quarter of fiscal 2006, we will begin recording the fair value of our share-based~~ ~~compensation~~significant inshareholders ~~our financial statements in accordance with Statement~~ of ~~Financial~~Rocksoft ~~Accounting~~to ~~Standards~~directly ~~No.~~acquire ~~123R,~~up ~~“Share-Based Payment (Revised 2004).” We have not yet determined which transition method we will use~~ to ~~adopt SFAS 123R~~19. ~~Assuming~~9% ~~the modified prospective method with no restatement is used, we will record stock compensation expense~~ of ~~approximately~~outstanding ~~$5.5~~shares ~~million~~at ~~between~~ the ~~first~~same ~~quarter~~price ofper ~~fiscal~~share ~~2006~~offered ~~through~~to ~~fiscal~~all ~~2009~~shareholders ~~for~~under ~~stock awards outstanding as of April 30,~~the ~~2005~~Implementation Agreement. AExercise ~~substantial majority~~ of this ~~$5.5~~option ~~million~~would ofnot ~~future~~require ~~expense~~Rocksoft ~~relates~~shareholder toor ~~stock~~court ~~options with exercise prices above the fair market value of our common stock as of the end of the second quarter~~approval. ~~Any~~We ~~additional~~expect ~~impact that~~ the ~~adoption~~transaction ~~of this statement~~ will ~~have on our financial position and results of operations will~~ be ~~determined~~completed ~~by share-based payments granted~~ in ~~future~~July ~~periods and the assumptions on which the value of those share-based payments is based~~2006.

~~Our~~Subsequent ~~financial statements for the three and six months ended April 30, 2004 have been restated~~ to ~~correct~~ our ~~accounting~~second ~~for~~fiscal ~~our investment in a private technology venture limited partnership. During the fourth~~ quarter, ofon ~~fiscal~~May 2, ~~2004~~2006, we ~~determined~~entered ~~that~~into ~~our~~an ~~investment~~Agreement inand ~~Frazier~~Plan ~~Technology~~of ~~Venture~~Merger ~~Fund I~~ (~~FTVI~~“Merger Agreement”), ato ~~limited partnership,~~be ~~had~~acquired ~~been~~by ~~improperly~~Quantum ~~accounted for since fiscal 2000~~Corporation. WeCertain ~~initially~~details ~~accounted~~of ~~for our investment under~~ the ~~cost~~transaction are ~~method~~available ~~since~~through ~~our~~materials ~~ownership~~filed ~~interest~~with inthe ~~FTVI~~SEC. isA ~~less~~proxy ~~than~~statement ~~20%~~ and weprospectus ~~do not have significant influence over the partnership’s operating~~ and ~~financial~~a ~~policies.~~registration ~~Subsequently~~statement iton ~~was~~Form ~~determined that the equity method is appropriate under EITF Topic D~~S-~~46,~~4 ~~“Accounting~~will ~~for~~be ~~Limited~~filed ~~Partnership~~with ~~Investments,”~~the ~~because~~SEC ~~our~~containing ~~limited~~important ~~partnership~~information ~~ownership interest~~about isthe ~~greater~~proposed ~~than 5%~~merger. ~~See~~We ~~Note~~expect ~~1 of~~ the ~~Notes~~transaction to ~~Interim~~take approximately ~~Condensed~~three ~~Consolidated~~to ~~Financial~~four ~~Statements~~months ~~for~~to ~~additional~~close ~~information.~~from ~~The~~the ~~following~~date ~~discussion~~the ~~and~~Merger ~~analysis~~Agreement ~~gives~~was ~~effect~~originally ~~to the restatement~~announced.

~~During~~Revenue for the ~~first~~second quarter of fiscal ~~2005,~~2006 weincreased ~~began~~10% ~~presenting~~from ~~revenue~~the ~~and~~same ~~cost of~~period ~~revenue~~a ~~separately~~year ~~for~~ago. ~~products~~In ~~and~~late ~~services~~April ~~because~~2006, inwe ~~fiscal~~announced ~~2005~~we ~~our~~had ~~annual~~shipped ~~service~~more ~~revenue~~than is2,000 ~~expected~~units tobased ~~exceed~~on ~~10%~~the ofScalar® ~~our~~i500™ ~~total~~platform ~~revenue~~in ~~for~~its ~~the~~ first ~~time~~five months of availability. WeSales ~~have~~of ~~made~~our aiLayer™ ~~corresponding~~products, ~~adjustment~~which toinclude the ~~Condensed~~Scalar ~~Consolidated~~i500 ~~Income~~and Scalar ~~Statement~~i2000™-based ~~for~~libraries, ~~the~~to ~~three~~both OEM and ~~six~~branded ~~months~~customers ~~ended~~were ~~April~~the ~~30,~~primary ~~2004.~~driver ~~See~~of ~~Notes~~our 1increased ~~and~~revenues 2during the second quarter of ~~the~~fiscal ~~Notes~~2006, tooffset ~~Interim~~in ~~Condensed~~part ~~Consolidated~~by ~~Financial~~declines ~~Statements~~in ~~for~~our ~~additional~~older ~~information~~library products. ~~The~~Revenues ~~following~~from ~~discussion~~our iLayer products comprised 47% and ~~analysis~~39% ~~gives~~of ~~effect~~product tosales in the ~~adjustment~~second quarter and first six months of fiscal 2006, respectively.

Gross profit margin for the three months ended April 30, 2006 decreased compared to the same period in fiscal 2005. We believe the rapid production ramp and the initial configuration mix of the Scalar i500-based products as well as substitution from our existing products at the end of their lifecycles contributed to the decreased product margin. The effect of the decreased gross margin was partially mitigated by good expense control with a smaller than anticipated increase in sales and marketing costs and a decrease in research and development expenses.

Sales and marketing expenses increased compared to the second quarter of fiscal 2005 primarily due to higher personnel-related costs. Research and development expenses decreased compared to the same period in the prior year primarily due to lower personnel and facilities expenses. Our general and administrative expenses decreased during the three months ended April 30, 2006 primarily as a result of lower bad debt expense. Operating expenses for the quarter include $1.0 million of non-cash stock-based compensation while previous fiscal periods were not required to be revised to reflect this change.

Net income was $2.2 million in the second quarter of fiscal 2006 on sales of $116.4 million compared to net income of $733,000 on sales of $106.2 million during the same quarter of fiscal 2005. The increase in net income during the second quarter of fiscal 2006 was primarily the result of increased revenue and other income, with lower gross profit margins and relatively flat operating expenses compared to the same period in fiscal 2005.

We consider total cash and marketable securities and net cash provided by operating activities important measures of our financial position and performance. Total cash and marketable securities were $264.0 million at the end of the period compared to $252.6 million at October 31, 2005 and $240.4 million at April 30, 2005. Net cash provided by operating activities was $18.4 million and $21.9 million for the first six months of fiscal 2006 and 2005, respectively.

We expect to continue to make investments in research and development and sales and marketing in order to remain competitive and to solidify our market position as a provider of intelligent storage solutions. We have made and continue to make advances in transforming our business from one that historically was focused on tape libraries to one with a broad portfolio of technologies and channels necessary to support software, disk and tape-based solutions in the

~~Results~~ rapidly evolving backup and archive storage markets. We expect the pending Rocksoft acquisition upon closing will help advance this transformation. We believe the success of ~~Operations~~our iLayer products confirms our ongoing investment in intelligent storage solutions. Our ability to serve broader markets with mid-range and enterprise-level products and software and to continue to develop technologically sophisticated, higher-margin branded products will continue to be key to our future success. We have shifted our research and development efforts to the highest growth opportunities in our markets, with emphasis on both software and hardware products. In addition, we view a comprehensive global service and support offering as an integral component of our strategy and our total customer solution. Service infrastructure and technology investment have been, and are expected to continue to be, major priorities, as we scale to meet our organizational growth and the needs of our expanding installed base of customers.

The competition ~~following~~in ~~table~~our ~~presents~~industry ~~our~~is ~~results~~strong ofand ~~operations~~we ~~for~~must ~~the~~constantly ~~second~~work ~~quarter~~to reduce the cost of ~~fiscal~~our ~~2005~~existing products while retaining high quality standards and ~~2004~~reliability. ~~Percentage~~We outsource the production of ~~revenue~~our ~~data~~Scalar isi500 ~~stated~~and asentry-level products and a ~~percentage~~portion of ~~total~~the ~~revenue,~~repair ~~except~~of ~~for~~these ~~product~~products ~~and~~to ~~service~~third ~~cost~~party ofmanufacturers ~~revenue,~~to ~~which~~allow isus ~~stated~~to astake ~~percentage~~advantage of ~~the~~our ~~applicable~~suppliers’ ~~revenue~~economies ~~type~~of (scale in ~~thousands~~component purchasing, ~~except~~manufacturing, ~~for~~testing ~~percentages):~~and other areas associated with production of our higher volume, lower margin products.

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

Our cost reduction efforts also include reorganization of our research and development team and European operations. The research and development team reorganization was completed in the fourth quarter of fiscal 2005 and the European operations reorganization was substantially completed in the second quarter of fiscal 2006. During the second quarter of fiscal 2006 we had lower personnel and facilities expenses in research and development related to these operations and we expect these operational efficiencies and lower costs to continue in fiscal 2006 and beyond. During the second quarter of fiscal 2006, we recorded $88,000 of workforce reduction and relocation costs related to the European operations reorganization in general and administrative expense.

We began recording the fair value of our stock-based compensation in our financial statements in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment (Revised 2004)” in the first quarter of fiscal 2006. Previous financial periods were not required to be revised to reflect this change. Stock-based compensation recognized under FAS 123(R) for the three and six months ended April 30, 2006 was $1.3 million and $2.7 million, respectively, which reduced both basic and diluted earnings per share by $0.01 and $0.03, respectively. Stock-based compensation recorded during the three and six months ended April 30, 2006 related to stock options and shares under our stock purchase plan. We anticipate $1.8 million in stock-based compensation in the remainder of fiscal 2006 and $4.0 million in subsequent years for awards outstanding as of April 30, 2006. Additional impact resulting from adoption of this statement on our financial position and results of operations will be determined by stock-based awards granted in future periods and the assumptions on which the value of those stock-based awards is based. Our tax accounting may also be impacted by actual exercise behavior and the relative market prices at exercise.

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

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

The following table presents our results of operations for the second quarter of fiscal 2006 and 2005. Percentage of revenue data is stated as a percentage of total revenue, except for product and service cost of revenue, which is stated as percentage of the applicable revenue type (in thousands, except for percentages):

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


	Three months ended April 30,
	2006					2005
	Dollars			% of Revenue		Dollars			% of Revenue
Revenue:
Product	$	101,568		87	%	$	92,047		87	%
Service		14,828		13	%		14,124		13	%

		116,396		100	%		106,171		100	%

Cost of revenue:
Product ($153 in stock-based compensation in 2006, $0 in 2005)		72,312		71	%		63,268		69	%
Service ($112 in stock-based compensation in 2006, $0 in 2005)		11,872		80	%		10,167		72	%

		84,184		72	%		73,435		69	%

Gross profit		32,212		28	%		32,736		31	%

Operating expenses:
Sales and marketing ($423 in stock-based compensation in 2006, $0 in 2005)		17,935		15	%		16,227		15	%
General and administrative ($267 in stock-based compensation in 2006, $0 in 2005)		6,218		5	%		6,418		6	%
Research and development ($344 in stock-based compensation in 2006, $0 in 2005)		8,975		8	%		10,050		9	%

		33,128		28	%		32,695		31	%

Operating profit (loss)		(916	)	-1	%		41		0	%

Other income (expense):
Interest income		2,079		2	%		1,270		1	%
Gain (loss) on securities and investment transactions, net		46		0	%		(36	)	0	%
Foreign currency transaction gains (losses), net		2,330		2	%		(225	)	0	%
Other		55		0	%		(202	)	0	%

		4,510		4	%		807		1	%

Income before provision for income taxes		3,594		3	%		848		1	%
Provision for income taxes		1,400		1	%		115		0	%

Net income	$	2,194		2	%	$	733		1	%

~~Combined~~Percentage ~~product~~columns ~~and~~may ~~service~~not ~~revenue~~add ~~decreased~~due ~~4% during the second quarter of fiscal 2005 and 5% during the first six months of fiscal 2005 from the comparable periods in fiscal 2004. These decreases are the result of lower sales~~ to ~~OEM customers as described above~~rounding. ~~During the second quarter of fiscal 2005, sales to branded customers increased 9% compared to the same period a year ago. ADIC~~

~~branded~~The ~~revenues~~following ~~represented~~table ~~60%~~presents ~~and~~our ~~53%~~results of ~~sales~~operations for the ~~second~~first ~~quarter~~six months of fiscal ~~2005~~2006 and ~~2004, respectively~~2005. ~~Revenue from OEM customers comprised 40% and~~ ~~47%~~Percentage of ~~sales for the second quarter of fiscal 2005 and 2004, respectively. The increase in branded~~ revenue ~~during~~data ~~the second quarter of fiscal 2005~~ is ~~primarily~~stated ~~attributable~~as to a ~~$2.9~~percentage ~~million increase in service revenue and higher sales~~ of ~~our enterprise-class~~total ~~products~~revenue, ~~which~~except ~~include~~for ~~tape~~product and ~~disk-based~~service ~~offerings~~cost ~~as well software. During the six months ended April 30, 2005, sales to branded customers increased 8% compared to the same period a year ago. ADIC branded revenues represented 59% and 52%~~ of ~~sales for the first six months of fiscal 2005 and 2004~~revenue, ~~respectively.~~which ~~Revenue~~is ~~from~~stated ~~OEM~~as ~~customers~~percentage ~~comprised 41% and 48%~~ of ~~sales for~~ the ~~first~~applicable ~~six months of fiscal 2005 and 2004, respectively. The increase in branded~~ revenue ~~during~~type ~~the first six months of fiscal 2005 is primarily attributable to a $5.7 million increase~~ (in ~~service revenue and higher sales of our enterprise products. During the third quarter~~thousands, weexcept ~~expect~~for ~~branded~~percentages): ~~and OEM revenues to be fairly similar to the second quarter. In the fourth quarter, we anticipate increased revenues and a greater proportion of sales to branded customers.~~

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


	Six months ended April 30,
	2006					2005
	Dollars			% of Revenue		Dollars			% of Revenue
Revenue:
Product	$	206,910		88	%	$	189,677		87	%
Service		28,727		12	%		27,314		13	%

		235,637		100	%		216,991		100	%

Cost of revenue:
Product ($330 in stock-based compensation in 2006, $0 in 2005)		145,395		70	%		131,803		69	%
Service ($216 in stock-based compensation in 2006, $0 in 2005)		22,978		80	%		19,659		72	%

		168,373		71	%		151,462		70	%

Gross profit		67,264		29	%		65,529		30	%

Operating expenses:
Sales and marketing ($801 in stock-based compensation in 2006, $0 in 2005)		35,382		15	%		32,909		15	%
General and administrative ($595 in stock-based compensation in 2006, $0 in 2005)		13,107		6	%		12,691		6	%
Research and development ($752 in stock-based compensation in 2006, $0 in 2005)		18,824		8	%		21,307		10	%

		67,313		29	%		66,907		31	%

Operating loss		(49	)	0	%		(1,378	)	-1	%

Other income (expense):
Interest income		4,084		2	%		2,315		1	%
Gain (loss) on securities and investment transactions, net		55		0	%		(2	)	0	%
Foreign currency transaction gains (losses), net		2,439		1	%		(132	)	0	%
Other		132		0	%		(287	)	0	%

		6,710		3	%		1,894		1	%

Income before provision for income taxes		6,661		3	%		516		0	%
Provision for income taxes		1,000		0	%		53		0	%

Net income	$	5,661		2	%	$	463		0	%

~~Sales~~Percentage ~~and~~columns ~~Marketing~~may ~~Expenses.~~not ~~Sales~~add ~~and marketing expenses decreased in absolute dollars and as a percentage of revenue during the second quarter of fiscal 2005 compared to the second quarter of fiscal 2004 primarily~~ due to ~~a decline in sales promotion costs related to the timing of product introductions~~rounding. Sales and marketing expenses increased in absolute dollars and as a percentage of revenue during the first six months of fiscal 2005 compared to the first six months of fiscal 2004 primarily due to increased labor costs related to additional headcount added throughout fiscal 2004 as part of our efforts to expand our sales channels in order to penetrate new markets, reach new customers and support new product offerings. For all of fiscal 2005, we expect sales and marketing expenditures to increase modestly compared to fiscal 2004 as we leverage the investment we have made in sales and marketing over the past few years.

~~General~~Revenue. Product revenue includes sales of hardware and ~~Administrative~~software ~~Expenses~~data storage solutions. ~~General~~Service ~~and~~revenue ~~administrative~~includes ~~expenses~~revenue ~~increased~~derived infrom ~~absolute~~contracts for ~~dollars~~field ~~and~~support asprovided ato ~~percentage~~our ofbranded-product customers. Product revenue increased 10% during the ~~first~~second ~~three~~quarter of fiscal 2006 and 9% during the first six months of fiscal ~~2005~~2006 compared to the same periods inof fiscal ~~2004 largely~~2005. ~~due~~Strong tosales ~~higher~~of ~~professional~~our iLayer ~~services~~products, ~~fees~~which ~~related~~include toboth ~~our~~the ~~first~~Scalar ~~year~~i500 ofand ~~Sarbanes~~Scalar i2000-~~Oxley~~based ~~Section~~libraries, ~~404~~comprised ~~compliance~~the inmajority ~~fiscal~~of ~~2005~~the ~~and~~increase toin ~~support~~product ~~ongoing~~revenue ~~tax~~from both OEM and ~~business~~branded ~~strategy~~customers, ~~planning.~~offset Wein ~~expect~~part ~~general~~by ~~and~~declines ~~administrative~~in ~~expenses~~revenues tofrom ~~continue~~our older library toproducts ~~increase~~for ~~during~~both ~~fiscal~~the ~~2005~~three ~~compared~~and tosix ~~fiscal~~months ~~2004~~ended ~~primarily~~April 30, as2006 acompared ~~result~~to ofsame ~~higher~~periods ~~professional~~of ~~services~~the ~~fees~~prior ~~related~~year. toRevenues from our ~~Sarbanes-Oxley~~iLayer ~~Section~~products ~~404~~comprised ~~compliance~~47% and ~~costs~~39% ~~associated~~of ~~with~~product ~~reorganization~~sales ~~among~~in ~~our~~the ~~European~~three ~~operations~~and six months ended April 30, 2006, respectively. Service revenue

~~Research and Development Expenses. Research and development expenses~~ increased in5% ~~absolute dollars and as a percentage of revenue~~ during both the ~~first~~second ~~three~~quarter and first six months of fiscal ~~2005~~2006 compared to the same periods ~~in fiscal 2004. During the second quarter~~ of fiscal 2005, we recorded $426,000 of severance, relocation and other exit costs related to the planned fourth quarter closures of our Ithaca, New York and Santa Clara, California research and development facilities. The remainder of the increase in research and development expenses during the second quarter of fiscal 2005 is largely due to ~~higher material costs associated with product development efforts for products expected~~ to becontinued ~~released~~growth ~~later this fiscal year. The remainder of the increase~~ in research and development expenses during the first six months of fiscal 2005 is primarily due to incremental expenses related to prototype branded and OEM products. These increased prototype expenses do not reflect an increase in headcount or other costs that are likely to be repeated in this fiscal year. We expect to record additional costs related to our two planned facilities closures during both of the remaining quarters in fiscal 2005. We anticipate research and development spending will be lower during the third quarter, with higher costs in the fourth quarter of ~~fiscal~~installed ~~2005~~base ~~when we expect to record the majority~~ of ~~the~~products ~~costs~~at ~~related~~branded ~~to the facilities closures~~customers.

~~Other~~Total ~~Income~~revenue ~~(Expense).~~increased ~~Other~~10% ~~income (expense) primarily consists of interest income, net foreign currency transaction losses~~ and ~~net~~9% ~~gain (loss) on securities and investment transactions. The increase in interest income~~ during ~~both~~ the ~~three~~second quarter and first six ~~month~~months ~~periods~~of fiscal ~~ended~~2006 ~~April~~from ~~30, 2005 is primarily~~ the ~~result~~same periods of ~~higher interest rates during~~ fiscal 2005. ~~Our~~These ~~foreign~~increases ~~currency transaction losses~~ are primarily the result of ~~the~~increased ~~dollar~~product ~~strengthening~~sales ~~against~~as ~~the~~described ~~euro~~above. ~~during~~During the ~~first~~second ~~half~~quarter of ~~both~~ fiscal ~~2005~~2006 ~~and~~sales ~~2004.~~to ~~Our~~OEM ~~net~~and ~~foreign~~branded ~~currency~~customers ~~transaction~~increased ~~losses~~17% ~~are~~and ~~impacted by fluctuations in the currency markets~~5%, ~~which can cause this number~~respectively, ~~to vary significantly quarter~~ over ~~quarter. The net losses on securities and investment transactions during~~ the ~~first~~comparable ~~six~~prior ~~months~~year ofperiod ~~fiscal 2005~~ and ~~the~~increased ~~second~~12% ~~quarters of fiscal 2005~~ and ~~2004~~6% ~~consist~~for ~~of our pro rata share of losses from our equity method investments. During the~~ first six months of fiscal ~~2004~~2006, werespectively ~~recorded~~over ~~securities~~the ~~gains~~comparable ~~primarily~~prior ~~related~~year toperiod. ~~the~~ADIC ~~receipt~~branded ofrevenues ~~shares~~represented 58% of ~~marketable~~revenue, ~~securities under earnout~~ and ~~escrow~~sales ~~provisions~~to ofOEM acustomers ~~November~~comprised ~~2002~~42% ~~investment transaction in which~~of ~~one~~revenue, offor ~~our~~both ~~strategic~~the ~~investments~~second ~~was~~quarter ~~converted to cash~~ and ~~marketable~~first ~~securities.~~six ~~These~~months ~~gains were partially offset by our pro rata share~~ of ~~losses~~fiscal ~~on our equity method investments~~2006. ~~During~~For the ~~third~~second quarter, weand ~~will~~first ~~record~~six amonths ~~gain~~ of ~~approximately $2.5~~fiscal ~~million related to the sale of our facility in Böehmenkirch~~2005, ~~Germany~~ADIC inbranded ~~early~~revenues ~~May.~~represented ~~During~~60% ~~the~~and ~~remainder~~59% of ~~fiscal~~revenue, ~~2005~~respectively, wewhile ~~expect~~sales ~~interest income~~ to ~~remain~~OEM ~~flat.~~customers ~~Net~~comprised ~~foreign currency transaction gains (losses) and net gain (loss) on~~40% ~~securities~~ and ~~investment~~41%, ~~transactions will be driven by prevailing market conditions~~respectively.

~~Provision~~Gross ~~(Benefit) for Income Taxes~~Profit. InGross ~~the~~profit ~~second~~decreased ~~quarter~~to 28% of ~~fiscal~~revenue ~~2005~~for wethe ~~had~~three anmonths ~~effective~~ended ~~tax~~April 30, ~~expense~~2006 compared ofto 1431%, ~~and~~of inrevenue for the ~~second~~same ~~quarter~~period of fiscal ~~2004 we had an effective tax benefit of 33%~~2005. InFor the ~~first~~ six months ofended ~~fiscal~~April 30, ~~2005~~2006, ~~and~~gross ~~2004~~profit wewas ~~had~~29% anof ~~effective~~revenue ~~tax~~compared ~~expense~~to ~~of 10~~30% ~~and~~of ~~26%,~~revenue ~~respectively.~~for ~~The~~the ~~effective~~same ~~tax~~period ~~rate~~of ~~includes~~fiscal ~~tax~~2005. ~~expense~~Gross ~~(benefit)~~profit ~~for~~margins ~~various~~depend ~~federal,~~on ~~state~~a ~~and~~number ~~international jurisdictions at statutory rates~~of factors, ~~which~~including ~~are~~sales ~~reduced for~~channel ~~tax~~and ~~benefits~~product ~~relating~~mix, tofixed ~~our~~infrastructure ~~business credits~~costs, ~~extraterritorial~~price ~~income~~competition ~~exclusion~~ and ~~non-taxable~~tape ~~interest~~drive ~~income~~costs. ~~For~~Gross ~~the~~profit ~~remainder~~was ofreduced ~~fiscal~~by ~~2005~~$265,000 weand ~~expect~~$546,000 toin ~~record~~stock-based acompensation ~~provision~~ for ~~income~~the ~~taxes,~~second ~~whether~~quarter aand ~~benefit or expense, comparable to the~~ first six months of fiscal 2006. ~~2005;~~Two-thirds ~~however,~~of ~~our~~the ~~effective~~overall ~~tax~~decline ~~rate~~in ~~may~~gross ~~fluctuate~~profit ~~based~~as on a ~~number~~percentage of ~~factors~~sales ~~including~~during ~~variations~~the insecond ~~estimated~~quarter ~~taxable~~of ~~income~~fiscal in2006 ~~our~~was ~~geographic~~attributable ~~locations,~~to ~~unforeseen~~lower ~~changes~~product inmargins ~~the~~and ~~valuation~~one-third ofwas ~~our~~due ~~net~~to ~~deferred~~lower ~~tax~~service margins. Reduced service margins and product ~~assets,~~margins ~~changes~~contributed inevenly ~~our~~to ~~estimates~~the ~~regarding~~decrease ~~resolution~~in ofgross ~~open~~profit ~~tax~~as ~~matters~~a orpercentage ~~changes~~of insales ~~tax~~during ~~laws~~the orfirst ~~our~~six ~~interpretations~~months of ~~them~~fiscal 2006.

~~Exit~~Product gross ~~Costs~~margin decreased to 29% and 30% in the second quarter and first six months of fiscal 2006, respectively, compared to 31% for both comparable periods in the prior year. During the second quarter and first six months of fiscal 2006, we had significant sales of our new Scalar i500 product. We believe the rapid production ramp and the initial configuration mix of the Scalar i500-based products as well as substitution from our existing products at the end of their lifecycles contributed to the decreased product margin. Additionally, during both the second quarter and first six months of fiscal 2006, our channel mix had a higher proportion of sales to OEM customers and lower proportion of sales to branded customers than the comparable periods of fiscal 2005. Sales to OEM customers typically have lower margins than sales to branded customers, which include higher-margin enterprise-class products. We expect increased production efficiencies, volume procurement-related cost reductions and evolving configuration mix and a shift toward branded products to improve gross margins in the coming months.

~~Research~~Service margin decreased to 20% for the three and ~~development~~six ~~facility~~months ~~closures~~ended April 30, 2006 from 28% for both the three and six months ended April 30, 2005, due to service costs increasing at a greater rate than service revenue growth. Service cost of revenue increases were primarily related to service contract purchases from third parties and our global services parts infrastructure, each of which represented approximately 40% of the increase for both the second quarter and first six months of fiscal 2006. These types of costs increase as our customer base expands into new geographies.

InSales ~~February~~and ~~2005,~~Marketing weExpenses. ~~announced~~Sales and ~~plans~~marketing toexpenses ~~close~~increased ~~our~~in ~~research~~absolute ~~and~~dollars ~~development~~yet ~~facilities~~remained inflat ~~Ithaca,~~as ~~New~~a ~~York~~percentage of revenue during both the second quarter and ~~Santa~~first ~~Clara,~~six ~~California~~months of fiscal 2006 compared to the same periods of fiscal 2005. The ~~purpose~~increases ~~of these~~were ~~closures~~primarily isdue to increased ~~improve~~personnel-related ~~customer~~costs. ~~service~~Fiscal 2006 sales and marketing expenses included $423,000 and $801,000 of stock-based compensation in the second quarter and first six months, respectively.

General and Administrative Expenses. General and administrative expenses decreased in absolute dollars and as a percentage of revenue during the second quarter of fiscal 2006 compared to the

~~optimize~~second ~~efficiency~~quarter ~~and~~of ~~lower~~fiscal ~~our~~2005. ~~cost~~The ~~structure~~decrease bywas ~~streamlining~~primarily ~~and~~due ~~integrating~~to ~~overhead~~lower ~~from~~bad ~~several~~debt ~~acquisitions.~~expense ~~Both~~resulting ~~closures~~from ~~are~~strong ~~expected~~customer tocollections ~~be completed~~offset ~~during~~in ~~the~~part ~~fourth~~by ~~quarter~~higher personnel-related ofexpenses, ~~fiscal~~including ~~2005.~~$267,000 ~~The~~in ~~charges~~stock-based ~~related~~compensation. toGeneral ~~these~~and ~~closures~~administrative ~~are~~expenses ~~recorded~~increased in ~~research~~absolute dollars and ~~development~~remained ~~expense.~~flat ~~The~~as ~~activity~~a ~~for~~percentage of revenue during the first six months ~~ended~~of ~~April~~fiscal ~~30,~~2006 compared to fiscal 2005. isThe asincrease ~~follows~~was (primarily due to higher personnel-related costs, including $595,000 in ~~thousands):~~stock-based compensation, offset in part by lower bad debt expense.

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

Research and Development Expenses. Research and development expenses decreased in absolute dollars and as a percentage of revenue during both the second quarter and first six months of fiscal 2006 compared to the same periods of fiscal 2005. The second quarter decrease was primarily due to lower personnel and facilities expenses, and the decrease for the first six months of fiscal 2006 was primarily due to lower material and prototype costs associated with product development efforts. The decreases were partially offset by the inclusion of $344,000 and $752,000 of stock-based compensation during the second quarter and first six months of fiscal 2006, respectively. We closed two research and development facilities in the fourth quarter of fiscal 2005, which contributed to reduced related facilities and personnel expenses in both the second quarter and first six months of fiscal 2006.

WeOther ~~expect~~Income. toOther ~~record~~income primarily consists of interest income, net foreign currency transaction gains (losses) and net gains (losses) on ~~additional~~securities ~~charges~~and ~~related~~investment totransactions. The increase in interest income is primarily the ~~closures~~result of higher interest rates during both the ~~third~~second quarter and ~~fourth~~first ~~quarters~~six months of fiscal 2006 compared to the same periods of fiscal 2005,. ~~with~~Our upnet toforeign currency transaction gains for the second quarter and first six months of fiscal 2006 included a $~~300,000~~1.1 inmillion ~~future~~gain ~~years~~on a foreign currency option. ~~Further,~~We wealso ~~expect~~had foreign currency transaction gains due to the ~~majority~~euro strengthening against the dollar during both the second quarter and first six months of fiscal 2006. Our foreign currency transaction losses in the ~~additional~~second ~~charges~~quarter and first six months of fiscal 2005 were primarily the result of the dollar strengthening against the euro. Our net foreign currency transaction gains are impacted by fluctuations in the currency markets, and there is no assurance that we will beexperience ~~accrued~~gains in the future. The net gain on securities and investment transactions during the ~~fourth~~second quarter ~~upon~~and first six months of fiscal 2006 is the net result of gains on sales of marketable securities of $399,000 and $1.2 million, respectively, largely offset by $353,000 and $1.1 million, respectively, for our ~~exit~~pro rata share of losses from our equity method investments. The net losses on securities and investment transactions during both ~~facilities.~~the Wesecond ~~currently~~quarter ~~anticipate~~and ~~total~~first ~~additional~~six ~~charges~~months asof ~~follows~~fiscal ~~(in~~2005 ~~thousands):~~consisted of our pro rata share of losses from our equity method investments.

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

Provision for Income Taxes. In the second quarter of fiscal 2006 and 2005 we had an effective tax expense of 39% and 14%, respectively. In the first six months of fiscal 2006 and 2005 we had an effective tax expense of 15% and 10%, respectively. The effective tax rate includes tax expense or benefit for various federal, state and international jurisdictions at statutory rates, which are reduced for tax benefits relating to our business credits, extraterritorial income exclusion and non-taxable interest income. For the remainder of fiscal 2006, we expect to record a provision for income tax expense; however, our effective tax rate may fluctuate based on a number of factors including variations in estimated taxable income in our geographic locations, unforeseen changes in the valuation of our net deferred tax assets, changes in our estimates regarding resolution of open tax matters or changes in tax laws, including ratification of the research and development tax credit, or our interpretations of them.

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

European shared services reorganization

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

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

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

European Shared Services Reorganization

~~Other~~In February 2005, we began a reorganization of our European operations to create a shared services center in Switzerland. The purpose of this reorganization is to improve our ability to meet our customers’ needs; centralize our administrative support functions and operating and financial controls; streamline our reporting; and improve our operating cost model by streamlining and integrating overhead from several acquisitions. The reorganization impacted administrative team members, some of whom relocated within our European operations. The charges related to the reorganization are recorded in general and administrative expense. We incurred workforce reduction and relocation costs and did not incur facilities-related or other costs in connection with the reorganization. The activity for the three and six months ended April 30, 2006 and 2005 is as follows (in thousands):


	Three months ended April 30,					Six months ended April 30,
	2006			2005		2006			2005
Balance at beginning of period	$	316		$	—	$	454		$	—
Charges		88			104		159			104
Cash payments		(120	)		—		(326	)		—
Noncash adjustments		(24	)		—		(27	)		—

Balance at end of period	$	260		$	104	$	260		$	104

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

Substantially all expected costs related to this reorganization were accrued as of April 30, 2006. We do not expect any significant additional costs in future quarters of fiscal 2006 or future years.

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

~~Liquidity~~During fiscal 2001, we recorded a $2.3 million liability to reflect anticipated costs to exit a manufacturing and ~~Capital~~development ~~Resources~~site in Englewood, Colorado which was replaced by a larger facility in Englewood in fiscal 2002. These accrued costs represent our estimate of the net amount of lease payments related to unused capacity of the old facility.

~~The~~During ~~following~~fiscal ~~table~~2005, ~~summarizes~~we ~~our~~recorded ~~statement~~a of$1.2 ~~cash~~million ~~flows~~liability ~~for~~to ~~the~~reflect ~~six~~anticipated ~~months~~costs ~~ended~~to ~~April~~exit ~~30,~~a ~~2005~~research and ~~2004~~development (facility in ~~thousands):~~Ithaca, New York, net of anticipated sublease income. These accrued costs represent our estimate of the net amount of lease and sublease payments related to abandonment of the facility.

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

The activity for the three and six months ended April 30, 2006 and 2005 for these facility exits is as follows (in thousands):

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


	Three months ended April 30,						Six months ended April 30,
	2006			2005			2006			2005
Balance at beginning of period	$	987		$	416		$	1,074		$	497
Cash payments		(51	)		(86	)		(138	)		(167	)

Balance at end of period	$	936		$	330		$	936		$	330

We believe the remaining accrual is adequate to cover the facility costs through the end of the lease terms at the respective facilities.

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

~~Cash~~The ~~flows~~following ~~used~~table ~~in investing~~summarizes ~~activities~~our ~~included~~statement ~~proceeds from certain securities transactions, primarily the maturities~~ of ~~marketable~~cash ~~debt~~flows ~~securities and sale of marketable equity securities of $108.5 million and $60.7 million~~ for the ~~first~~ six months of 2005 and 2004, respectively. These proceeds were offset by purchases of marketable securities of $163.0 million and $78.3 million during the first six months of fiscal 2005 and 2004, respectively, and $429,000 and $364,000 of investments in non-marketable securities of non-public technology businesses during the first six months of fiscal 2005 and 2004, respectively. Investments in property, plant and equipment were $7.1 million and $9.0 million during the first six months of fiscal 2005 and 2004, respectively. Capital expenditures during the first six months of fiscal 2005 were comprised primarily of computer hardware and software for our global information technology infrastructure and to support initiatives within our global services organization and tooling and equipment related to new product introductions. Capital expenditures during the first six months of fiscal 2004 were comprised primarily of computer hardware and software to support initiatives within our global services and research and development organizations and tooling and equipment related to new product introductions. During the six months ended April 30, ~~2004,~~2006 ~~we received proceeds of $15.1 million from the disposal of assets held for sale, which primarily comprised inventory~~ and ~~leasehold~~2005 ~~improvements~~(in ~~related~~thousands): ~~to the Benchmark outsourcing agreement completed during the period.~~

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


	Six months ended April 30,
	2006		2005
Beginning cash and cash equivalents	$	131,554	$	94,695
Net cash flows provided by (used in):
Operating activities		18,407		21,913
Investing activities		105,342		(61,983	)
Financing activities		4,773		(6,732	)
Effect of exchange rate changes on cash and cash equivalents		1,252		(188	)

Net increase (decrease) in cash and cash equivalents		129,774		(46,990	)

Ending cash and cash equivalents	$	261,328	$	47,705

~~Our cash~~During ~~and~~the ~~cash~~first ~~equivalents~~six ~~totaled~~months ~~$47.7~~of ~~million~~fiscal ~~and~~2006, ~~$94.7~~the ~~million~~difference atbetween ~~April~~reported ~~30,~~net ~~2005~~income and ~~October~~cash provided ~~31,~~by ~~2004,~~operating ~~respectively.~~activities Atwas ~~April~~primarily ~~30,~~due ~~2005,~~to ~~our~~depreciation ~~cash~~ and ~~cash~~amortization ~~equivalents~~ and ~~marketable~~a ~~securities~~decrease ~~totaled~~in ~~$240.4~~accounts ~~million~~receivable, upwhich ~~from~~were ~~$232.9~~offset ~~million~~by ~~at October~~a ~~31,~~decrease ~~2004.~~in ~~Our~~accounts ~~working capital, the difference between current assets and current liabilities, was $279~~payable.3 ~~million~~Accounts atreceivable ~~April~~decreased ~~30,~~primarily ~~2005~~due ~~compared~~ to ~~$281.4~~collections ~~million~~from atour customers ~~October~~and ~~31,~~a ~~2004.~~reduction ~~The~~in ~~ratio~~sales. ofAccounts ~~current~~payable ~~assets~~decreased toprimarily ~~current~~due ~~liabilities was 4.0~~ to 1 atthe ~~April~~timing ~~30,~~of ~~2005~~payments ~~and 3.9~~ to ~~1 at October 31, 2004~~suppliers.

~~Based~~During ~~on our~~the ~~strong~~first ~~cash~~six months ~~position,~~of ~~anticipated~~fiscal ~~profitable operations and planned expenditures~~2005, ~~including~~the ~~further~~difference ~~investment~~between inreported ~~our~~net ~~product~~income ~~development strategy, we believe that our existing cash~~ and cash ~~equivalents,~~provided ~~marketable~~by ~~securities and anticipated cash flow from our~~ operating activities ~~will~~was beprimarily ~~sufficient~~due to ~~fund~~depreciation ~~our~~and ~~working~~amortization ~~capital~~ and ~~capital~~decreases ~~expenditure~~in ~~needs~~accounts ~~for~~receivable atand ~~least the next 12 months. However~~inventories, ~~cash~~which ~~flows~~were ~~from~~offset ~~operations could be negatively impacted~~ by a decrease in ~~demand for our~~ ~~products~~accounts aspayable. aAccounts ~~result~~receivable ofdecreased ~~rapid~~primarily ~~technological~~due ~~changes~~to ~~and other risks. Over~~ the ~~longer~~timing ~~term,~~of wesales ~~may choose~~ to ~~fund~~and ~~our~~collections ~~operations~~from ~~through~~both ~~the~~our ~~issuance~~OEM ofand ~~additional~~branded ~~equity or debt financing~~customers. The ~~issuance~~decrease ofin ~~equity~~inventories orwas ~~convertible~~primarily ~~debt~~due ~~securities~~to ~~could result~~a reduction in ~~dilution~~finished togoods ~~our~~held ~~stockholders,~~at ~~and~~third weparty warehouses ~~cannot~~for ~~provide~~certain ~~any~~OEM ~~assurance~~customers. ~~that~~Accounts ~~such~~payable ~~additional~~decreased ~~long-term~~primarily ~~financing,~~due ifto ~~required,~~the ~~could~~timing beof ~~completed~~payments onto ~~favorable terms~~suppliers.

Cash flows provided by (used in) investing activities included proceeds from securities transactions, primarily the maturities and sales of marketable securities of $682.2 million and $108.5 million for the first six months of 2006 and 2005, respectively. These proceeds were offset by purchases of marketable securities of $563.4 million and $163.0 million during the first six months of fiscal 2006 and 2005, respectively, and $582,000 and $429,000 of investments in non-marketable securities of non-public technology businesses during the first six months of fiscal 2006 and 2005, respectively. Investments in property, plant and equipment were $7.9 million and $7.1 million during the first six months of fiscal 2006 and 2005, respectively. Capital expenditures during the first six months of fiscal 2006 were primarily related to Scalar i500 test and manufacturing equipment and assets to support our advanced solution product development. Capital expenditures during the first six months of fiscal 2005 were comprised primarily of computer hardware and software for our global information technology infrastructure and to support initiatives within our global services organization and tooling and equipment related to new product introductions.

We generated cash from financing activities through the receipt of proceeds from the exercise of stock options of $4.3 million and $1.8 million during the first six months of fiscal 2006 and 2005, respectively. We repurchased $8.5 million of our common stock during the six months ended April 30, 2005 and there were no repurchases during the six months ended April 30, 2006. Excess tax benefit from

~~We will continue to evaluate possible acquisitions of, or investments in businesses, products or~~ ~~technologies that we believe are strategic, which may require~~ the ~~use~~exercise of ~~cash.~~stock Inoptions ~~addition,~~during wethe ~~have~~year ~~made~~was ~~and~~due ~~expect~~ to ~~continue~~the torequisite ~~make~~reclassification ~~investments~~of inthis ~~companies~~benefit ~~with~~from ~~whom~~operating weactivities ~~have~~following ~~identified~~the ~~potential~~requirements of ~~synergies~~FAS 123(R).

At April 30, 2006, our cash and cash equivalents totaled $261.3 million, up from $131.6 million at October 31, 2005. At April 30, 2006, our cash and cash equivalents and marketable securities totaled $264.0 million, up from $252.6 million at October 31, 2005. Our working capital, the difference between current assets and current liabilities, was $297.5 million at April 30, 2006 compared to $283.0 million at October 31, 2005. The ratio of current assets to current liabilities was 3.8 to 1 and 3.4 to 1 at April 30, 2006 and October 31, 2005, respectively.

Significant additions to our contractual cash obligations since disclosed in our Annual Report on Form 10-K for the year ended October 31, 2005 include our intent to purchase Rocksoft Limited, an Australian company, for approximately $63 million in cash. We expect the Rocksoft transaction to be completed in July 2006. We continue to have contractual obligations related to operating leases, purchase obligations primarily consisting of accounts payable to our vendors and two remaining annual payments of $200,000 for a $1.0 million patent license. We have accrued significantly all obligations representing workforce reduction and relocation costs associated with our European reorganization as described above.

Based on our strong cash position, anticipated profitable operations and planned expenditures, including further investment in our advanced solutions product development strategy, we believe that our existing cash and cash equivalents, marketable securities and anticipated cash flow from our operating activities will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. However, cash flows from operations could be negatively impacted by a decrease in demand for our products as a result of rapid technological changes and other risks as well as higher than anticipated costs related to the integration of Rocksoft.

Off-Balance Sheet Arrangements

As of April 30, 2006, we had commitments to provide an additional $1.7 million in capital funding towards strategic investments we currently hold in two limited partnership venture capital funds. We will invest funds as requested until our remaining commitments are satisfied.

As part of our agreement with a contract manufacturer, we could find it expedient to pay a fee to gain ownership of certain manufacturing and manufacturing test process information and fixtures for one of our products. At this time we are unable to reasonably estimate the amount of the potential payment, if any. Accordingly, no provision for this potential liability has been made in our consolidated financial statements.

To improve the efficiencies of our European operations, during 2005 we outsourced our logistics to a third party in the Netherlands. In connection with this outsourcing arrangement, we provided a bank guarantee, with a restricted euro cash balance as collateral, to a third party agent in the Netherlands. As of April 30, 2006 the restricted cash balance was approximately $197,000. This third party agent has taken responsibility for fiscal representation of ADIC in the Netherlands. The agreement with the agent includes this bank guarantee since the agent has liability for our international value-added tax with the Dutch taxing authorities. The bank guarantee may be increased or decreased based on assessments of the Dutch taxing authorities to the third party agent. The bank guarantee is an off-balance sheet arrangement.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The critical accounting policies that involve significant judgments and estimates used in the preparation of our consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended October 31, ~~2004~~2005. New critical accounting policies that involve significant judgments and estimates are disclosed below.

WeOn ~~have~~November 1, ~~presented~~2005, ~~revenue~~we adopted ~~and~~FAS 123(R) ~~cost~~which ofrequires ~~revenue~~the ~~separately~~measurement ~~for products~~ and ~~services~~recognition ~~beginning~~of incompensation ~~the~~for ~~first~~all ~~quarter~~stock-based ofawards ~~fiscal~~made ~~2005.~~to ~~Product~~employees ~~revenue~~and ~~includes~~directors ~~sales~~including ofstock ~~hardware~~options and ~~software~~employee ~~data~~stock ~~storage~~purchases ~~solutions,~~under asa ~~well~~stock aspurchase ~~installation~~plan ~~and~~based ~~professional~~on ~~services~~estimated fair ~~related to these products~~values. ~~Service~~Under ~~revenue~~FAS 123(R), ~~is derived~~we ~~from~~use ~~contracts~~the ~~for~~Black-Scholes ~~field~~option ~~support~~pricing ~~provided~~model toas our ~~branded~~method ~~customers~~of ~~and~~valuation ~~not~~for ~~otherwise~~stock-based ~~included~~awards. Our indetermination ~~the base price~~ of the ~~product.~~fair ~~Service~~value ~~does~~of ~~not~~stock-based ~~include~~awards ~~revenue~~on orthe ~~costs~~date ~~associated~~of ~~with~~grant ~~basic~~using ~~warranty~~an ~~support~~option onpricing ~~new~~model ~~branded~~is affected orby ~~OEM~~our ~~products. We~~stock ~~classify~~price ~~expenses~~ as ~~costs~~well ofas ~~service~~assumptions ~~revenue~~regarding bya ~~estimating~~number ~~the portion~~ of ~~our~~highly ~~total~~complex ~~cost~~and ofsubjective ~~revenue~~variables. ~~that~~These ~~relates~~variables toinclude, ~~providing~~but ~~field~~are ~~support~~not limited to ~~our~~the ~~customers~~expected ~~under~~life ~~contract.~~of ~~These~~the ~~estimates~~award, ~~are~~our ~~based~~expected ~~upon~~stock ~~a variety of factors~~price, ~~including~~volatility over the ~~nature~~ ofterm of the ~~support~~award ~~activity,~~and ~~the~~actual ~~cost~~and ofprojected ~~stocking~~exercise ~~and~~behaviors. ~~shipping~~Although ~~service~~the ~~parts~~fair ~~for~~value ~~maintenance~~of ~~and~~stock-based ~~the~~awards ~~level~~is ofdetermined ~~infrastructure~~in ~~required~~accordance towith ~~support~~FAS 123(R), the ~~activities~~Black-Scholes ~~that~~option ~~comprise~~pricing ~~service~~model ~~revenue.~~requires In the ~~event~~input ~~our~~of ~~service~~highly ~~business~~subjective ~~changes~~assumptions, ~~our~~and other ~~estimates~~reasonable ofassumptions ~~cost~~could ofprovide ~~service~~differing ~~revenue may be impacted~~results.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

~~Item~~We 4are exposed to foreign currency exchange rate risk. ~~Controls~~The assets and liabilities ~~Procedures~~of our non-U.S. subsidiaries have functional currencies other than the U.S. dollar and are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. A 10% appreciation in the U.S. dollar would have resulted in an approximately $2.7 million decrease in income before provision for income taxes during the first six months of fiscal 2006. Such a change in income would have resulted from applying a different exchange rate to translate and revalue the financial statements of our non-U.S. subsidiaries. To hedge this exposure, we may enter into forward-currency exchange contracts from time to time. Such contracts provide for the exchange of one currency for another at an agreed-upon price at an agreed-upon settlement date. We had one foreign currency option contract outstanding as of April 30, 2006, providing for the exchange of U.S. for Australian dollars in anticipation of the Rocksoft acquisition. A 10% adverse change in the exchange rate would reduce the value of this option $1.1 million, with a corresponding decrease in income before provision for income taxes.

~~(a)~~Interest ~~Evaluation~~Rate ofRisk ~~Disclosure Controls and Procedures~~

~~Our~~From ~~chief~~time to ~~executive~~time ~~officer~~we ~~and~~invest ~~our~~in ~~chief~~marketable ~~financial~~debt ~~officer~~securities ~~have~~as ~~evaluated~~part of our ~~disclosure~~cash ~~controls~~management policy and ~~procedures~~not ~~(as~~for ~~defined~~trading purposes. We also invest in ~~Rules~~auction ~~13a-15(e)~~rate ~~and 15d-15(e)~~securities ~~under~~which ~~the~~have ~~Exchange~~variable ~~Act)~~interest asrates ofthat ~~the~~typically ~~end~~reset ofevery ~~the~~7 ~~period~~to ~~covered~~49 bydays. ~~this~~Investments ~~quarterly~~in both ~~report,~~fixed rate and ~~they~~floating ~~have~~rate ~~determined~~interest ~~that~~earning asinstruments carry a degree of ~~April~~interest ~~30,~~rate ~~2005~~risk. ~~our~~Fixed ~~disclosure~~rate ~~controls~~securities ~~and~~may ~~procedures~~have ~~are~~their ~~effective~~fair tomarket ~~ensure~~value ~~that~~adversely ~~information~~impacted ~~required~~due to ~~be disclosed~~a rise in ~~the~~interest ~~reports~~rates, ~~that~~while wefloating ~~file~~rate ~~pursuant~~securities tomay produce ~~the~~less ~~Exchange~~income ~~Act~~than isexpected ~~recorded~~if interest rates fall. As of April 30, ~~processed~~2006, ~~summarized~~we ~~and~~did ~~reported~~not ~~within~~hold ~~the~~any ~~time~~debt ~~periods~~securities, ~~specified~~although inwe ~~the~~did ~~Securities~~hold ~~and~~them ~~Exchange~~during ~~Commission’s~~the ~~rules~~six ~~and~~month ~~forms~~period then ended. A hypothetical 10% adverse change in interest

(b) Changes in Internal Control over Financial Reporting

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

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

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

rates applied to our marketable debt securities during the six months ended April 30, 2006 would have resulted in a decrease of approximately $314,000 in income before provision for income taxes.

Market Risk

From time to time we invest in equity securities of public companies and have classified these securities as available for sale. These investments are subject to fluctuations in fair value due to the volatility of the stock market, the industries in which these companies operate and the performance of the individual companies. As of April 30, 2006, we had available for sale equity investments with a fair value and cost basis of $2.7 million and $2.3 million, respectively. We strive to minimize the impact of stock market declines to earnings and cash flows. However, continued market volatility, as well as mergers and acquisitions, have the potential to have a non-cash impact on our financial position and operating results in future periods. A hypothetical 10% adverse change in the stock price of our marketable equity securities would not have a material adverse effect on our financial condition, results of operations or cash flows.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and our chief financial officer have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report, and they have determined that as of April 30, 2006 our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

During the three months ended April 30, 2006, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

~~None~~On May 18, 2006, a lawsuit was filed in King County Superior Court, Seattle, Washington, naming the Company and its directors as defendants. The lawsuit is a purported class action filed by Richard Carrigan on behalf of an alleged class of the Company’s shareholders. Plaintiff alleges, among other things, that the director defendants breached their fiduciary duties in approving the proposed acquisition of the Company by Quantum Corporation that was publicly announced on May 2, 2006. The suit seeks to enjoin the defendants from consummating the proposed acquisition and other relief.

Item 1A.

Risk Factors

The information presented below is an update to the “Risk Factors” included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2005 and should be read in conjunction therewith. Except as set forth below, there have been no material changes to the Risk Factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2005.

Risks Relating to the Proposed Merger with Quantum

Quantum and ADIC may be required to comply with material restrictions or conditions in order to obtain the regulatory approvals to complete the merger and any delays in obtaining regulatory approvals will delay and may possibly prevent the merger.

The merger is subject to review by the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, and by certain antitrust authorities outside of the United States. Under the HSR Act, Quantum and ADIC are required to make pre-merger notification filings and await the expiration or early termination of the statutory waiting period prior to completing the merger.

The governmental entities from whom approvals are required may attempt to condition their approval of the merger, or of the transfer to Quantum of licenses and other entitlements, on the satisfaction of certain regulatory conditions that may have the effect of imposing additional costs on ADIC. These conditions could include a complete or partial license, divestiture, spin-off or the sale of certain assets or businesses, which may be on terms that are not as favorable to ADIC as may have been attainable absent the merger. Each of Quantum and ADIC are obligated under the merger agreement to take specified actions, subject to certain limitations, including selling or otherwise divesting certain of their properties or operations that would not be adverse and material to Quantum, ADIC or the benefits Quantum expects to gain by the merger, in order to obtain the required consents or approvals under the HSR Act and other antitrust regulations.

While Quantum and ADIC expect to obtain the required regulatory approvals, Quantum and ADIC cannot be certain that all of the required antitrust approvals will be obtained, nor can they be certain that the approvals will be obtained within the time contemplated by the merger agreement. A delay in obtaining the required approvals will delay and may possibly prevent the completion of the merger.

If the proposed merger is not completed, ADIC’s financial results and operations and the trading price of ADIC common stock may be adversely affected.

If the merger is not completed, ADIC will have expended significant resources for which it will have received little or no benefit. ADIC has incurred and will continue to incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of attorneys, accountants and ADIC’s financial advisors. In addition, ADIC has diverted significant management resources in an effort to complete the merger and ADIC is subject to restrictions contained in the merger agreement on the conduct of its business. Also, if the merger is not completed under certain circumstances specified in the merger agreement, ADIC is required to pay Quantum a break-up fee of $28.5 million.

As a result, if the merger is not completed, ADIC may experience negative reactions from the financial markets and ADIC’s customers, employees, and business, distribution, and technology partners. Such reactions may adversely affect ADIC’s financial results and operations and the trading price of ADIC common stock.

If Quantum is unable to finance the merger through available cash and additional financings, the completion of the merger will be jeopardized.

Quantum believes that it can fund the ADIC acquisition with internally available cash and investments, cash generated from operations and additional borrowings. While Quantum expects to be able to borrow the necessary additional funds on the basis of commitment letters entered into with KeyBank National Association, there can be no assurance that the required funds will be available to Quantum. If Quantum has difficulty obtaining or cannot obtain the necessary funding on acceptable terms and in a timely manner, the completion of the merger could be delayed or jeopardized.

General customer uncertainty related to the merger could harm ADIC.

ADIC’s customers may, in response to the announcement of the proposed merger, delay or defer purchasing decisions, or use the announcement as a basis to seek price concessions from ADIC. If ADIC’s customers delay or defer purchasing decisions, or threaten to do so in order to attain more favorable pricing, the revenues of ADIC could materially decline or any anticipated increases in revenue could be lower than expected.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~During~~None. ~~the quarterly period ended April 30, 2005, ADIC repurchased shares of its common stock on the open market as set forth on the following table:~~

ISSUER PURCHASES OF EQUITY SECURITIES

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

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

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

At our annual shareholders meeting on March 10 15, ~~2005~~2006, two directors were reelected to the Board, each to hold office for three-year terms. The nominees received the following votes (there were no broker non-votes):

Nominee	Number of VotesFor	Number of VotesWithheld
John W. Stanton	55,206,282	5,695,079
Christopher T. Bayley	56,614,614	1,286,171
Peter H. van Oppen	54,913,435	5,987,926
Frank M. (“Pete”) Higgins	55,007,155	2,893,630

Item 5.

Other Information

None.

Item 6.

Exhibits

See Exhibit Index on page ~~[29] below~~31.

EXHIBIT INDEX

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

SIGNATURES

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

				ADVANCED DIGITAL INFORMATION CORPORATION
Dated: June 8, 2005				/s/ PETER H. VAN OPPEN
Dated: May 31, 2006				/s/ PETER H. VAN OPPEN
				Peter H. van Oppen, Chair and Chief Executive Officer (Principal Executive Officer)
Dated: June 8, 2005				/s/ JON W. GACEK
Dated: May 31, 2006				/s/ JON W. GACEK
				Jon W. Gacek, Chief Financial Officer and Executive Vice President, Finance and Operations (Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit Number	Description of Exhibits	Reference

2.1	Implementation Agreement by and among Advanced Digital Information Corporation, Rocksoft Limited, Neil James Johnson and Ross Neil Williams dated March 14, 2006.	(A)

2.2	Option Deed by and between Advanced Digital Information Corporation and Neil James Johnson dated March 14, 2006.	(A)

2.3	Option Deed by and between Advanced Digital Information Corporation and Ross Neil Williams dated March 14, 2006.	(A)

31.1	Certification of Peter H. van Oppen, Chair and Chief Executive Officer of Advanced Digital Information Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Jon W. Gacek, Chief Financial Officer and Executive Vice President, Finance and Operations, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Peter H. van Oppen, Chair and Chief Executive Officer of Advanced Digital Information Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Jon W. Gacek, Chief Financial Officer and Executive Vice President, Finance and Operations of Advanced Digital Information Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(A)	Incorporated by reference to designated exhibits to Form 8-K (File No. 000-21103), filed on March 15, 2006.

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