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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended July 31, 2004



OR



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



For the transition period from  to



Commission file number 0-21103



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ADVANCED DIGITAL INFORMATION CORPORATION



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|                                                       |  |                                              
|------------------------------------------------------ |  | ---------------------------------------------
|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



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



Yes  x    No ̈



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



Yes  x    No ̈



The total shares of common stock without par value outstanding at the end of the quarter reported is 63,547,643.



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PART IFINANCIAL INFORMATION



Item 1. Financial Statements



Advanced Digital Information Corporation

Condensed Consolidated Balance Sheets

(In thousands, except for share data)

(Unaudited)



|                                                                                                                  |  |              |         |                 |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | --------------- | - | ------- | -
|                                                                                                                  |  | July 31,2004 |         | October 31,2003 |  
|Assets                                                                                                            |  |              |         |                 |   |         |  
|Current assets:                                                                                                   |  |              |         |                 |   |         |  
|Cash and cash equivalents                                                                                         |  | $            | 224,594 |                 | $ | 180,401 |  
|Accounts receivable, net of allowances of $1,451 in 2004 and $1,435 in 2003                                       |  |              | 86,917  |                 |   | 100,391 |  
|Inventories, net                                                                                                  |  |              | 47,306  |                 |   | 35,736  |  
|Short-term marketable securities                                                                                  |  |              | 1,000   |                 |   | 20,788  |  
|Assets held for sale                                                                                              |  |              |        |                 |   | 12,384  |  
|Prepaid expenses and other                                                                                        |  |              | 2,943   |                 |   | 2,356   |  
|Income taxes receivable                                                                                           |  |              | 8,155   |                 |   | 5,520   |  
|Deferred income taxes                                                                                             |  |              | 13,699  |                 |   | 13,638  |  
|                                                                                                                  |  |              |         |                 |   |         |  
|Total current assets                                                                                              |  |              | 384,614 |                 |   | 371,214 |  
|Property, plant and equipment, net of accumulated depreciation of $37,160 in 2004 and $26,141 in 2003             |  |              | 47,391  |                 |   | 45,505  |  
|Service parts for maintenance, net of accumulated amortization of $27,575 in 2004 and $20,924 in 2003             |  |              | 28,165  |                 |   | 28,427  |  
|Investments                                                                                                       |  |              | 4,161   |                 |   | 3,728   |  
|Goodwill                                                                                                          |  |              | 2,596   |                 |   | 2,596   |  
|Intangible and other assets, net of accumulated amortization of $2,732 in 2004 and $2,250 in 2003                 |  |              | 1,433   |                 |   | 1,702   |  
|                                                                                                                  |  |              |         |                 |   |         |  
|                                                                                                                  |  | $            | 468,360 |                 | $ | 453,172 |  
|                                                                                                                  |  |              |         |                 |   |         |  
|Liabilities and Shareholders Equity                                                                              |  |              |         |                 |   |         |  
|Current liabilities:                                                                                              |  |              |         |                 |   |         |  
|Accounts payable                                                                                                  |  | $            | 52,268  |                 | $ | 45,159  |  
|Accrued liabilities                                                                                               |  |              | 18,411  |                 |   | 19,653  |  
|Deferred revenue                                                                                                  |  |              | 38,752  |                 |   | 29,848  |  
|Current portion of long-term debt                                                                                 |  |              |        |                 |   | 192     |  
|                                                                                                                  |  |              |         |                 |   |         |  
|Total current liabilities                                                                                         |  |              | 109,431 |                 |   | 94,852  |  
|Deferred income taxes                                                                                             |  |              | 2,523   |                 |   | 2,507   |  
|Long-term debt                                                                                                    |  |              |        |                 |   | 967     |  
|Commitments and contingencies (Note 8)                                                                            |  |              |         |                 |   |         |  
|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, 63,547,643 issued and outstanding (63,700,832 in 2003) |  |              | 233,008 |                 |   | 234,190 |  
|Retained earnings                                                                                                 |  |              | 122,967 |                 |   | 120,650 |  
|Accumulated other comprehensive income (loss):                                                                    |  |              |         |                 |   |         |  
|Cumulative translation adjustment                                                                                 |  |              | 431     |                 |   | (42     | )
|Unrealized investment gains                                                                                       |  |              |        |                 |   | 48      |  
|                                                                                                                  |  |              |         |                 |   |         |  
|Total shareholders equity                                                                                        |  |              | 356,406 |                 |   | 354,846 |  
|                                                                                                                  |  |              |         |                 |   |         |  
|                                                                                                                  |  | $            | 468,360 |                 | $ | 453,172 |  
|                                                                                                                  |  |              |         |                 |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



1



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Condensed Consolidated Statements of Operations



(In thousands, except for per share data)



(Unaudited)



|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                          |  | Three months endedJuly 31, |         |   | Nine months ended July 31, |  
|                                                          |  | 2004                       |         |   | 2003                       |   |         | 2004 |  |   | 2003    |  
|Net sales                                                 |  | $                          | 110,034 |   |                            | $ | 108,259 |      |  | $ | 339,406 |   |  | $ | 305,997 |  
|Cost of sales                                             |  |                            | 80,387  |   |                            |   | 75,683  |      |  |   | 244,115 |   |  |   | 210,651 |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                              |  |                            | 29,647  |   |                            |   | 32,576  |      |  |   | 95,291  |   |  |   | 95,346  |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses:                                       |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Sales and marketing                                       |  |                            | 17,522  |   |                            |   | 14,355  |      |  |   | 48,939  |   |  |   | 42,012  |  
|General and administrative                                |  |                            | 5,823   |   |                            |   | 5,948   |      |  |   | 18,107  |   |  |   | 18,095  |  
|Research and development                                  |  |                            | 9,565   |   |                            |   | 9,986   |      |  |   | 28,265  |   |  |   | 30,257  |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                            | 32,910  |   |                            |   | 30,289  |      |  |   | 95,311  |   |  |   | 90,364  |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Operating profit (loss)                                   |  |                            | (3,263  | ) |                            |   | 2,287   |      |  |   | (20     | ) |  |   | 4,982   |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Other income (expense):                                   |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                           |  |                            | 649     |   |                            |   | 598     |      |  |   | 1,710   |   |  |   | 1,834   |  
|Gain on securities transactions, net                      |  |                            |        |   |                            |   | 976     |      |  |   | 871     |   |  |   | 2,388   |  
|Foreign currency transaction gains (losses), net          |  |                            | 203     |   |                            |   | (111    | )    |  |   | 116     |   |  |   | 1,060   |  
|Other                                                     |  |                            | (136    | ) |                            |   | (133    | )    |  |   | (316    | ) |  |   | (347    | )
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|                                                          |  |                            | 716     |   |                            |   | 1,330   |      |  |   | 2,381   |   |  |   | 4,935   |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before provision (benefit) for income taxes |  |                            | (2,547  | ) |                            |   | 3,617   |      |  |   | 2,361   |   |  |   | 9,917   |  
|Provision (benefit) for income taxes                      |  |                            | (1,264  | ) |                            |   | 982     |      |  |   | 44      |   |  |   | 3,177   |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss)                                         |  | $                          | (1,283  | ) |                            | $ | 2,635   |      |  | $ | 2,317   |   |  | $ | 6,740   |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Basic net income (loss) per share                         |  | $                          | (0.02   | ) |                            | $ | 0.04    |      |  | $ | 0.04    |   |  | $ | 0.11    |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  
|Diluted net income (loss) per share                       |  | $                          | (0.02   | ) |                            | $ | 0.04    |      |  | $ | 0.04    |   |  | $ | 0.11    |  
|                                                          |  |                            |         |   |                            |   |         |      |  |   |         |   |  |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



2



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Condensed Consolidated Statements of Cash Flows



(In thousands)



(Unaudited)



|                                                                                                 |  |                            |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                 |  | Nine months ended July 31, |        
|                                                                                                 |  | 2004                       |         |   | 2003 |  
|Cash flows from operating activities:                                                            |  |                            |         |   |      |   |         |  
|Net income                                                                                       |  | $                          | 2,317   |   |      | $ | 6,740   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                |  |                            |         |   |      |   |         |  
|Depreciation and amortization                                                                    |  |                            | 18,235  |   |      |   | 16,625  |  
|Bad debt expense                                                                                 |  |                            | 46      |   |      |   | 507     |  
|Inventory obsolescence                                                                           |  |                            | 2,442   |   |      |   | 4,298   |  
|Gain on securities transactions                                                                  |  |                            | (871    | ) |      |   | (2,388  | )
|Deferred income taxes                                                                            |  |                            | (36     | ) |      |   | (144    | )
|Tax benefit from exercise of stock options                                                       |  |                            | 1,777   |   |      |   | 1,376   |  
|Other                                                                                            |  |                            | 49      |   |      |   | 40      |  
|Change in assets and liabilities:                                                                |  |                            |         |   |      |   |         |  
|Accounts receivable                                                                              |  |                            | 13,135  |   |      |   | (14,038 | )
|Inventories                                                                                      |  |                            | (15,020 | ) |      |   | (15,213 | )
|Prepaid expenses and other assets                                                                |  |                            | (571    | ) |      |   | (118    | )
|Income taxes receivable                                                                          |  |                            | (2,664  | ) |      |   | 9,457   |  
|Service parts for maintenance                                                                    |  |                            | (7,959  | ) |      |   | (7,437  | )
|Accounts payable                                                                                 |  |                            | 6,270   |   |      |   | 12,804  |  
|Accrued liabilities                                                                              |  |                            | (1,571  | ) |      |   | 6,721   |  
|Deferred revenue                                                                                 |  |                            | 8,571   |   |      |   | 3,034   |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Net cash provided by operating activities                                                        |  |                            | 24,150  |   |      |   | 22,264  |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Cash flows from investing activities:                                                            |  |                            |         |   |      |   |         |  
|Purchase of property, plant and equipment                                                        |  |                            | (12,755 | ) |      |   | (11,219 | )
|Proceeds from assets held for sale                                                               |  |                            | 16,740  |   |      |   |        |  
|Purchase of marketable securities                                                                |  |                            | (4,004  | ) |      |   | (13,852 | )
|Proceeds from securities transactions                                                            |  |                            | 24,590  |   |      |   | 32,266  |  
|Purchase of other investments                                                                    |  |                            | (504    | ) |      |   | (363    | )
|Purchase of intangible assets                                                                    |  |                            | (200    | ) |      |   |        |  
|Return of investment on other investments                                                        |  |                            | 71      |   |      |   |        |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Net cash provided by investing activities                                                        |  |                            | 23,938  |   |      |   | 6,832   |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Cash flows from financing activities:                                                            |  |                            |         |   |      |   |         |  
|Repayment of short-term and long-term debt                                                       |  |                            | (1,221  | ) |      |   | (3,265  | )
|Proceeds from short-term borrowings                                                              |  |                            |        |   |      |   | 781     |  
|Repurchase of common stock                                                                       |  |                            | (9,510  | ) |      |   | (697    | )
|Proceeds from issuance of common stock for stock options, stock warrants and Stock Purchase Plan |  |                            | 6,551   |   |      |   | 3,782   |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                              |  |                            | (4,180  | ) |      |   | 601     |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                                          |  |                            | 285     |   |      |   | 1,241   |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                        |  |                            | 44,193  |   |      |   | 30,938  |  
|Cash and cash equivalents at beginning of period                                                 |  |                            | 180,401 |   |      |   | 150,741 |  
|                                                                                                 |  |                            |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                       |  | $                          | 224,594 |   |      | $ | 181,679 |  
|                                                                                                 |  |                            |         |   |      |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



3



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Condensed Consolidated Statements of Changes in Shareholders Equity



Nine months ended July 31, 2004



(In thousands)



(Unaudited)



|                                                                                           |  |              |   |  |                  |         |                                            |  |   |         |  |   |     |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------ | - |  | ---------------- | ------- | ------------------------------------------ |  | - | ------- |  | - | --- | - |  | - | ------- | -
|                                                                                           |  | Common Stock |   |  | RetainedEarnings |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total   | 
|                                                                                           |  | Shares       |   |  | Amount           |         |                                            |  |  
|Balance at October 31, 2003                                                                |  | 63,701       |   |  | $                | 234,190 |                                            |  | $ | 120,650 |  | $ | 6   |   |  | $ | 354,846 |  
|Shares repurchased                                                                         |  | (1,010       | ) |  |                  | (9,510  | )                                          |  |   |        |  |   |    |   |  |   | (9,510  | )
|Purchases under Stock Purchase Plan                                                        |  | 131          |   |  |                  | 1,395   |                                            |  |   |        |  |   |    |   |  |   | 1,395   |  
|Exercise of stock options, including tax benefit of $1,777                                 |  | 701          |   |  |                  | 6,879   |                                            |  |   |        |  |   |    |   |  |   | 6,879   |  
|Exercise of warrants                                                                       |  | 25           |   |  |                  | 54      |                                            |  |   |        |  |   |    |   |  |   | 54      |  
|Comprehensive income:                                                                      |  |              |   |  |                  |         |                                            |  |   |         |  |   |     |   |  |   |         |  
|Net income                                                                                 |  |             |   |  |                  |        |                                            |  |   | 2,317   |  |   |    |   |  |   |        |  
|Change in unrealized investment gains:                                                     |  |              |   |  |                  |         |                                            |  |   |         |  |   |     |   |  |   |         |  
|Unrealized investment losses, net of tax of $27                                            |  |             |   |  |                  |        |                                            |  |   |        |  |   | (50 | ) |  |   |        |  
|Reclassification adjustment for investment losses included in net income, net of tax of $1 |  |             |   |  |                  |        |                                            |  |   |        |  |   | 2   |   |  |   |        |  
|Change in foreign currency translation adjustment, net of tax of $255                      |  |             |   |  |                  |        |                                            |  |   |        |  |   | 473 |   |  |   |        |  
|Total comprehensive income                                                                 |  |             |   |  |                  |        |                                            |  |   |        |  |   |    |   |  |   | 2,742   |  
|                                                                                           |  |              |   |  |                  |         |                                            |  |   |         |  |   |     |   |  |   |         |  
|Balance at July 31, 2004                                                                   |  | 63,548       |   |  | $                | 233,008 |                                            |  | $ | 122,967 |  | $ | 431 |   |  | $ | 356,406 |  
|                                                                                           |  |              |   |  |                  |         |                                            |  |   |         |  |   |     |   |  |   |         |  



See the accompanying
notes to these condensed consolidated financial statements.



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Notes to Interim Condensed Consolidated Financial Statements



July 31, 2004



(Unaudited)



Note 1. Basis of presentation



The accompanying condensed consolidated financial statements are unaudited
and include the accounts of the Company and its subsidiaries. All significant intercompany transactions, balances and profits have been eliminated in consolidation. Certain prior period balances have been adjusted or reclassified to conform to
current period presentation. These reclassifications have no effect on net income, shareholders equity or cash flows as previously presented.



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, 2003. 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 nine month periods ended July 31, 2004 are not necessarily indicative of
results to be expected for a full year.



Note 2. Stock-based compensation
plans



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



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Notes to Interim Condensed Consolidated Financial Statements (Continued)



July 31, 2004



(Unaudited)



|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                   |  | Three months endedJuly 31,                |        |   | Nine months endedJuly 31, |  
|                                                                                                                   |  | 2004                                      |        |   | 2003                      |   |        | 2004 |  |   | 2003   |  
|                                                                                                                   |  | (In thousands, except for per share data) |       
|Net income (loss), as reported                                                                                     |  | $                                         | (1,283 | ) |                           | $ | 2,635  |      |  | $ | 2,317  |   |  | $ | 6,740  |  
|Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax |  |                                           | (1,608 | ) |                           |   | (1,465 | )    |  |   | (5,006 | ) |  |   | (5,046 | )
|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income (loss)                                                                                        |  | $                                         | (2,891 | ) |                           | $ | 1,170  |      |  | $ | (2,689 | ) |  | $ | 1,694  |  
|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic net income (loss) per share:                                                                                 |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                        |  | $                                         | (0.02  | ) |                           | $ | 0.04   |      |  | $ | 0.04   |   |  | $ | 0.11   |  
|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                          |  | $                                         | (0.05  | ) |                           | $ | 0.02   |      |  | $ | (0.04  | ) |  | $ | 0.03   |  
|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Diluted net income (loss) per share:                                                                               |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                        |  | $                                         | (0.02  | ) |                           | $ | 0.04   |      |  | $ | 0.04   |   |  | $ | 0.11   |  
|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                          |  | $                                         | (0.05  | ) |                           | $ | 0.02   |      |  | $ | (0.04  | ) |  | $ | 0.03   |  
|                                                                                                                   |  |                                           |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



The majority of the
options granted during the three and nine months ended July 31, 2004 and 2003 expire after ten years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted
average assumptions for options granted during the periods presented:



|                                          |  |                             |   |  |                            |   |  |      |   |  |      |  
|----------------------------------------- |  | --------------------------- | - |  | -------------------------- | - |  | ---- | - |  | ---- | -
|                                          |  | Three months ended July 31, |   |  | Nine months ended July 31, |  
|                                          |  | 2004                        |   |  | 2003                       |   |  | 2004 |   |  | 2003 |  
|Weighted average risk free interest rates |  | 4.08                        | % |  | 2.80                       | % |  | 3.89 | % |  | 3.16 | %
|Expected dividend yield                   |  | 0                           | % |  | 0                          | % |  | 0    | % |  | 0    | %
|Expected volatility                       |  | 79                          | % |  | 79                         | % |  | 79   | % |  | 79   | %
|Expected lives (in years)                 |  | 6.0                         |   |  | 6.0                        |   |  | 6.0  |   |  | 6.0  |  



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Advanced Digital Information Corporation



Notes to Interim Condensed Consolidated Financial Statements (Continued)



July 31, 2004



(Unaudited)



Note 3. Benchmark outsourcing agreement



In November 2003, we expanded an existing outsource manufacturing
relationship with Benchmark Electronics, Inc. to include final assembly and test of a significant portion of our entry-level and workgroup tape automation product line. In connection with this expansion, we transferred to Benchmark approximately 150
team members associated with manufacturing, test and supply chain management. Benchmark assumed the lease on our Redmond, Washington manufacturing facility and purchased inventory associated with the product line and property, plant and equipment
related to the operation for $15.1 million in cash. This purchase price exceeded the $12.4 million of assets held for sale as of October 31, 2003 primarily due to the fact that certain inventory purchased during November 2003 was sold to Benchmark.
In June 2004, we further expanded our existing outsource relationship to incorporate screening and repair of certain entry-level and workgroup tape automation products. In connection with this expansion, we transferred to Benchmark certain team
members from our customer service and repair operations in Redmond. Additionally, Benchmark purchased certain inventory and property, plant and equipment associated with these operations for $1.6 million in cash. There was no gain or loss recorded
on any of these transactions.



Note 4. Earnings per share



The following table sets forth the computation of basic and diluted net
income (loss) per share for the three and nine months ended July 31, 2004 and 2003. For the three months ended July 31, 2004, options to purchase 2,305,000 shares of common stock, which would be equal to 404,000 adjusted weighted average shares,
were not included in the computation of diluted net loss per share because they are antidilutive.



|                                                                                                             |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------ | ------------------------- | ---- | - | ------ |  | ---- | ------ |  | - | ------
|                                                                                                             |  | Three months endedJuly 31,                |        | Nine months endedJuly 31,
|                                                                                                             |  | 2004                                      |        |                           | 2003 |   | 2004   |  | 2003
|                                                                                                             |  | (In thousands, except for per share data)
|Numerator:                                                                                                   |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|Net income (loss)                                                                                            |  | $                                         | (1,283 | )                         |      | $ | 2,635  |  | $    | 2,317  |  | $ | 6,740 
|                                                                                                             |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|Denominator:                                                                                                 |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|Denominator for basic net income (loss) per shareweighted average shares                                    |  |                                           | 64,235 |                           |      |   | 62,657 |  |      | 64,135 |  |   | 62,291
|Dilutive potential common shares from Team Member (employee) stock options and warrants                      |  |                                           |       |                           |      |   | 1,024  |  |      | 905    |  |   | 857   
|                                                                                                             |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|Denominator for diluted net income (loss) per shareadjusted weighted average shares and assumed conversions |  |                                           | 64,235 |                           |      |   | 63,681 |  |      | 65,040 |  |   | 63,148
|                                                                                                             |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|Basic net income (loss) per share                                                                            |  | $                                         | (0.02  | )                         |      | $ | 0.04   |  | $    | 0.04   |  | $ | 0.11  
|                                                                                                             |  |                                           |        |                           |      |   |        |  |      |        |  |   |       
|Diluted net income (loss) per share                                                                          |  | $                                         | (0.02  | )                         |      | $ | 0.04   |  | $    | 0.04   |  | $ | 0.11  
|                                                                                                             |  |                                           |        |                           |      |   |        |  |      |        |  |   |       



7



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Advanced Digital Information Corporation



Notes to Interim Condensed Consolidated Financial Statements (Continued)



July 31, 2004



(Unaudited)



Note 5. Inventories



Inventories are comprised of the following:



|                                     |  |                |         |   |                 |   |         |  
|------------------------------------ |  | -------------- | ------- | - | --------------- | - | ------- | -
|                                     |  | July 31,2004   |         |   | October 31,2003 |  
|                                     |  | (In thousands) |        
|Finished goods                       |  | $              | 33,546  |   |                 | $ | 30,858  |  
|Work-in-process                      |  |                | 183     |   |                 |   | 622     |  
|Raw materials                        |  |                | 26,414  |   |                 |   | 18,275  |  
|                                     |  |                |         |   |                 |   |         |  
|                                     |  |                | 60,143  |   |                 |   | 49,755  |  
|Allowance for inventory obsolescence |  |                | (12,837 | ) |                 |   | (14,019 | )
|                                     |  |                |         |   |                 |   |         |  
|                                     |  | $              | 47,306  |   |                 | $ | 35,736  |  
|                                     |  |                |         |   |                 |   |         |  



Note 6. Investments in short-term
marketable securities and other investments



At July 31,
2004, both the cost basis and the fair value of the marketable securities we held was $1,000,000. At July 31, 2004, marketable securities comprised investment-grade government and commercial debt securities purchased in accordance with our cash
management policy to generate a higher yield than cash equivalents. Consistent with our investment policy, investment maturities do not exceed 24 months at the date of purchase. 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. We did not sell any marketable securities during the three months ended July 31, 2004. During the three months ended July 31, 2003,
we sold a portion of our marketable equity securities that we held at that time for a realized gain of $818,000. During the nine month periods ended July 31, 2004 and 2003, sales of marketable securities resulted in gains of $48,000 and $1,455,000,
respectively.



From time to time, we make other strategic
investments that are accounted for under the cost method. In November 2002, one of these investments was converted to cash and marketable equity securities with a combined value of $8,351,000, and we recorded a gain on securities transactions of
$651,000. During the nine months ended July 31, 2004 and 2003, we received additional shares of marketable equity securities under earnout and escrow provisions of the November 2002 investment transaction noted above and recorded additional gains on
securities transactions of $823,000 and $282,000, respectively. During the three months ended July 31, 2004 and 2003, we recorded gains of $0 and $158,000, respectively.



8



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Advanced Digital Information Corporation



Notes to Interim Condensed Consolidated Financial Statements (Continued)



July 31, 2004



(Unaudited)



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 labor 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 and tapes used in our products but manufactured by a third party, we provide to the customer a warranty on such drives and tapes that is substantially equivalent to the warranty provided by the
manufacturer.



Changes in our accrued warranty balance for the
nine months ended July 31, 2004 are as follows (in thousands):



|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Balance at October 31, 2003    |  | $ | 5,481  |  
|Accruals for warranties issued |  |   | 6,649  |  
|Settlements during the period  |  |   | (5,663 | )
|                               |  |   |        |  
|Balance at July 31, 2004       |  | $ | 6,467  |  
|                               |  |   |        |  



9



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Advanced Digital Information Corporation



Notes to Interim Condensed Consolidated Financial Statements (Continued)



July 31, 2004



(Unaudited)



Note 8. Commitments and contingencies



During fiscal 2001 we recorded a $2,318,000 liability to reflect anticipated
costs to exit a manufacturing and development site which has been replaced by a larger facility. During the nine month period ended July 31, 2004, we made payments of $529,000, $394,000 of which related to unused capacity in the facility. This
$394,000 reduced the liability from $1,008,000 at October 31, 2003 to $614,000 at July 31, 2004. We expect these payments to continue through December 2006.



From time to time we are involved in legal proceedings and governmental investigations that arise in the ordinary course of business. We do not expect any
of these proceedings or investigations to have a material adverse effect on our business, financial condition, liquidity or operating results. However, legal claims and governmental investigations are inherently uncertain, and we cannot assure you
that we will not be adversely affected in the future by such events.



Note
9. Recent accounting pronouncements



In May 2003, the EITF
reached a consensus on Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software. EITF 03-5 affirms that the revenue recognition guidance in
SOP 97-2 applies to non-software deliverables, such as computer hardware, in an arrangement if the software is essential to the functionality of the non-software deliverables. We adopted EITF 03-5 during the first quarter of fiscal 2004. Under this
pronouncement we will apply SOP 97-2 to any hardware that is software-related and will recognize revenue accordingly. To date the adoption of this accounting principle has not had a significant impact to our financial position or results of
operations.



In December 2003, the SEC issued Staff Accounting
Bulletin No. 104, Revenue Recognition, which supercedes Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB 104s primary purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements, superceded as a result of the issuance of EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Although SAB 104 incorporates guidance prescribed by EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Given this, the issuance of SAB 104 has not had a significant impact on our financial position or results of operations.



10



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



The following discussion and analysis should be read in conjunction with
our financial statements and the information about our critical accounting estimates included in our Annual Report on Form 10-K for the year ended October 31, 2003. This discussion contains certain forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and intentions. Such risks are detailed in our Annual Report on Form 10-K for the year ended October 31, 2003 and are incorporated herein by reference. Our actual results could
differ materially from those discussed here. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.



General



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



During the third quarter
of fiscal 2004 we experienced our second quarterly sequential decline in revenues after six quarters of sequential sales growth. The causes of these lower sales volumes include customer decision-making cycles being lengthened due to an increase in
the number of available software, disk or tape-based storage alternatives being evaluated, general economic uncertainties and customer resource constraints due to new regulatory compliance and internal financial control requirements. Despite these
factors, our new hardware and software-based products continue to be well received by our customers. We are continuing to build our global presence as a provider of enterprise-level storage solutions. We expect our new products, existing OEM
partners and relationship with EMC will further establish us as a leader in providing innovative, enterprise-class hardware and data-management software products incorporating both disk and tape and will help gradually improve overall sales growth
and result in improved financial results. Achieving these results, however, will take time and financial commitment.



We expect to continue to expand our product offerings with a focus on elements that both differentiate our products from competitors and meet increasing
customer demands in a constantly evolving and competitive industry. We are in the process of transforming our business from one that has historically been heavily dependent on mid-range tape storage to one that focuses on creating innovative,
enterprise-class hardware and data management software products incorporating both disk and tape. We believe our ability to serve broader markets with enterprise-level products and software will be key to our future success. In addition, we view a
comprehensive global service strategy as an integral component of our total customer solution. We believe that service includes the standard activities needed to ensure successful selection, installation and on-going support of products, as well as
innovative product design that can help minimize the need for conventional service. Service infrastructure and technology investment has beenand continues to bea major priority, as we scale to meet our organizational growth and the needs
of our expanding installed base.



We 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.



11



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In November 2003, we expanded an existing outsource manufacturing relationship with Benchmark
Electronics, Inc. to include final assembly and test of a significant portion of our entry-level and workgroup tape automation product line. In connection with this expansion, we transferred to Benchmark approximately 150 team members associated
with manufacturing, test and supply chain management. Benchmark assumed the lease on our Redmond, Washington manufacturing facility and purchased inventory associated with the product line and property, plant and equipment related to the operation
for $15.1 million in cash. In June 2004, we further expanded our existing outsource relationship to incorporate screening and repair of certain entry-level and workgroup tape automation products. In connection with this expansion, we transferred to
Benchmark certain team members from our customer service and repair operations in Redmond. Additionally, Benchmark purchased certain inventory and property, plant and equipment associated with these operations for $1.6 million in cash. There was no
gain or loss recorded on any of these transactions.



In June
2004, we announced the execution of a reseller agreement with EMC Corporation pursuant to which EMC will sell ADIC tape libraries subject to certain terms and conditions. All products sold through EMC will continue to bear the ADIC brand and all
service associated with the products will be the responsibility of ADIC. We expect this expansion of our enterprise sales channel to gradually improve overall sales growth; however, there are no minimum purchase commitments under the arrangement,
the quantity of products to be purchased by EMC will be based upon market demand and the agreement may be disruptive to our current business.



Results of Operations



Net Sales. Net sales increased during the third quarter of fiscal 2004 to $110.0 million, an increase of 2% from $108.3 million in the comparable
quarter of fiscal 2003. Net sales for the nine months ended July 31, 2004 were $339.4 million, an increase of 11% from $306.0 million during the nine months ended July 31, 2003. During the third quarter of fiscal 2004, sales to branded customers
increased 4% while sales to OEM customers decreased 1% as compared to the same period in fiscal 2003. As a percentage of net sales, branded sales increased and OEM sales decreased. For the three months ended July 31, 2004, branded revenues comprised
52% of net sales compared to 51% of net sales in the same period a year ago. OEM sales represented 48% and 49% of net sales, respectively, during the same periods. The growth in branded sales during the third quarter of fiscal 2004 is primarily due
to increased revenues from service contracts. During the same period, sales to OEM customers decreased slightly as a decline in sales of older products approximately offset growth in sales of more recently introduced products. During the nine months
ended July 31, 2004, revenue from branded sales increased 9% over the comparative period in fiscal 2003. Sales to OEM customers increased 13% during the nine months ended July 31, 2004 compared to the nine months ended July 31, 2003. For the nine
months ended July 31, 2004, branded revenues comprised 52% of net sales compared to 53% of net sales in the same period a year ago. OEM sales represented 48% and 47% of net sales, respectively, during the same periods. The growth in branded sales
during the nine months ended July 31, 2004 is primarily due to increased revenues from service contracts. The growth in OEM sales for the nine months ended July 31, 2004 is primarily due to increased sales of products introduced within the past two
years.



Intelligent Storage Solutions (ISS) products, which include elements of our software
and connectivity technology and are sold through both branded and OEM sales channels, represented 40% and 33% of total sales during the third quarter of fiscal 2004 and 2003, respectively. ISS related sales comprised 37% and 38% of total sales
during the first nine months of fiscal 2004 and 2003, respectively. This decline in the proportion of ISS revenue during the nine months ended July 31, 2004 reflects growth in our other products rather than a drop in overall ISS sales. The absolute
dollar value of our ISS sales increased in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003. We believe that an increasing proportion of ISS sales, whether sold on a branded or OEM basis, will generally result in
the likelihood of increasing gross margins as a percentage of sales, although this expected correlation may be overshadowed in any particular period by sales levels, the specific mix of ISS products or other factors.



12



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Gross Profit.Gross profit was $29.6 million or 27% of net sales for the three months ended July
31, 2004 compared to $32.6 million or 30% of net sales for the same period in fiscal 2003. For the nine months ended July 31, 2004, gross profit was $95.3 million or 28% of net sales compared to $95.3 million or 31% of net sales for the same period
in fiscal 2003. The decrease in gross profit as a percentage of net sales during both the three and nine months ended July 31, 2004, is primarily the result of increased investment in our global services infrastructure to support our growing global
customer base. Lower-than-expected sales volumes have caused the growth in our global services costs to outpace our revenue growth. We expect that gross profits will improve as new higher margin products that include elements of our proprietary
storage software and connectivity technology continue to gain acceptance, new channels add incremental sales of our enterprise-level products and broader economic uncertainties diminish.



Sales and Marketing Expenses. Sales and marketing expenses were $17.5 million or 16% of net sales for the three
months ended July 31, 2004 compared to $14.4 million or 13% of net sales for the same period in fiscal 2003. For the nine month period ended July 31, 2004, sales and marketing expenses were $48.9 million or 14% of net sales compared to $42.0 million
or 14% of net sales for the same period in fiscal 2003. Sales and marketing expenses have increased in absolute dollars primarily as a result of increased labor costs as weve added headcount as part of our continued efforts to expand our sales
channels in order to penetrate new markets, reach new customers and support new product offerings. During the remainder of fiscal 2004, we expect sales and marketing expenditures to increase in absolute dollars both domestically and in our European
and other international markets.



General and Administrative
Expenses. General and administrative expenses were $5.8 million or 5% of net sales for the three months ended July 31, 2004 compared to $5.9 million or 5% of net sales for the same period in fiscal 2003. For the nine month period ended July 31,
2004, general and administrative expenses were $18.1 million or 5% of net sales compared to $18.1 million or 6% of net sales for the same period in fiscal 2003. We expect very modest growth in the absolute dollar amount of general and administrative
expenses during the fourth quarter of fiscal 2004.



Research
and Development Expenses. Research and development expenses were $9.6 million or 9% of net sales for the third quarter of fiscal 2004 compared to $10.0 million or 9% of net sales for the third quarter of fiscal 2003. During the nine months ended
July 31, 2004, we incurred research and development expenses of $28.3 million or 8% of net sales compared to $30.3 million or 10% of net sales for the same period in fiscal 2003. Lower material costs associated with product development efforts
accounted for the substantial portion of decrease in both comparative periods due to the timing of product introductions. During the three and nine months ended July 31, 2003, we incurred significant costs related to the development of new products
released during the second half of fiscal 2003. We continue to believe that significant investment in research and development is required to remain competitive and to solidify our market position in intelligent storage solutions. We anticipate
research and development spending to increase in absolute dollars during the fourth quarter of fiscal 2004 as we continue to invest in new product development and enhancements to our current product lines. Further, we believe the potential for
growth in the market for storage solutions is sufficient to justify continued growth in our investment in research and development.



13



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Other Income. Other income primarily consists of interest income, net gain on securities
transactions and net foreign currency transaction gains (losses). Interest income was $649,000 and $598,000 during the third quarter of fiscal 2004 and 2003, respectively, and $1.7 million and $1.8 million during the first nine months of fiscal 2004
and 2003, respectively. The increase in interest income during the three months ended July 31, 2004 is the result of higher returns on cash and investment balances. Other income during the three months ended July 31, 2004 and 2003 includes a gain on
securities transactions of $0 and $976,000, respectively. The gain on securities transactions during the nine month period ended July 31, 2004 and 2003 was $871,000 and $2.4 million, respectively. The gains in both comparison periods are primarily
related to the conversion of one of our investments in a private company to cash and marketable equity securities, the subsequent receipt of additional shares under earnout and escrow provisions and the sale of a portion of those securities. Foreign
currency transaction gains (losses) were $203,000 and $(111,000) during the third quarter of fiscal 2004 and 2003, respectively, and $116,000 and $1.1 million during the first nine months of fiscal 2004 and 2003, respectively. Our net foreign
currency transaction gains (losses) are impacted by fluctuations in the currency markets, and there is no assurance that we will experience the same types of gains on these transactions that we have in many recent periods. Excluding net foreign
currency transaction gains (losses), we expect other income to remain flat during the fourth quarter of fiscal 2004.



Provision (Benefit) for Income Taxes. For the three months ended July 31, 2004, income tax benefit was $1.3 million compared to income tax expense
of $982,000 for the comparable period in fiscal 2003. Income tax expense was $44,000 for the nine months ended July 31, 2004 compared to $3.2 million for the nine months ended July 31, 2003. The effective income tax rates for the three and nine
months ended July 31, 2004 were a benefit of 50% and an expense of 2%, respectively. The effective tax rates for the comparable periods in fiscal 2003 were 27% and 32%, respectively. The estimate of our effective tax rate is based on currently
applicable tax law and estimates and assumptions relating to future events and results, including our pre-tax income levels as well as the level of permanent deductions for our credits for research and development spending, our extraterritorial
income exclusion and non-taxable interest income. Actual results could differ from those estimates. The effective tax rate includes tax expense for various federal, state and international jurisdictions. The tax benefit during the third quarter of
fiscal 2004 reflects the quarters loss and adjustments in our year-to-date tax provision reflecting lower estimates for annual pre-tax income and the annual effective tax rate. Lower pre-tax income results in a lower anticipated effective tax
rate as tax credits and non-taxable items represent a larger proportion of income.



Liquidity and Capital Resources



During the
first nine months of fiscal 2004, the difference between reported net income and cash provided by operating activities was primarily due to depreciation and amortization, a decrease in accounts receivable and increases in accounts payable and
deferred revenue, which were offset by increases in inventories and service parts for maintenance. Accounts receivable decreased primarily due to lower revenues. Inventories and accounts payable 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 growing installed base of products. 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. During the first nine months of fiscal 2003, the difference between reported net income and cash provided by operating activities was primarily due to
depreciation and amortization, increases in accounts payable and accrued liabilities and a receipt of a tax refund, which were offset by increases in accounts receivable, inventories and service parts for maintenance. Accounts receivable increased
primarily due to increased sales, and inventories and service parts for maintenance increased as we launched both new products and existing products into new channels. Accounts payable and accrued liabilities increased primarily due to the timing of
payments.



14



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Cash flows provided by investing activities included proceeds from certain securities transactions,
primarily the maturities of marketable debt securities and sale of marketable equity securities, of $24.6 million and $32.3 million for the first nine months of fiscal 2004 and 2003, respectively. These proceeds were partially offset by purchases of
marketable securities of $4.0 million and $13.9 million during the first nine months of fiscal 2004 and 2003, respectively, and $504,000 and $363,000 of investments in non-marketable securities of non-public technology businesses during the same
respective periods. During the nine months ended July 31, 2004, we received proceeds of $16.7 million from the disposal of assets held for sale, which primarily comprised inventory and leasehold improvements related to the Benchmark manufacturing
outsourcing agreement completed during the period. Investments in property, plant and equipment were $12.8 million and $11.2 million during the first nine months of fiscal 2004 and 2003, respectively. Capital expenditures during the first nine
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. Capital
expenditures during the first nine months of fiscal 2003 were comprised primarily of computer hardware and software for our global information technology infrastructure and tooling and equipment related to new product introductions.



With respect to cash flows provided by (used in) financing activities, during
the first nine months of fiscal 2004 and 2003, we received proceeds from the issuance of common stock under our Stock Purchase Plan and the exercise of stock options and stock warrants of $6.6 million and $3.8 million, respectively. We repurchased
$9.5 million and $697,000 of our common stock during the nine months ended July 31, 2004 and 2003, respectively. During the nine months ended July 31, 2003, we borrowed $781,000 on a credit line from a German bank, which we repaid in full during
fiscal 2003. Offsetting cash flows provided by financing activities in both periods were certain payments on short-term and long-term debt, which were $1.2 million and $3.3 million for the first nine months of fiscal 2004 and 2003, respectively. All
of our outstanding debt was repaid in full during the third quarter of fiscal 2004.



At July 31, 2004, our cash and cash equivalents increased by $44.2 million compared to cash and cash equivalents at October 31, 2003. Our cash and cash equivalents and marketable securities totaled $225.6 million and
$201.2 million at July 31, 2004 and October 31, 2003, respectively. Our working capital, the difference between current assets and current liabilities, was $275.2 million and $276.4 million at July 31, 2004 and October 31, 2003, respectively. The
ratio of current assets to current liabilities was 3.5 to 1 and 3.9 to 1 at July 31, 2004 and October 31, 2003, respectively.



During fiscal 2001 we recorded a $2,318,000 liability to reflect anticipated costs to exit a manufacturing and development site which has been replaced by
a larger facility. During the nine month period ended July 31, 2004, we made payments of $529,000, $394,000 of which related to unused capacity in the facility. This $394,000 reduced the liability from $1,008,000 at October 31, 2003 to $614,000 at
July 31, 2004. We expect these payments to continue through December 2006.



Based on our cash position, anticipated profitable operations and planned expenditures, we believe that our existing cash and cash equivalents, marketable securities, debt capacity and anticipated cash flow from our
operating activities will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. We will continue to evaluate possible acquisitions of, or investments in businesses, products, or technologies that we
believe are of strategic value, which may require the use of cash. In addition, we have made and expect to continue to make investments in companies with whom we have identified potential synergies.



15



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



We are exposed to various market risks, including changes in foreign
currency rates and interest rates. We may enter into various derivative transactions to manage certain of these exposures.



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 as of July 31, 2004 would have resulted in an approximately
$1.8 million decrease in income before provision for income taxes during the first nine months of fiscal 2004. 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.



Item 4. 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 July 31, 2004 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.



During the
three months ended July 31, 2004, 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.



16



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



On December 22, 2003, three former team members filed a lawsuit against ADIC in U.S. District Court for the Western District of Washington (Williams
et. al vs. Advanced Digital Information Corporation). The plaintiffs alleged that ADIC failed to pay wages in accordance with the Fair Labor Standards Act and the Washington Minimum Wage Act. ADIC settled with the plaintiffs in June 2004 for a
nominal amount. This settlement did not have a material adverse effect on our business, financial condition, liquidity or operating results.



Item 2. Changes in Securities



In connection with ADICs acquisition of Pathlight Technology, Inc. (Pathlight) on May 11, 2001, ADIC assumed all outstanding warrants to
purchase shares of common stock of Pathlight. Accordingly, after applying the applicable conversion ratio to the outstanding Pathlight warrants, ADIC assumed warrants providing for the issuance of an aggregate of 308,291 shares of ADIC common stock
at prices ranging from $1.235 to $7.401 per share (the Assumed Warrants). All of the Assumed Warrants contained provisions permitting net exercise.



The shares of common stock issuable by ADIC upon exercise of the Assumed Warrants have not been registered under the Securities Act of 1933, as
amended, and have been issued upon exercise of Assumed Warrants in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, on the basis that the Assumed Warrants were issued to, and are held by, a limited number
of accredited investors. The following table sets forth information with respect to unregistered shares of ADIC common stock that were issued upon exercise of Assumed Warrants during the quarter ended July 31, 2004:



|             |  |                                          |  |                   |        |                           |       
|------------ |  | ---------------------------------------- |  | ----------------- | ------ | ------------------------- | ------
|Date of Sale |  | Purchaser                                |  | ConsiderationPaid |        | Number of SharesPurchased
|6/4/04       |  | Amschel, LLC / Coller Investment Capital |  | $                 | 54,182 |                           | 22,881
|             |  |                                          |  |                   |        |                           |       



As of June 23, 2004,
the remaining outstanding Assumed Warrants (providing for the issuance of an aggregate of 3,482 shares) expired without being exercised.



Item 3. Defaults Upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



17



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Item 6. Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



See Exhibit Index on page 19 below.



| | (b) | Reports on Form 8-K
| | --- | -------------------



On May 13, 2004, ADIC furnished a Current Report on Form 8-K under Items 12 and 7 containing a press release announcing financial results relating to our
second quarter of fiscal 2004 ended April 30, 2004.



18



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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.



19



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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: September 10, 2004 |  | /s/ PETER H. VAN OPPEN                                                                                                                  
|                          |  | Peter H. van Oppen, Chair and Chief Executive Officer                                                                                   
|                          | 
|Dated: September 10, 2004 |  | /s/ JON W. GACEK                                                                                                                        
|                          |  | Jon W. Gacek, Chief Financial Officer and Executive Vice President  Finance and Operations (Principal Financial and Accounting Officer)



20