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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2004

OR

For the transition period from              to             

Commission file number 0-21103

ADVANCED DIGITAL INFORMATION CORPORATION

11431 Willows Road N.E.

P.O. Box 97057

Redmond, Washington 98073-9757

(425) 881-8004

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

Yes  x    No  ¨

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

Yes  x    No  ¨

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Advanced Digital Information Corporation

Condensed Consolidated Balance Sheets

(In thousands, except for share data)

(Unaudited)

See the accompanying notes to these condensed consolidated financial statements.

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Advanced Digital Information Corporation

Condensed Consolidated Statements of Operations

(In thousands, except for per share data)

(Unaudited)

See the accompanying notes to these condensed consolidated financial statements.

2

Advanced Digital Information Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See the accompanying notes to these condensed consolidated financial statements.

3

Advanced Digital Information Corporation

Condensed Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended July 31, 2004

(In thousands)

(Unaudited)

See the accompanying notes to these condensed consolidated financial statements.

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Advanced Digital Information Corporation

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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Advanced Digital Information Corporation

Notes to Interim Condensed Consolidated Financial Statements (Continued)

July 31, 2004

(Unaudited)

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:

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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.

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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:

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.

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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):

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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:

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.

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Item 6. Exhibits and Reports on Form 8-K

See Exhibit Index on page 19 below.

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.

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EXHIBIT INDEX

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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.

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