UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2003

Or

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

For the transition period from      to      

Commission file number 0-21103

ADVANCED DIGITAL INFORMATION CORPORATION

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

11431 Willows Road N.E.
P.O. Box 97057
Redmond, Washington 98073-9757

(425) 881-8004

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

     Yes x No 

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

     Yes x No 

     The total shares of common stock without par value outstanding at the end of the quarter reported is 62,801,220.

TABLE OF CONTENTS

PART I-FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

Advanced Digital Information Corporation
Consolidated Balance Sheets
(In thousands, except for share data)

					October 31,			July 31,
					2002			2003
Assets
Current assets:
	Cash and cash equivalents				$	150,741		$	181,679
	Accounts receivable, net of allowances of $1,379 in 2002 and $1,655 in 2003					71,383			84,512
	Inventories, net					32,296			43,625
	Short-term marketable securities					24,878			24,125
	Prepaid expenses and other					2,245			2,422
	Income taxes receivable					6,305			—
	Deferred income taxes					13,250			13,328
			Total current assets			301,098			349,691
Property, plant and equipment, net of accumulated depreciation of $20,672 in 2002 and $32,927 in 2003						48,722			50,174
Service parts for maintenance, net of accumulated amortization of $15,545 in 2002 and $21,340 in 2003						22,936			26,179
Deferred income taxes						3,347			3,325
Long-term marketable securities						7,221			—
Investments						10,928			3,590
Intangible and other assets, net of accumulated amortization of $3,869 in 2002 and $4,346 in 2003						4,885			4,424
					$	399,137		$	437,383
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable				$	35,126		$	48,568
	Accrued liabilities					11,668			19,079
	Income taxes payable					—			3,127
	Deferred revenue					20,343			23,978
	Bank lines of credit and current portion of long-term debt					2,282			203
				Total current liabilities		69,419			94,955
Long-term debt						984			988
Commitments
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, 62,801,220 issued and outstanding (61,874,990 in 2002)					222,687			227,148
	Retained earnings					108,159			114,899
	Accumulated other comprehensive income (loss):
		Cumulative translation adjustment				(1,887	)		(610	)
		Unrealized investment gains (losses)				(225	)		3
				Total shareholders’ equity		328,734			341,440
					$	399,137		$	437,383

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Operations

(In thousands, except for per share data)

		Three months ended						Nine months ended
		July 31,						July 31,
		2002			2003			2002			2003
Net sales		$	75,999		$	108,259		$	253,409		$	305,997
Cost of sales			53,789			75,683			186,406			210,651
	Gross profit		22,210			32,576			67,003			95,346
Operating expenses:
	Sales and marketing		13,206			14,355			36,090			42,012
	General and administrative		6,015			5,948			16,954			18,095
	Research and development		8,196			9,986			22,266			30,257
	Acquisition expenses		—			—			1,475			—
			27,417			30,289			76,785			90,364
Operating profit (loss)			(5,207	)		2,287			(9,782	)		4,982
Other income (expense):
	Interest income		777			598			2,784			1,834
	Interest expense		(63	)		(44	)		(182	)		(135	)
	Gain on securities transactions, net		38			976			8,217			2,388
	Foreign currency transaction gains (losses), net		835			(111	)		916			1,060
	Other		(89	)		(89	)		(28	)		(212	)
			1,498			1,330			11,707			4,935
Income (loss) before provision (benefit) for income taxes			(3,709	)		3,617			1,925			9,917
Provision (benefit) for income taxes			(1,594	)		982			(849	)		3,177
Net income (loss)		$	(2,115	)	$	2,635		$	2,774		$	6,740
Basic net income (loss) per share		$	(0.03	)	$	0.04		$	0.04		$	0.11
Diluted net income (loss) per share		$	(0.03	)	$	0.04		$	0.04		$	0.11

See the accompanying notes to these consolidated financial statements.

2

Advanced Digital Information Corporation
Consolidated Statements of Cash Flows
(In thousands)

			Nine months ended
			July 31,
			2002			2003
Cash flows from operating activities:
	Net income		$	2,774		$	6,740
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		11,542			16,625
		Allowance for doubtful accounts receivable		802			507
		Inventory obsolescence		2,907			4,298
		Gain on securities transactions		(8,217	)		(2,388	)
		Acquired in-process research and development		1,200			—
		Deferred income taxes		(327	)		(144	)
		Tax benefit from exercise of stock options		2,233			1,376
		Other		3			40
	Change in assets and liabilities:
		Accounts receivable		10,800			(14,038	)
		Inventories		7,277			(15,213	)
		Prepaid expenses and other assets		(576	)		(118	)
		Service parts for maintenance		(5,533	)		(7,437	)
		Accounts payable		(4,705	)		12,804
		Accrued liabilities		(670	)		6,721
		Income taxes		1,816			9,457
		Deferred revenue		2,365			3,034
Net cash provided by operating activities				23,691			22,264
Cash flows from investing activities:
	Purchase of property, plant and equipment			(21,740	)		(11,219	)
	Purchase of marketable securities			(43,727	)		(13,852	)
	Proceeds from securities transactions			20,726			32,266
	Purchase of other investments			(2,934	)		(363	)
Net cash provided by (used in) investing activities				(47,675	)		6,832
Cash flows from financing activities:
	Repayment of bank lines of credit and long-term debt			(1,652	)		(3,265	)
	Proceeds from short-term borrowings			—			781
	Repurchase of common stock			(3,430	)		(697	)
	Proceeds from issuance of common stock for stock options, stock warrants and Stock Purchase Plan			4,534			3,782
Net cash provided by (used in) financing activities				(548	)		601
Effect of exchange rate changes on cash				707			1,241
Net increase (decrease) in cash and cash equivalents				(23,825	)		30,938
Cash and cash equivalents at beginning of period				155,274			150,741
Cash and cash equivalents at end of period			$	131,449		$	181,679

See the accompanying notes to these consolidated financial statements.

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Advanced Digital Information Corporation

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended July 31, 2003

(In thousands)

												Accumulated
												Other
				Common Stock						Retained		Comprehensive
				Shares			Amount			Earnings		Income (Loss)			Total
Balance at October 31, 2002					61,875		$	222,687		$	108,159	$	(2,112	)	$	328,734
Shares repurchased					(113	)		(697	)		—		—			(697	)
Purchases under Stock Purchase Plan					240			1,129			—		—			1,129
Exercise of stock options, including tax benefit of $1,376					799			4,029			—		—			4,029
Comprehensive income:
	Net income				—			—			6,740		—			—
	Change in unrealized investment gains:
			Unrealized investment gains, net of tax of $36		—			—			—		66			—
			Reclassification adjustment for investment losses included in net income, net of tax of $87		—			—			—		162			—
	Change in foreign currency translation adjustment, net of tax of $688				—			—			—		1,277			—
		Total comprehensive income			—			—			—		—			8,245
Balance at July 31, 2003					62,801		$	227,148		$	114,899	$	(607	)	$	341,440

See the accompanying notes to these consolidated financial statements.

4

Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements

July 31, 2003

Note 1. Basis of presentation

     The accompanying 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 (loss), shareholders’ equity or cash flows as previously presented.

     The accompanying unaudited 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, 2002. 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, 2003 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 related interpretations. 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:

5

Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

July 31, 2003

			Three months ended							Nine months ended
			July 31,							July 31,
			2002				2003			2002			2003
						(In thousands, except for per share data)
Net income (loss), as reported			$	(2,115	)		$	2,635		$	2,774		$	6,740
Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax				(2,279	)			(1,465	)		(7,539	)		(5,046	)
Pro forma net income (loss)			$	(4,394	)		$	1,170		$	(4,765	)	$	1,694
Basic net income (loss) per share:
		As reported	$	(0.03	)		$	0.04		$	0.04		$	0.11
	Pro forma		$	(0.07	)		$	0.02		$	(0.08	)	$	0.03
Diluted net income (loss) per share:
		As reported	$	(0.03	)		$	0.04		$	0.04		$	0.11
	Pro forma		$	(0.07	)		$	0.02		$	(0.08	)	$	0.03

     The options granted during the nine months ended July 31, 2002 and 2003 expire after five and ten years, respectively. The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions for options granted during the periods presented:

	Three months ended						Nine months ended
	July 31,						July 31,
	2002			2003			2002			2003
Weighted average risk free interest rates		4.15	%		2.80	%		4.12	%		3.16	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		84	%		79	%		84	%		79	%
Expected lives (in years)		4.0			6.0			4.0			6.0

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

July 31, 2003

Note 3. 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, 2002 and 2003:

		Three months ended					Nine months ended
		July 31,					July 31,
		2002			2003		2002		2003
					(In thousands, except for per share data)
Numerator:
	Net income (loss)	$	(2,115	)	$	2,635	$	2,774	$	6,740
Denominator:
	Denominator for basic net income (loss) per share- weighted average shares		62,546			62,657		62,340		62,291
	Dilutive potential common shares from Team Member (employee) stock options and warrants		—			1,024		1,414		857
	Denominator for diluted net income (loss) per share- adjusted weighted average shares and assumed conversions		62,546			63,681		63,754		63,148
Basic net income (loss) per share		$	(0.03	)	$	0.04	$	0.04	$	0.11
Diluted net income (loss) per share		$	(0.03	)	$	0.04	$	0.04	$	0.11

Note 4. Inventories

     Inventories are comprised of the following:

	October 31, 2002			July 31, 2003
	(In thousands)
Finished goods	$	26,225		$	32,384
Work-in-process		140			473
Raw materials		16,644			25,045
		43,009			57,902
Allowance for inventory obsolescence		(10,713	)		(14,277	)
	$	32,296		$	43,625

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

July 31, 2003

Note 5. Investments in marketable securities and other investments

     At July 31, 2003, the cost basis of the marketable securities we held was $24,120,000 and the fair value was $24,125,000. The difference between the cost basis and fair value of $5,000, net of taxes of $2,000 is recorded as an unrealized investment gain. At July 31, 2003, the fair value of marketable securities comprised equity securities of $138,000 and debt securities of $23,987,000. The equity securities consist of stock in a U.S. company that operates in an area within our strategic focus. The debt securities consist of investment-grade government and commercial 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. During the three months ended July 31, 2003, we sold a portion of our marketable securities and realized gains of $818,000. No marketable securities were sold during the three months ended July 31, 2002. During the nine month periods ended July 31, 2002 and 2003, sales of marketable securities resulted in gains of $3,657,000 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. In December 2002 and May 2003, we received additional shares of marketable equity securities under an earnout provision and recorded additional gains on securities transactions of $124,000 and $158,000, respectively.

     During the nine month period ended July 31, 2002 we received cash of $287,000 related to the sale of derivative financial instruments on certain marketable equity securities held by us. We recognized a gain on securities transactions of $38,000 and $4,560,000, respectively, during the three and nine month periods ended July 31, 2002 to reflect the change in the fair value of the related liability during the period plus the cash received on sales of derivatives during the period.

Note 6. Intangible and other assets

     On November 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which requires us to discontinue amortization of goodwill. As required by SFAS 142, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. In applying these criteria, we transferred net assembled workforce from intangible assets to goodwill in the first quarter of fiscal 2003. During the first quarter, we completed the assessment for impairment of goodwill required upon implementation of SFAS 142 and concluded that goodwill was not impaired. We are required to perform goodwill impairment tests on an annual basis or when indicators of impairment exist. We performed our annual goodwill impairment test in the third quarter of fiscal 2003 and concluded that goodwill was not impaired. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

July 31, 2003

     The following table presents net income (loss) and net income (loss) per share for the three and nine months ended July 31, 2002 and 2003 on a pro forma basis as if SFAS 142 had been adopted on November 1, 2001:

		Three months ended					Nine months ended
		July 31,					July 31,
		2002			2003		2002		2003
					(In thousands, except for per share data)
Net income (loss), as reported		$	(2,115	)	$	2,635	$	2,774	$	6,740
Add back: amortization of goodwill (including assembled workforce), net of tax			70			—		211		—
Pro forma net income (loss)		$	(2,045	)	$	2,635	$	2,985	$	6,740
Basic net income (loss) per share:
	As reported	$	(0.03	)	$	0.04	$	0.04	$	0.11
	Pro forma	$	(0.03	)	$	0.04	$	0.05	$	0.11
Diluted net income (loss) per share:
	As reported	$	(0.03	)	$	0.04	$	0.04	$	0.11
	Pro forma	$	(0.03	)	$	0.04	$	0.05	$	0.11

     Intangible and other assets consists of the following:

	October 31, 2002								July 31, 2003
	Gross			Accumulated					Gross		Accumulated
	amount			amortization			Net amount		amount		amortization			Net amount
			(In thousands)								(In thousands)
Developed technology	$	980		$	(925	)	$	55	$	980	$	(980	)	$	—
Core technology		3,804			(1,675	)		2,129		3,804		(2,083	)		1,721
Assembled workforce		147			(139	)		8		—		—			—
Non-compete agreements		50			(12	)		38		50		(26	)		24
Goodwill		3,706			(1,118	)		2,588		3,853		(1,257	)		2,596
Other assets		67			—			67		83		—			83
	$	8,754		$	(3,869	)	$	4,885	$	8,770	$	(4,346	)	$	4,424

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

July 31, 2003

     During the three and nine month periods ended July 31, 2003, we recorded intangible amortization expense of $141,000 and $477,000, respectively. During the comparable periods in fiscal 2002, intangible amortization expense was $331,000 and $984,000, respectively. Total expected future amortization related to intangible assets is provided in the following table:

	Amortization
	(In thousands)
Three months ended October 31, 2003	$	141
Fiscal year 2004	$	562
Fiscal year 2005	$	543
Fiscal year 2006	$	499

Note 7. Guarantees

     In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of the guarantee. In addition, FIN 45 requires disclosures about the guarantees that a company has issued, including a rollforward of the company’s product warranty liabilities. We are required to apply the recognition provisions of FIN 45 prospectively to any guarantees issued after December 31, 2002. The disclosure provisions of FIN 45 were effective for us beginning in first quarter of fiscal 2003 and are included below. The provisions of FIN 45 have not had a significant impact on our financial position or results of operations.

     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 cost of these parts is amortized over their estimated useful lives, which range from 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, 2003 are as follows:

Balance at October 31, 2002	$	4,225
Accruals for warranties issued		4,807
Settlements during the period		(3,617	)
Balance at July 31, 2003	$	5,415

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Advanced Digital Information Corporation

Notes to Interim Consolidated Financial Statements (Continued)

July 31, 2003

Note 8. Recent accounting pronouncements

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also amends the disclosure provisions of that statement. The disclosure provisions of this statement are effective for us beginning in the second quarter of fiscal 2003, and the required disclosures are included in Note 2. We do not currently have plans to change to the fair value method of accounting for our stock-based compensation, but we will reassess our plans during the fourth quarter of fiscal 2003 to determine whether we will change to the fair value method during fiscal 2004.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in interim periods beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities and results of operations of a VIE need to be included in a company’s financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE. The provisions of FIN 46 are effective immediately for all VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the provisions of FIN 46 must be adopted at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 requires that certain financial instruments that, under previous guidance, could be accounted for as equity, now be classified as liabilities. These financial instruments include mandatorily redeemable shares, instruments that require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares. SFAS 150 also requires additional disclosures about alternative ways of settling these types of instruments and the capital structure of entities. Most of the provisions of SFAS 150 are effective for all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

11

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, 2002. 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, 2002 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

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

Results of Operations

     Net Sales. Net sales increased during the third quarter of fiscal 2003 to $108.3 million, an increase of 42% from $76.0 million in the comparable quarter of fiscal 2002. Net sales for the nine months ended July 31, 2003 were $306.0 million, an increase of 21% from $253.4 million during the nine months ended July 31, 2002. The increase in both comparison periods is due to higher sales to both OEM and branded customers. Revenue from OEM customers increased 79% in the third quarter of fiscal 2003 from the comparable quarter of fiscal 2002, and branded sales increased 19% between the comparable quarters. OEM sales increased as a percentage of net sales to 49% during the third quarter of fiscal 2003 compared to 39% in the third quarter of fiscal 2002. During the nine months ended July 31, 2003, OEM revenue increased 26% over the comparative period in fiscal 2002. Branded sales increased 16% during the nine months ended July 31, 2003 compared to the same period ended July 31, 2002. The growth in OEM sales is due to a combination of increasing penetration with existing products and the addition of more products. Branded sales have increased in all major geographical markets over the comparable fiscal periods in 2002. Additionally, the Scalar® i2000 Tape Library was released during the third quarter of fiscal 2003 and contributed to the increase in sales over the same period in 2002.

     Intelligent Storage Solutions™ (ISS), which include elements of our software and connectivity technology and are sold through both branded and OEM sales channels, represented 33% of sales in the third quarter of fiscal 2003 compared to 36% of sales during the third quarter of fiscal 2002. ISS related sales comprised 37% and 28% of sales during the first nine months of fiscal 2003 and 2002, respectively. 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 the specific mix of ISS products or other factors.

     Gross Profit. Gross profit was $32.6 million or 30% of net sales for the three months ended July 31, 2003 compared to $22.2 million or 29% of net sales for the same period in fiscal 2002, an increase of

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47% on a net sales increase of 42%. For the nine months ended July 31, 2003, gross profit was $95.3 million or 31% of net sales compared to $67.0 million or 26% of net sales for the same period in fiscal 2002, an increase of 42% on a net sales increase of 21%. The increase in gross profit in fiscal 2003 over the comparable periods in fiscal 2002 is primarily a result of the absolute dollar increase in branded sales, including revenue from software and other higher-margin enterprise-level products. This increase was partially offset by the increase in the proportion of OEM sales, which typically carry a lower gross margin than branded sales.

     Sales and Marketing Expenses. Sales and marketing expenses were $14.4 million or 13% of net sales for the three months ended July 31, 2003 compared to $13.2 million or 17% of net sales for the same period in fiscal 2002. For the nine month period ended July 31, 2003, sales and marketing expenses were $42.0 million or 14% of net sales compared to $36.1 million or 14% of net sales for the same period in fiscal 2002. Sales and marketing expenses have increased in absolute dollars due to continued efforts to expand our sales and services channels to support new product offerings and improve market penetration with our more complex enterprise-level products. We expect very modest sequential growth in sales and marketing expenditures during the balance of fiscal 2003.

     General and Administrative Expenses. General and administrative expenses were $5.9 million or 5% of net sales for the three months ended July 31, 2003 compared to $6.0 million or 8% of net sales for the same period in fiscal 2002. For the nine month period ended July 31, 2003, general and administrative expenses were $18.1 million or 6% of net sales compared to $17.0 million or 7% of net sales for the same period in fiscal 2002. The changes in general and administrative expenses from the comparable periods in fiscal 2002 are the net result of increased expenses due to continued investments in our infrastructure, including our global information system, partially offset by decreases in bad debt. We expect general and administrative expenses to increase modestly during the remainder of fiscal 2003.

     Research and Development Expenses. Research and development expenses were $10.0 million or 9% of net sales for the third quarter of fiscal 2003 compared to $8.2 million or 11% of net sales for the third quarter of fiscal 2002. During the nine months ended July 31, 2003, we incurred research and development expenses of $30.3 million or 10% of net sales compared to $22.3 million or 9% of net sales for the same period in fiscal 2002. These increases reflect our strategy to maintain heavy investments in software and connectivity product development and relate to added personnel resources and additional spending related to new products. We believe that significant investments in research and development are required to remain competitive and to solidify our market position in intelligent storage solutions. We expect moderate growth in research and development expenses during the remainder of fiscal 2003 as we continue to invest in new product development.

     Acquisition Expenses. Expenses related to our acquisition of V-Stor were $1.5 million for the three and nine month periods ended July 31, 2002. These one-time acquisition charges related to acquired in-process research and development and compensation to V-Stor personnel.

     Other Income. Other income primarily consists of net gain on securities transactions, interest income and net foreign currency transaction gains (losses). Other income was $1.3 million for the third quarter of fiscal 2003 compared to $1.5 million for the third quarter of fiscal 2002. For the nine months ended July 31, 2003, other income was $4.9 million compared to $11.7 million for the same period in fiscal 2002. Other income during the three months ended July 31, 2003 and 2002 included a gain on securities transactions of $976,000 and $38,000, respectively. The gain on securities transactions during the nine months ended July 31, 2003 and 2002 was $2.4 million and $8.2 million, respectively. The gains realized in fiscal 2003 primarily relate to conversion of one of our investments in a private company to cash and marketable equity securities and subsequent sale of a portion of those securities. The gains realized in fiscal 2002 consisted of gains from the sale of derivative financial instruments on securities

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held for investment as well as the sale of marketable securities. Interest income was $598,000 and $777,000 during the third quarter of fiscal 2003 and 2002, respectively, and $1.8 million and $2.8 million during the first nine months of fiscal 2003 and 2002, respectively. The decrease in interest income is the result of lower returns on cash and investment balances. Foreign currency transaction gains (losses) were a loss of $111,000 and a gain of $835,000 during the third quarter of fiscal 2003 and 2002, respectively, and gains of $1.1 million and $916,000 during the first nine months of fiscal 2003 and 2002, respectively. The gains are the result of the strengthening of the Euro during the nine month periods, with the loss resulting from a stronger dollar during the third quarter of fiscal 2003. Interest expense in all periods primarily relates to interest on operating credit lines through two German banks along with a loan payable to a German bank.

     Provision (Benefit) for Income Taxes. For the three months ended July 31, 2003, income tax expense was $982,000 compared to income tax benefit of $1.6 million for the comparable period in fiscal 2002. Income tax expense was $3.2 million for the nine months ended July 31, 2003 compared to income tax benefit of $849,000 for the nine months ended July 31, 2002. The effective income tax rates for the three and nine months ended July 31, 2003 were 27% and 32%, respectively. The effective tax rates for the comparable periods in fiscal 2002 were 43% and (44%), respectively. Our effective tax rate is based on estimates and assumptions relating to future events. Actual results could differ from those estimates. In fiscal 2003, effective income tax rates reflect benefits recognized as a result of ongoing tax planning initiatives. In fiscal 2002, taxes paid in various federal, state and international jurisdictions were exceeded by the tax benefits of our credit for research and development spending, our extraterritorial income exclusion and non-taxable interest income. The effective tax rate includes tax expense for various federal, state and international jurisdictions.

Liquidity and Capital Resources

     Cash flows provided by operating activities were $22.3 million and $23.7 million for the nine months ended July 31, 2003 and 2002, respectively. During the first nine months of fiscal 2003, operating cash was primarily provided by net income, 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. During the first nine months of fiscal 2002, operating cash was primarily provided by net income, depreciation and amortization, decreases in accounts receivable and inventories and increases in deferred revenue and was offset by an increase in service parts for maintenance and a decrease in accounts payable. Inventories decreased as we entered into certain vendor-managed inventory programs, under which ownership transfers at the time we take possession of inventory in the manufacturing process. Service parts for maintenance increased in order to support new product offerings as well as maintain our increasing installed base of existing solutions.

     Cash flows provided by investing activities were $6.8 million for the first nine months of fiscal 2003. In the comparable period of fiscal 2002, cash flows used in investing activities were $47.7 million. Cash flows include proceeds from certain securities transactions of $32.3 million and $20.7 million for first nine months of 2003 and 2002, respectively. These proceeds were partially offset by purchases of marketable securities of $13.9 million and $43.7 million and investments in non-marketable securities of $363,000 and $2.9 million during the first nine months of fiscal 2003 and 2002, respectively. Investments in property, plant and equipment were $11.2 million and $21.7 million during the first nine months of fiscal 2003 and 2002, respectively. Capital expenditures during the first nine months of fiscal 2003 and 2002 were comprised primarily of computer hardware and software for our global information technology infrastructure and tooling and equipment related to new product introductions. Capital

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expenditures during the first nine months of fiscal 2002 also included leasehold improvements for our Englewood, Colorado facility.

     Cash flows provided by financing activities were $601,000 for the first nine months of fiscal 2003. In the comparable period of fiscal 2002, cash flows used in financing activities were $548,000. We repurchased $697,000 and $3.4 million of our common stock during the nine months ended July 31, 2003 and 2002, respectively. During the first nine months of fiscal 2003 and 2002, we received proceeds from the issuance of common stock under our Stock Purchase Plan and the exercise of stock options and warrants of $3.8 million and $4.5 million, respectively. Offsetting the above proceeds in both periods were certain payments on bank lines of credit and long-term debt, which were $3.3 million and $1.7 million during the first nine months of fiscal 2003 and 2002, respectively. During the first nine months of fiscal 2003, we borrowed an additional $781,000 from two German banks.

     At July 31, 2003, our cash and cash equivalents totaled $181.7 million, a $31.0 million increase from $150.7 million at October 31, 2002. Our cash equivalents and marketable securities totaled $205.8 million and $182.8 million at July 31, 2003 and October 31, 2002, respectively. Our working capital, the difference between current assets and current liabilities, was $254.7 million and $231.7 million at July 31, 2003 and October 31, 2002, respectively. The ratio of current assets to current liabilities was 3.7 to 1 and 4.3 to 1 at July 31, 2003 and October 31, 2002, respectively.

     We believe that our existing cash and cash equivalents, available bank lines of credit, 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 strategic, which may require the use of cash. In addition, we have made and expect to continue to make investments in companies with whom we have identified potential synergies.

Recent Accounting Pronouncements

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It also amends the disclosure provisions of that statement. The disclosure provisions of this statement are effective for us beginning in the second quarter of fiscal 2003, and the required disclosures are included in Note 2. We do not currently have plans to change to the fair value method of accounting for our stock-based compensation, but we will reassess our plans during the fourth quarter of fiscal 2003 to determine whether we will change to the fair value method during fiscal 2004.

     In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in interim periods beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN 46 provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities and results of operations of a VIE need to be included in a company’s financial statements. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders in a VIE. The provisions of FIN 46 are effective immediately

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for all VIEs created after January 31, 2003. For VIEs created before February 1, 2003, the provisions of FIN 46 must be adopted at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 requires that certain financial instruments that, under previous guidance, could be accounted for as equity, now be classified as liabilities. These financial instruments include mandatorily redeemable shares, instruments that require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares. SFAS 150 also requires additional disclosures about alternative ways of settling these types of instruments and the capital structure of entities. Most of the provisions of SFAS 150 are effective for all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. This accounting pronouncement is not expected to have a significant impact on our financial position or results of operations.

Critical Accounting Estimates

     The preparation of our financial statements requires us to make estimates and judgments. The critical accounting policies that affect our more significant estimates and judgments are disclosed in our Annual Report on Form 10-K for the year ended October 31, 2002. New critical accounting policies are disclosed below.

     As a result of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” on November 1, 2002, we discontinued the amortization of goodwill. Instead, goodwill was reviewed for impairment upon adoption of SFAS 142 and will be reviewed annually thereafter, or more frequently when indicators of impairment are present. We did not record an impairment charge based on this initial review or our annual review performed during the third quarter of fiscal 2003. Other intangible assets are carried and reported at acquisition cost, net of accumulated amortization subsequent to acquisition. The acquisition cost is amortized over the estimated useful lives of the assets, which range from two to ten years. Intangible assets are reviewed for impairment whenever events or circumstances indicate impairment might exist, or at least annually. The determination of the net carrying value of goodwill and intangible assets and the extent to which, if any, there is impairment are dependent on material estimates and judgments on our part, including the useful life over which the intangible assets are to be amortized, and the estimates of the value of future net cash flows, which are based upon further estimates of future revenues, expenses and operating margins.

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, 2003 would have resulted in an approximately $2.3 million decrease in income before provision for income taxes during the first nine months of fiscal 2003. 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.

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     At July 31, 2003, we had fixed rate debt of $1.2 million provided by a German bank. The fair value of such debt approximates the carrying amount on the consolidated balance sheet at July 31, 2003. Interest on the fixed rate debt is 4.4%.

Item 4. Controls and Procedures

     We maintain a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in filings pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     Our chief executive officer and our chief financial officer have evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report, and they have determined that our disclosure controls and procedures are effective.

     Subsequent to our evaluation, there were no significant changes in our internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     No material pending litigation.

Item 2. Changes in Securities

     None.

Item 3. Defaults Upon Senior Securities

     None.

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

     None.

Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

     Exhibit 31.1 — Certification of Peter H. van Oppen, Chairman 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.

     Exhibit 31.2 — Certification of Jon W. Gacek, Senior Vice President and Chief Financial 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.

     Exhibit 32.1 — Certification of Peter H. van Oppen, Chairman and Chief Executive Officer of Advanced Digital Information Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     Exhibit 32.2 — Certification of Jon W. Gacek, Senior Vice President and Chief Financial Officer of Advanced Digital Information Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     No reports on Form 8-K were filed during the quarter ended July 31, 2003.

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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.

Dated: September 12, 2003	ADVANCED DIGITAL INFORMATION CORPORATION
	PETER H. VAN OPPEN Peter H. van Oppen, Chairman and Chief Executive Officer
Dated: September 12, 2003	JON W. GACEK Jon W. Gacek, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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