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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

14661 Franklin Avenue

Registrant’s telephone number, including area code:

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

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

      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 þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $31,666,721 on October 4, 2003, based on the closing sale price of such stock on The Nasdaq SmallCap Market.

      The number of shares outstanding of Registrant’s Common Stock, $0.001 par value, was 34,581,655 on June 25, 2004.

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

DOCUMENTS INCORPORATED BY REFERENCE

      Information required under Items 10, 11, 12, 13 and 14 of Part III hereof are incorporated by reference to portions of the registrant’s definitive Proxy Statement to be filed in connection with the solicitation of proxies for its Annual Meeting of Stockholders to be held September 8, 2004.

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PART I

Introduction

      MTI Technology Corporation was incorporated in California in March 1981 and reincorporated in Delaware in October 1992. Our principal executive offices are located at 14661 Franklin Avenue, Tustin, California 92780. Our telephone number at that location is (714) 481-7800. References in this Form 10-K to “we,” “our,” “us,” the “Company” and “MTI” refer to MTI Technology Corporation and its consolidated subsidiaries.

      All references to years refer to our fiscal years ended April 1, 2000, April 7, 2001, April 6, 2002, April 5, 2003, and April 3, 2004, as applicable, unless the calendar year is specified. References to dollar amounts that appear in the tables and in the Notes to Consolidated Financial Statements are in thousands, except share and per share data amounts, unless otherwise specified. The fiscal year ended April 7, 2001, consisted of 53 weeks. All other fiscal years consisted of 52 weeks.

Overview

      We are a system integrator providing storage solutions for the mid-range enterprise market. Historically, we partnered with independent storage technology companies to develop, integrate and maintain high-performance, high-availability storage solutions for the mid-range and Global 2000 companies worldwide. We continue to service select third party hardware and software, and our Professional Services organization provides planning, consulting and implementation support for storage products from other leading vendors. We believe that there is as much value in creating, integrating, implementing and providing umbrella services around these various technologies as there is in developing the raw technology. On March 31, 2003, we entered into a reseller agreement with EMC Corporation, a world leader in information storage systems, software, networks and services, and have become a reseller and service provider of EMC Automated Networked Storage^TM systems and software. Although we intend to focus primarily on EMC products, we will continue to support and service our customers that continue to use our MTI-branded RAID controller technology and our partnered independent storage technology. We believe that we can differentiate ourselves through our ability to offer umbrella services on a wide range of storage products covering online storage, replicated site environments and data protection from leading technology companies. We sell our solutions and services to Global 2000 companies for their data center computing environments.

      Under the terms of the EMC reseller agreement, we will combine our core services capabilities including storage networking assessment, installation, resource management and enhanced data protection with the complete line of EMC Automated Networked Storage systems and software, with a focus on the CLARiiON® family of systems. We are developing and implementing solutions that incorporate a broad array of third party products which, we believe, are the finest commercial technologies available to meet customer requirements in the areas of Storage Area Networks, Network Attached Storage, high-availability systems for enhanced business continuance, data protection systems incorporating enhanced backup and recovery, Information Lifecycle Management (“ILM”), archiving and tape automation while minimizing our past dependencies on MTI-branded RAID controller technology. We also enhance the value of our storage solutions through our 24x7x365 support and service infrastructure, which includes an international network of 113 on-site field engineers, a storage solution laboratory, and our global technical support centers.

      The total storage solutions that we deliver to the market are generally compatible with Sun Solaris, HP-UX, Windows NT, Novell Netware, IBM AIX, and Linux operating systems. Having the ability to work on these operating platforms enables us to meet varied customer demands. Our customers represent a cross-section of industries and governmental agencies and range from small businesses to Fortune 500 companies. No single customer accounted for more than ten percent of total revenue during fiscal years 2004, 2003 and 2002.

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Our Strategy

      Our strategy is to simplify the storage, availability, protection and management of large amounts of data by delivering fully integrated solutions to our customers based on EMC Automated Networked Storage systems and other vendors’ best-of-breed technologies and high value services.

      We provide customers access to technology through strategic partnerships with leading storage vendors including EMC, Legato, Brocade, Quantum, and StorageTek. The core value of our vendor relationships is our commitment to providing services and solutions around these technologies. From basic services such as installation and integration to advanced services by our Professional Services Consulting group designing and implementing fully integrated solutions, we assist our customers with the full potential of the technologies we implement in their operations.

      In order to continue to provide the broadest array of storage solutions, we require access to a full complement of technology from the leaders in the industry. Through our relationship with EMC and other vendors, we can now offer our customers effective solutions addressing some of their most urgent business and regulatory requirements.

Significant Business Developments

      On June 17, 2004, we sold 566,797 shares of Series A Convertible Preferred Stock in a private placement financing at $26.46 per share, which raised $15 million in gross proceeds, before consideration of professional fees. The sale included issuance to the investors of warrants to purchase 1,624,308 shares of the Company’s common stock with an exercise price of $3.10 per share. The shares of common stock into which the warrants are exercisable represent twenty-five percent (25%) of the aggregate number of shares of common stock into which the Series A Convertible Preferred Stock are convertible plus an additional 207,315 shares of common stock. Each share of Series A Convertible Preferred Stock is convertible into common stock at an initial conversion rate of ten shares of common stock for each share of Series A Convertible Preferred Stock, subject to adjustments upon certain dilutive issuances of securities by the Company at the initial stated price per share. The Series A Convertible Preferred Stock carries a cumulative dividend of 8% per year payable when and if declared by the Board of Directors. The warrants are exercisable on or after December 20, 2004, and expire on June 17, 2015. As part of the private placement, a representative of the investors has joined the Company’s Board of Directors.

      Effective March 31, 2003, we became part of EMC’s Authorized Service Network. As a result, we are part of a worldwide network of professional service organizations enabling us to offer enhanced service and consulting capabilities to our customers.

      Also during fiscal year 2004, as a result of our increased sales volume, we became an EMC Premier Velocity Partner. This designation entitles us to more favorable pricing structures as well as additional sponsorship and support from EMC.

      In the fourth quarter of fiscal year 2004, we amended the EMC reseller agreement to extend the terms of the agreement an additional three years. The EMC reseller agreement will expire on March 31, 2009. Thereafter, and subject to mutual agreement, the EMC reseller agreement shall be automatically renewed for successive one-year renewal periods until terminated by either party with a 90-day notice.

      During the fourth quarter of fiscal year 2002, we recorded a restructuring charge of $4.9 million which consisted of $4.3 million in charges related to the abandonment of either underutilized or historically unprofitable facilities, $0.3 million in charges related to headcount reduction of 56 employees, and $0.3 million in charges related to the disposal of certain fixed assets. The cash outflow of the restructuring charge was

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      During fiscal year 2003, we recorded an additional restructuring charge of $1.4 million which consisted of charges of $0.5 million related to headcount reduction of 39 employees, or 15% of the Company’s workforce, $0.5 million related to the disposal or abandonment of fixed assets and $0.4 million due to lower than anticipated lease payments from sub-lessees in certain facilities. Of the 39 positions terminated, 14, 3, 6, 1, 14 and 1 were from the Sales, Marketing, General and Administrative, Customer Service, Research and Development and Manufacturing departments, respectively.

      In the first quarter of fiscal year 2004, we recorded an additional $0.04 million restructuring charge due to lower than anticipated lease payments from sub-lessees in our Sunnyvale, California facility. Also in the first quarter of fiscal year 2004, we eliminated 18 full-time positions, 1, 16 and 1 from the domestic general and administrative, global customer solutions and manufacturing departments, respectively. As a result of this reduction in workforce, we expect to realize quarterly cost savings of $0.3 million.

      In the second quarter of fiscal year 2004, we reversed $0.3 million of the restructuring charge due to higher than anticipated lease payments from sub-lessees and usage of space in our Westmont, Illinois facility.

      In the third quarter of fiscal year 2004, we eliminated 21 full-time positions, 8 from our field service department, 7 from our manufacturing department, 2 from our general and administrative department and 4 from our sales department. As a result of this reduction in workforce, we expect to realize quarterly cost savings of $0.5 million.

EMC Asset Purchase Agreement

      Effective February 9, 1996, we entered into an asset purchase agreement with EMC, in which we sold to EMC substantially all of our existing patents, patent applications and related rights. We were entitled to receive $30.0 million over the life of the EMC asset purchase agreement. The final payment of $5.0 million was received in January 2001. We also were entitled to receive royalty payments in the aggregate of up to a maximum of $30.0 million over the term of the EMC asset purchase agreement.

      As part of the maximum $30.0 million in royalties, minimum royalties of $10.0 million were to be received in five annual installments, beginning within 30 days of the first anniversary of the effective date of the EMC asset purchase agreement, and within 30 days of each subsequent anniversary thereof. As of March 2001, we had received all installments. Also, as a result of a computer and technology agreement between EMC and IBM announced in March 1999, the minimum royalties of $10.0 million were to be increased to $15.0 million. Payments were to be received under the EMC asset purchase agreement in five equal annual installments. We received the first three annual installments in March 2000, March 2001 and March 2002. On April 1, 2003, we entered into an amended asset purchase agreement with EMC, pursuant to which EMC paid to us $5.9 million, which fully satisfied all obligations of EMC under the asset purchase agreement. Also, we granted EMC immunity from suit for patent infringement with respect to our patents.

      We also received from EMC an irrevocable, non-cancelable, perpetual and royalty-free license to exploit, market and sell the technology protected under the applicable patents. This license will terminate in the event of a change in control of the Company involving certain acquirers. As part of the EMC asset purchase agreement, MTI and EMC granted to each other a license to exploit, market and sell the technology associated with each of their respective existing and future patents arising from any patent applications in existence as of the effective date of the EMC asset purchase agreement for a period of five years, which expired February, 2001. See Note 12 of Notes to Consolidated Financial Statements.

      Subsequent to the fiscal year ended April 3, 2004, we assigned to EMC all of our rights, title and interest in and to all our remaining patents and patent applications.

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Our Market

      Our primary market focus is the worldwide mid-range open systems-based market for storage solutions. EMC currently fulfills approximately 39% of the storage infrastructure for this market. We believe this represents a significant market opportunity for us. We believe that we can continue to increase our revenue by leveraging EMC’s leadership position in the market.

      The growth of IT-managed data is creating a significant market opportunity for enterprise storage solution providers. Worldwide IT storage capacity deployments are growing and storage is considered to be a major IT discipline in most organizations with storage spending exceeding server and networking expenditures. Storage expenditures are shifting to services and we believe that complexity, not a lack of technology, is now the key weakness in the IT storage environment. There are currently many powerful networking, software and integrated “appliance” products available that address storage manageability and automate key storage management functions. Historically, we have sold many of these state-of-the-art products ranging from fibre-channel storage area network (SAN), network area storage (NAS), direct attached storage (DAS) and content addressable storage (CAS), to data replication and backup systems. Understanding and working with the vast array of storage offerings is complex and expensive for the IT customer. As a result, we believe that the market will shift to consuming traditional storage and storage automation products in the context of a full-service solution in which the responsibility for designing, integrating, and maintaining the storage environment will be assigned to an outside storage services specialist like ourselves.

      We believe that the trend towards acquiring fully integrated storage solutions will be particularly strong in the mid-range of the enterprise storage market, where companies tend to host their own mission critical applications yet do not have the staffing resources of mainframe environments. Despite increasing demand for additional storage requirements over the last few years, we believe that companies in the mid-range segment do not have sufficient access to fully integrated storage solution providers. The majority of system integrators and resellers tend to either be too small, lack the necessary multi-national infrastructure or do not have the required technology relationships to satisfy the needs of the mid-range market. In addition, too few vendors, resellers, and integrators focus purely on storage. Therefore, we believe that our size, partnerships and professional services focus present a unique opportunity to exploit market shifts and growth.

Our Storage Solution

      We deliver storage solutions to solve many common and demanding customer problems. These solutions are built on what we believe to be the best-of-breed platform complemented by other strategic partners such as EMC, Legato, Brocade, Quantum, StorageTek, and ADIC. We believe that we integrate these solutions into a complete, easy-to-operate and reliable storage environment to meet the customer’s specific business objectives. Our technical specialists assess the customer’s environment and custom design each solution to address the customer’s specific needs, both in terms of technical configuration and vendor product selection. Leveraging our technical resources and vendor relationships, we select, along with our customer’s input, a platform that will interoperate and meet the solution objectives. We then custom design and deliver these solutions with a full range of value-added service offerings from installation and implementation to ongoing maintenance, support, management, residency and knowledge transfer. Our solutions approach provides us the opportunity to not only meet their hardware and software requirements, but also advise and implement comprehensive business process (e.g. ILM, business continuance, regulatory compliance) improvements thus enhancing our value proposition. Moreover, as a provider of both products and professional services and on going support, we are able to reduce the customer’s overhead costs.

      Our solutions are divided into three areas that address different aspects of the storage environment:

	•	Storage infrastructure solutions that center on state-of-the-art, high-performance, high-availability networked storage systems from EMC (DAS, SAN, NAS and CAS). These solutions are designed to deliver fast, reliable, and resilient on-line storage systems that are easily and rapidly deployed. Our solutions are integrated with easy to use Storage Resource Management software that allow our customers to improve system administration productivity;

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	•	Backup Solutions that incorporate leading edge solutions from platform vendors such as Legato in combination with state-of-the-art tape libraries from Quantum, StorageTek and ADIC; and
	•	Replication services on a local level and/or on a wide area basis to create operational copies of current data or for enhanced data protection and business continuity utilizing software and hardware services from EMC, Legato and other leading Storage Application Software vendors.

Global Customer Solutions

      The quality and reliability of the products we sell and the continuing support of these products are important elements of our business. As we move forward with our reseller partnership with EMC, we believe that the expertise of our professional services staff and the delivery of high quality customer service will be of even greater importance to our customer base. Additionally, as part of EMC’s Authorized Service Network, we are part of a worldwide network of professional service organizations enabling us to offer enhanced service and consulting capabilities to our customers.

      As part of our strategy to build a worldwide organization devoted to addressing customers’ storage related needs, we have engineered a major realignment within the service elements of the business. During the first quarter of fiscal year 2004, we created a new function called Global Customer Solutions (“GCS”), consisting of 112 people, to better align and utilize our resources as we embrace our new business model as a reseller of the full line of EMC storage solutions. GCS is the umbrella function for all of our customer support functions. The GCS functions encompass all of product procurement, integration, logistics support, software and hardware technical support, Field Service Operations and Professional Services Consultancy. We have consolidated our legacy product sustaining function in two separate primary product support centers, one located at our corporate headquarters in Tustin, California, and a second located in Godalming, England. As a part of our consolidation efforts and to avoid duplication at the two facilities, the Godalming, England facility handles primarily our European customer base and sustaining for our S and D series RAID storage, while the Tustin, California facility continues to sustain our traditional RAID storage, and primarily handle our U.S. customer base. As necessary, technical professionals from either facility are dispatched worldwide to address and solve our customer requirements.

      We currently offer a variety of customer services that include system and software maintenance of MTI and EMC-manufactured products, as well as other open-system platforms, consulting services, storage-management integration and training. We offer on-site service response 24 hours-a-day, seven-days-a-week, 365 days-a-year. Service revenue represented approximately 44%, 51%, and 41% of our total revenue in fiscal years 2004, 2003, and 2002, respectively.

      Currently, we are selling most EMC hardware products with up to 3-year 24x7 warranties and EMC software products with 90-day warranties. As a result, the amount of service contracts associated with those hardware product sales is expected to decrease in value. Depending upon the conversion of our current customer base to EMC products from MTI proprietary products, service revenues may continue to decrease. As sales of EMC products increase, we expect sales of back-up products, which are not a part of the EMC reseller agreement, to increase. The back-up products carry shorter warranty periods, thus providing us an opportunity for increased maintenance contract revenue. Furthermore, technology refresh activity will increase the demand for our professional services which is expected to be a significant driver of our future growth in the services arena.

Sales and Marketing

      Since 1996, we have focused our business on the storage needs of the open-systems based and mid-range enterprise computing market. We have over 4,000 customers who have relied on us to design, implement and service portions of the storage environments that support their critical business applications. On March 31, 2003, we signed a reseller agreement with EMC. The vast majority of our sales and marketing efforts are focused on selling and servicing storage solutions purchased from EMC and its wholly-owned subsidiary, Legato Systems. Our market strategy is to become the preferred provider for sales, professional services and maintenance to the mid-range enterprise market for EMC-branded storage solutions. In order to accomplish

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      We believe that in today’s technology storage marketplace, buying decisions are based much more on return on investment than in the past. Today’s buyers are more “business managers” than traditional technology buyers and purchases are made to solve existing business issues. Therefore, product brand is of the utmost importance. Our EMC relationship allows us to have access to a world-class product brand to meet the demands of today’s marketplace.

      We differentiate ourselves from other resellers through our dedicated focus on EMC storage solutions, our multi-national direct-end sales force and on-site professional service and maintenance organization. Our marketing is focused around direct lead generation through select localized telemarketing and other marketing strategies. We expanded our direct end-user sales force during fiscal year 2004 and we expect to continue to expand throughout fiscal year 2005.

Order Backlog

      As a reseller of EMC Automated Networked Storage Systems and software, our backlog levels will depend on the availability of EMC products. EMC generally ships products within ten days upon receipt of a purchase order. A significant portion of our sales occurs in the last month of a quarter. Consequently, our backlog at the end of a quarter is dependant upon our ability to place a purchase order with EMC soon enough to allow EMC adequate time to assemble, test and ship orders prior to the end of the quarter. As a result, we believe that order backlog as of any particular date is not meaningful as it is not necessarily indicative of future sales levels. As of April 3, 2004, our order backlog was $2.9 million as compared to $1.8 million as of April 5, 2003.

Manufacturing and Integration Services

      As of April 3, 2004, MTI ceased manufacturing operations. Our manufacturing and integration services operations that are located in Dublin, Ireland, and Tustin, California have transitioned to central procurement, order fulfillment and logistics operations. Order fulfillment for North America is managed through Tustin, California and products are generally drop-shipped directly from suppliers such as EMC, Legato, Brocade, Quantum, StorageTek, and ADIC. Order fulfillment for Europe is managed directly through Dublin, Ireland. We continue to have a smaller scale product integration capability in Dublin, Ireland to fulfill the need for our legacy RAID products.

Competition

      The market for data storage solutions is extremely competitive, characterized by rapidly changing technology. We have a number of competitors in various markets, including Hitachi Data Systems, Hewlett-Packard Company, Sun Microsystems, Inc., IBM, and Network Appliance, Inc., each of which has substantially greater name recognition, marketing capabilities, and financial and personnel resources than we have. As a reseller of EMC-centric solutions, we believe that we have a competitive advantage of selling products of the highest levels of functionality, performance and availability in the information storage market.

      Since our goal is to enable customers to purchase a single, integrated storage solution, rather than multiple components requiring integration by the customer, we believe the principal elements of competition include quality of professional services consulting, ongoing support and maintenance coupled with responsiveness to costumers and market needs, as well as price, product quality, reliability and performance. There can be no assurance that we will be able to compete successfully or that competition will not have a materially-adverse effect on our results of operations. See “Factors That May Affect Future Results — The markets for the products and services that we sell are intensely competitive which may lead to reduced sales of our products, reduced profits and reduced market share for our business” In Item 7 of this Form 10-K.

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Proprietary Rights

      We have relied on a combination of patent, copyright, trademark and trade-secret laws, employee and third party non-disclosure agreements and technical measures to protect our proprietary rights in our products. Since we shifted our strategy to become an EMC reseller, our reliance on property rights is less relevant.

      Pursuant to the EMC asset purchase agreement, we sold to EMC substantially all of our then-existing patents, patent applications, and related rights. We have an irrevocable, non-cancelable, perpetual and royalty-free license to exploit, market and sell the technology protected under the patents sold to EMC. The license we were granted pursuant to the terms and conditions of that agreement will terminate in the event of a change of control of the Company involving certain identified acquirers. On April 1, 2003, we entered into an amended asset purchase agreement with EMC, under which EMC paid us $5.9 million, which satisfied all obligations of EMC under the February 9, 1996, Asset Purchase Agreement. Also, we granted EMC immunity from suit for patent infringement with respect to our patents.

      Subsequent to the fiscal year ended April 3, 2004, we assigned to EMC all of our rights, title and interest in and to all of our remaining patents and patent applications.

Employees

      As of April 3, 2004, we had 254 full-time employees worldwide, including 80 in sales and marketing, 112 in global customer solutions, 20 in procurement and quality assurance, and 42 in general administration and finance. None of our employees are represented by a labor union, and we consider our relations with our employees to be good.

Availability of SEC Filings

      All reports filed by MTI with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by MTI with the SEC at the SEC’s public reference room located at 450 Fifth St. N.W., Washington, D.C., 20549. Information regarding operation of the SEC’s public reference room can be obtained by calling the SEC at 1-800-SEC-0330. MTI also provides copies of its Forms 8-K, 10-K 10-Q, Proxy and Annual Report at no charge to investors upon request and makes its reports available through its website at www.mti.com, as soon as reasonably practicable after filing such material with the SEC.

      Our corporate offices, including marketing, sales and support, general administration, and finance functions are located in Tustin, California, in a leased facility consisting of approximately 41,130 square feet. These premises are occupied under a lease agreement that expires on September 30, 2005. In July 2002, we completed consolidating our manufacturing facility into our 28,500 square feet facility in Dublin, Ireland, for which the lease expires in 2023. We also lease 16,000 square feet, 19,500 square feet, 11,800 square feet and 1,500 square feet facilities in Godalming, England, Chatou, France, Wiesbaden, Germany and Munich, Germany, respectively, which are used for sales and services.

      We abandoned 21,700 square feet, 11,160 square feet, 2,635 square feet, 3,200 square feet, 2,050 square feet and 3,400 square feet of our facilities located in Sunnyvale, California, Westmont, Illinois, Raleigh, North Carolina, Dublin, Ireland, Godalming, England, and Chatou, France, respectively, in the fourth quarter of fiscal year 2002. However, we are still obligated under the Sunnyvale, California, Westmont, Illinois, Raleigh, North Carolina, Dublin, Ireland, Godalming, England, and Chatou, France lease agreements that expire on July 31, 2006, June 30, 2005, April 30, 2005, October 14, 2023, November 5, 2012 and April 30, 2007, respectively. We have been able to sublet portions of our Sunnyvale, California, Westmont, Illinois, Raleigh, North Carolina, and Dublin, Ireland offices. We will continue to seek sub-tenants in order to further reduce our cost from the closure of our facilities. However, due to current economic conditions, there can be no assurance that we will be able to sub-lease the facilities in a timely manner.

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      We also lease approximately 11 sales and support offices located throughout the U.S. and Europe.

      Between July and September 2000, several complaints were filed in the United States District Court for the Central District of the California against us and several current or former officers seeking unspecified damages for our alleged violation of the Securities Exchange Act of 1934, as amended, by failing to disclose certain adverse information primarily during fiscal year 2000. On or about December 5, 2000, the several complaints were consolidated as In re MTI Technology Corp. Securities Litigation II.

      On October 17, 2002, the parties reached a tentative settlement in principle of this action. On or about December 3, 2002, the parties executed and submitted to the court for preliminary approval their agreement to settle the litigation. On May 19, 2003, the District Court preliminarily approved the settlement. On July 28, 2003, the District Court gave final approval of the settlement, all but $0.1 million of which was paid by our insurers, in return for a release of all claims against us and the other defendants, and dismissed the litigation with prejudice. The settlement has now become final under its terms, as the time to appeal from the dismissal has run.

      We are also, from time to time, subject to claims and suits arising in the ordinary course of business. In our opinion, the ultimate resolution of these matters are not expected to have a materially-adverse effect on our consolidated financial position, results of operations or liquidity.

      No matters were submitted to a vote of MTI’s stockholders during the fourth quarter of fiscal year 2004.

PART II

Principal Market and Prices

      On May 30, 2002, we received a notification letter from Nasdaq for non-compliance with Marketplace Rule 4450(a)(5) because the bid price of our common stock had closed at less than $1.00 per share over the previous 30 consecutive trading days. We had 90 calendar days, or until August 28, 2002, to regain compliance. On August 16, 2002, our securities ceased trading on the Nasdaq National Market and began trading on the Nasdaq SmallCap Market. We were granted an additional 90 calendar days, or until November 26, 2002, to demonstrate compliance with the minimum $1.00 per share requirement or meet initial listing criteria of Marketplace Rule 4310(c)(8)(D), which entitled us to an additional 180 calendar day grace period from Nasdaq to demonstrate compliance. On November 26, 2002, we received a letter from Nasdaq extending our listing on the SmallCap Market. As a result of the extension, we had until May 27, 2003 to comply with the minimum bid price requirement of the SmallCap Market, which requires us to maintain a $1.00 minimum bid price for a minimum of 10 consecutive trading days. During April 2003, the closing bid price of our common stock was $1.00 per share or greater for more than 10 consecutive trading days and on May 6, 2003, we received a notification letter from Nasdaq notifying us that we regained compliance with the Rule. As a result, our common stock will continue to be quoted on the Nasdaq SmallCap Market so long as we continue to satisfy the ongoing Nasdaq compliance requirements.

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      The following table sets forth the range of high and low sales prices per share of our common stock for each quarterly period as reported on The Nasdaq National Market and the Nasdaq SmallCap Market for the periods indicated. The price of our common stock at the close of business on June 25, 2004, was $2.24. See “Factors That May Affect Future Results — We may fail to comply with Nasdaq Marketplace Rules”

Number of Common Stockholders

      The approximate number of record holders of our common stock as of June 25, 2004, was 356.

Dividends

      We have never declared or paid any dividends. We currently expect to retain any earnings for use in the operation of our business and, therefore, do not anticipate declaring or paying any cash dividends in the foreseeable future.

Warrants

      On January 16, 2004, Silicon Valley bank converted all of its warrants to purchase 190,678 shares of our common stock into 40,176 shares of common stock through a cashless warrant exercise.

Issuer Purchases of Equity Securities

      During the fourth quarter of fiscal 2004, there were no purchases made by or on behalf of the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, as amended, of shares of the Company’s common stock that is registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.

Recent Sales of Unregistered Securities

      On June 17, 2004, the Company sold 566,797 shares of Series A Convertible Preferred Stock in a private placement financing at $26.46 per share, which raised $15 million in gross proceeds, before consideration of professional fees. The sale included issuance to the investors of warrants to purchase 1,624,308 shares of the Company’s common stock with an exercise price of $3.10 per share. The shares of common stock into which the warrants are exercisable represent twenty-five percent (25%) of the aggregate number of shares of common stock into which the Series A Convertible Preferred Stock are convertible plus an additional 207,315 shares of common stock. Each share of Series A Convertible Preferred Stock is convertible into common stock at an initial conversion rate of ten shares of common stock for each share of Series A Convertible Preferred Stock, subject to adjustments upon certain dilutive issuances of securities by the Company. The Series A Convertible Preferred Stock carries a cumulative dividend of 8% per year payable when and if declared by the Board of Directors. The warrants are exercisable on or after December 20, 2004, and expire on June 17, 2015. As part of the private placement, a representative of the investors has joined the Company’s Board of Directors.

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      The statements included in this report that are not historical or based on historical facts constitute “forward-looking statements” that involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements, expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about our efforts in reselling EMC’s products, our restructuring activities and strategic shift, the ability of our securities to trade on any market or exchange system, revenue, margin, the effect of accounting changes, attempts to raise additional funds, MTI-branded product sales and changes in product mix, customers, reductions in research and development expenditures, foreign currency hedging activity, anticipated decreases in spending, dependence on new products and quarterly fluctuations. Our transition from a manufacturer to a storage solution provider and focus of sales efforts on the mid-range enterprise market may not be successful. We may fail to achieve anticipated revenue levels and efficiencies of operation. There can be no assurance that we will be successful with our new operating strategy, that we will be able to retrain our employees in an expeditious manner or to hire employees during this period of strategy shift. Estimates made in connection with our critical accounting policies may differ from actual results. Given these uncertainties, investors in our common stock are cautioned not to place undue reliance on our forward-looking statements. The forward-looking statements in this report speak only as of the date of this report and we do not undertake to revise or update any of them. We urge you to review and carefully consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission.

      This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto contained elsewhere in this report and the section of this report titled “Factors That May Affect Future Results”.

Critical Accounting Policies

      The preparation of the consolidated financial statements requires estimates and judgments that affect the reported amounts of revenues, expenses, assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying values of assets and liabilities. Critical accounting policies are defined as those that are most important to the portrayal of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and could potentially produce materially different results under different assumptions and conditions. For a detailed discussion of the application of the following critical accounting policies and other accounting policies, see Notes to the Consolidated Financial Statements.

      Revenue recognition. We record product sales after the inventory has cleared customs, if necessary, and upon pick-up by a common carrier for Free On Board (“FOB”) origin shipments. For FOB destination shipments, sales are recorded upon delivery to the customer. Sales are recorded net of an allowance for estimated returns, as long as no significant post-delivery obligations exist and collection of the resulting receivable is probable and the sales price is fixed or determinable. Generally, product sales are not contingent upon customer testing, approval and/or acceptance. However, if sales require customer acceptance or include post-delivery obligations, revenue is recognized upon customer acceptance or fulfillment of any post delivery obligations. We record revenue from equipment maintenance contracts as deferred revenue when billed and recognize the revenue as earned over the period in which the services are provided, primarily straight-line over the term of the contract.

      We consider sales contracts that include a combination of systems, software or services to be multiple deliverable arrangements. Revenue recognition with multiple deliverables whereby software is incidental to the overall product solution is governed by EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” An item is considered a separate element if it involves a separate earnings process. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, we employ the

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      For sales transactions that include software products which are more than incidental to the overall product solution, we apply Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” as amended by SOP 98-9, “Modification of SOP 97-2 with Respect to Certain Transactions,” whereby the residual method is employed. Revenue is recognized from software licenses, provided the software has been delivered to the customer, persuasive evidence of an arrangement exists, the price charged to the customer is fixed or determinable and there are no significant obligations on our part related to the sale and the resulting receivable is deemed collectible, net of an allowance for returns and cancellations. We recognize revenue from maintenance agreements ratably over the term of the related agreement. Maintenance contracts are recorded as deferred revenue on the balance sheet. Revenue from consulting and other software-related services is recognized as the services are rendered.

      We may allow our customers who purchase new equipment to trade-in used equipment to reduce the purchase price under the sales contract. These trade-in credits are considered discounts and are allocated to the delivered elements governed by EITF 00-21. Thus, product revenue from trade-in transactions is recognized net of trade-in value.

      We consider sales transactions that are initiated by EMC and jointly negotiated and closed by EMC and our sales-force as Partner Assisted Transactions (“PATs”). We recognize revenue from PATs on a gross basis because we bear the risk of returns and collectability of the full accounts receivable. Product revenue of the delivered items is recorded at residual value upon pick-up by a common carrier for FOB origin shipments. For FOB destination shipments, product revenue is recorded upon delivery to the customer. If we subcontract the undelivered items such as maintenance and professional services to EMC, we record the costs of those items as deferred costs and amortize the costs using the straight-line method over the life of the contract. We defer the revenue for the undelivered items at fair value based upon contracted prices with EMC according to EITF 00-21. At times, our customers prefer to enter into service agreements directly with EMC. In this instance, we assign the obligation to perform services to EMC and, therefore, we do not record revenue nor defer any costs related to the services. Finally, upon assignment of maintenance and professional services to EMC, EMC may elect to subcontract the professional services to us. In this case, we defer the revenue for the professional services at fair value according to EITF 00-21.

      Product warranty. We record warranty expense at the time revenue is recognized and maintain a warranty accrual for the estimated future warranty obligation based upon the relationship between historical and anticipated costs and sales volumes. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty calls and repair cost. During the third quarter of fiscal year 2004, we reviewed our historical costs of warranty for EMC products sold over the last nine months, since we entered into the reseller agreement with EMC. Based on our review, and given the favorable warranty rate experienced on EMC products to date, we determined that it was not necessary to record any additional provision for warranty related to EMC products for the third and fourth quarters of fiscal year 2004. We will continue to assess the adequacy of our warranty accrual each quarter and we will begin to record warranty provision on EMC products sold beginning in the first quarter of fiscal year 2005. The recorded warranty rate for EMC products will likely be lower than fiscal 2004 given our favorable warranty experience with EMC products. Should actual warranty calls and repair cost differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.

      Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated returns and losses resulting from the inability of our customers to make payments for products sold or services

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      Income taxes. We are required to estimate our income taxes, which includes estimating our current income taxes as well as measuring the temporary differences resulting from different treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets or liabilities. We apply Statement of Financial Accounting Standards No.(Statement) 109, “Accounting for Income Taxes”; under the asset and liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse, net of a valuation allowance. We have recorded a full valuation allowance against our deferred tax assets as management has determined that it is more likely than not that these assets will not be utilized. In the event that actual results differ from our estimates, our provision for income taxes could be materially impacted.

      Valuation of goodwill. We assess the impairment of goodwill in accordance with Financial Accounting Standards Board Statement 142 on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of acquired assets or the strategy for our overall business, and significant negative industry or economic trends. Upon the adoption of Statement 142 and the completion of the transitional impairment test in fiscal year 2002, we concluded that there was no impairment of goodwill. We completed our annual assessment for goodwill impairment in the fourth quarter of fiscal year 2004. Based upon factors such as the market valuation approach, comparison between the reporting units’ estimated fair value using discounted cash flow projections over the next three years, and carrying value, we concluded that there was no impairment of our goodwill. Changes in assumptions and estimates included within this analysis could produce significantly different results than those identified above and those recorded in the consolidated financial statements. We will update our assessment during the fourth quarter of fiscal year 2005 or as other facts and circumstances indicate.

      Inventories. Our inventory consists of logistics inventory and production inventory. Logistics inventory is used for product under maintenance contracts and warranty, and is not for sale. As of April 3 2004, we had net logistics inventory of $3.1 million, of which substantially all of such inventory is related to legacy products, and net production inventory of $3.1 million. Inventories are valued at the lower of cost (first-in, first-out) or market, net of an allowance for obsolete, slow-moving, and unsalable inventory. The allowance is based upon management’s review of inventories on-hand, historical product sales, and future sales forecasts. Historically, we used rolling forecasts based upon anticipated product orders to determine our component and product inventory requirements. As a reseller, we procure inventory primarily upon receipt of purchase orders from customers; as such, the risk of EMC production inventory obsolescence is low. Our logistics inventory reserve is based on a combined analysis of historical usage, current and anticipated maintenance contract renewals and future product sales. If we overestimate our product or component requirements, we may have excess inventory, which could lead to additional excess and obsolete charges.

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Results of Operations

      The following table sets forth selected items from the Consolidated Statements of Operations as a percentage of total revenue for the periods indicated, except for product gross profit and service gross profit, which are expressed as a percentage of the related revenue. This information should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements included elsewhere herein:

      Net product revenue: Net product revenue for fiscal year 2004 increased $6.3 million, or 16% from fiscal year 2003. This increase was comprised of a $3.0 million and a $3.3 million, or 15% and 17%, increase in domestic product and international product revenue, respectively. The increase in net product revenue is primarily a result of entering into the EMC reseller agreement in the fourth quarter of fiscal 2003. Our ability to sell these products enabled us to further penetrate the mid-range storage market as evidenced by the addition of 242 new customer accounts during fiscal year 2004. Also contributing to the increase in net product revenue was the addition of:

	•	a Vice-President of U.S. sales, with 20 years of storage experience, responsible for North American sales; and
	•	five additional veteran salespersons during fiscal 2004 who accounted for $5.2 million or 23% of total net product revenue in fiscal 2004.

      The increase in net product revenue was driven primarily by strong demand for EMC server and software products, which generally have a higher average selling price than our proprietary products. Server and software products increased from fiscal 2003 by $6.2 million and $2.3 million, respectively, offset by a decrease of $2.2 million from tape library sales. The decline in tape library revenue is attributable to a shift in focus towards developing expertise selling the EMC product set.

      Service revenue: Service revenue was $36.7 million for fiscal year 2004, a decrease of $5.6 million, or 13%, from fiscal year 2003. This decrease was attributable to decreased maintenance revenue of $6.2 million, offset by increased professional services revenue of $0.6 million. Subsequent to the end of fiscal year 2003, we became a reseller and service provider of EMC Automated Networked Storage Systems and software. Commencing with the sale of the EMC array of products, most EMC hardware products are sold with up to a

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      Product gross profit: Product gross profit was $8.9 million for fiscal year 2004, an increase of $1.8 million, or 25%, from fiscal year 2003. The gross profit percentage of net product sales was 19% for fiscal year 2004 as compared to 18% for fiscal year 2003. The increase in product gross profit was primarily the result of an increase in product sales, principally EMC server and software products, coupled with a $1.7 million reduction in inventory obsolescence related charges as compared to fiscal year 2003, partially offset by lower standard product margin percentages on a transaction-by-transaction basis.

      Service gross profit: Service gross profit for fiscal year 2004 decreased $4.3 million, or 29%, from fiscal year 2003. The gross profit percentage for service revenue was 28% in fiscal year 2004, as compared to 35% for fiscal year 2003. We attribute the decreases in service gross profit to reduced field service revenue, particularly maintenance revenue which is supported by a relatively fixed cost structure. In an effort to improve our service gross profit, the following actions have been taken:

	•	effective October 1, 2003, we outsourced our domestic Customer Response Center operations to Directpointe, Inc., a related party, for a minimum monthly charge of $0.01 million; and
	•	in the third quarter of fiscal year 2004, we eliminated eight full time positions in our field service operations. We expect these reductions to provide quarterly cost savings of $0.2 million.

      Selling, general and administrative expenses: Selling, general and administrative expenses for fiscal year 2004 decreased $1.3 million, or 5%, from fiscal year 2003. The decrease was primarily due to a 19% or $1.2 million decrease in fixed charges such as depreciation, rent, insurance, property taxes and utilities expenses; a 37% or $0.4 million decrease in marketing expense; an 11% or $0.8 million decrease in outside purchases such as consulting and professional services, tax services, bank fees and bad debt expense and an 11% or $0.1 million decrease in supplies. The decrease in fixed charges was primarily the current year impact of asset disposals and facilities abandonments in the prior fiscal year. The decreases in marketing, outside purchases and supplies expenses were the result of a directed program to cut expenses in order to return to profitability The above decreases were offset by a 4% or $0.5 million increase in salary and benefits expense and a 3% or $0.1 million increase in travel and lodging expense. These increases were a result of increased headcount in our sales department. Also, during fiscal year 2003, we recovered $0.6 million from accounts that were previously determined to be uncollectible, as compared to bad debt expense of $0.03 million in fiscal 2004.

      Research and development expenses: Research and development expenses in fiscal year 2004 decreased $4.5 million, or 85%, from fiscal year 2003. These decreases were primarily attributable to decreases in salary and benefit expenses of $2.5 million resulting from the headcount reductions that occurred primarily during fiscal year 2003 and the first quarter of fiscal year 2004, decreases in outside consulting expense of $1.0 million, decreases in rent, utilities, repair and maintenance, depreciation, insurance and property tax expenses of $0.8 million and decreases in travel and lodging and supplies expenses of $0.2 million. These decreases were the result of our change to our business model from the sale of MTI-branded products to the sale of co-branded solutions serving the storage and enhanced data protection market.

      Restructuring Charges: We recorded a net restructuring benefit of $0.2 million in fiscal 2004. This was the result of a reversal of the restructuring reserve in the second quarter of fiscal year 2004 of $0.3 million due to higher than anticipated lease payments from sub-lessees and usage of space in our Westmont, Illinois facilities. This benefit was partially offset by an additional charge in the first quarter of fiscal year 2004 of

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      We recorded a $1.0 million restructuring charge in the first quarter of fiscal year 2003, which consisted of charges of approximately $0.5 million related to a headcount reduction of 39 employees, or 15% of our workforce, and $0.5 million related to the disposal or abandonment of fixed assets. Of the 39 employees terminated, 14, 3, 6, 1, 14, and 1 were from the Sales, Marketing, General and Administrative, Customer Service, Research and Development, and Manufacturing departments, respectively. The cash outflow of the restructuring charge is $0.5 million related to severance, which was paid during fiscal year 2003.

      In the third quarter of fiscal year 2003, we recorded a $0.2 million restructuring charge due to lower than anticipated lease payments from sub-lessees in our Sunnyvale, California and Raleigh, North Carolina facilities.

      In the fourth quarter of fiscal year 2003, we recorded a $0.2 million restructuring charge due to lower than anticipated lease payments from sub-lessees in our European facilities.

      The changes to the restructuring reserve from its inception in the fourth quarter of fiscal year 2002 are as follows (in millions):

      Other income, net: Other income, net, which includes interest income and expense, in fiscal year 2004 decreased $0.4 million, or 37%, over fiscal year 2003. This decrease was primarily due to the $1.2 million gain on the sale of a security investment included in fiscal year 2003. Additional interest expense of $0.1 million in fiscal year 2004 due to higher borrowings on the line of credit also contributed to the decrease. These decreases were partially offset by $0.7 million in interest income related to the IRS refund recorded in fiscal year 2004.

      Gain (loss) on foreign currency transactions: We recorded a $0.03 million gain on foreign currency transactions during fiscal year 2004, as compared to a $0.6 million gain in fiscal year 2003. During fiscal year 2004, the Euro appreciated against the U.S. dollar in approximately the same percentage as compared to fiscal year 2003; however, these foreign currency gains were offset by losses caused by the appreciation of the British Pound Sterling against the Euro.

      Income taxes: We recorded a net tax benefit of $3.2 million for fiscal year 2004, as compared to a net tax expense of $0.2 million for fiscal year 2003. The net tax benefit is due to the IRS settlement on income tax audits for fiscal years 1992 through 1996 which resulted in a tax payable of $0.2 million for which we had accrued $1.7 million and an income tax receivable of $1.7 million for fiscal years 1982 through 1990 based

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      Net product revenue: Net product revenue for fiscal year 2003 decreased $29.4 million, or 42% from fiscal year 2002. This decrease was primarily because of a $27.7 million and a $1.7 million, or 58% and 8%, decrease in domestic product and international product revenue, respectively. In terms of product mix on a worldwide basis, this decrease was the result of decreased revenue of $22.8 million, $3.6 million and $3.0 million from server products, tape libraries and tape related software products, respectively. Server products revenue in fiscal year 2003 from the Vivant product family was $14.7 million, down 59% from $36.0 million in fiscal 2002. The decrease was primarily due to the decrease in sales volume rather than average sales price. In general, we have found that our customer base has become much more cautious in its buying patterns and purchasing is being confined to an as-needed basis, with increasing levels of customer justification and management approval required during the sales process. This more difficult sales environment was partially a result, but not solely a result, of the global economic downturn, coupled with the U.S. war against Iraq. As a result, our customers delayed or reduced their expenditures, including those for information technology, thus decreasing the current demand for our information-storage systems and software. Additionally, aggressive competition in the form of pricing discounts offered by Hitachi Data Systems, Hewlett-Packard Company, Sun Microsystems, Inc., IBM, and Network Appliance, Inc., each of which has substantially greater name recognition, marketing capabilities and financial and personnel resources than we have, have contributed to the decrease in our sales.

      Service revenue: Service revenue was $42.3 million for fiscal year 2003, a decrease of $6.1 million, or 13%, from fiscal year 2002. This decrease was attributable to decreased maintenance revenue of $4.1 million, decreased consulting revenue of $1.2 million and other decreased service revenue of $0.8 million. The decrease in maintenance revenue is primarily due to the expiration of maintenance contracts without offsetting renewed and new maintenance contracts. We attribute the lower number of renewals to the loss of customers to our competitors, customers that have updated their technology which is now covered by warranty, and customers that have ceased operations. The decrease in consulting and other revenue is primarily attributable to decreased product revenue. In fiscal year 2003, we changed our Service and Business Systems operations throughout the world to operate under one leadership in an attempt to minimize duplication of costs, increase efficiencies and exploit successful operations.

      Product gross profit: Product gross profit was $7.2 million for fiscal year 2003, a decrease of $5.9 million, or 45%, from fiscal year 2002. The gross profit percentage of net product sales was 18% for fiscal year 2003 as compared to 19% for fiscal year 2002. This decrease was primarily due to continued pricing pressures and changes in product mix. In fiscal year 2003, we sold more library and software products than server products, particularly the Vivant product family, and library and software products carry lower margins than server products. The unfavorable change in product mix was partially offset by improved manufacturing efficiencies, our ability to sell $1.2 million of non-Vivant inventory that was previously fully reserved and reduced inventory charges from $7.0 million, which consisted primarily of additional reserves for Gladiator 6700, 8700 and 8900 inventories, in the fiscal year 2002 to $3.2 million, which consisted primarily of reserves for Vivant, VCACHE and S-200, in fiscal year 2003.

      Service gross profit: Service gross profit for fiscal year 2003 decreased $4.0 million, or 22%, from fiscal year 2002. The gross profit percentage for service revenue was 35% in fiscal year 2003, as compared to 39% for fiscal year 2002. In addition to the relatively fixed cost structure, we attribute the decreases in service gross profit to a 23% decrease in domestic customer service revenue, particularly maintenance revenue, partially offset by a 5% increase in international customer service revenue.

      Selling, general and administrative expenses: In fiscal year 2003, selling, general and administrative expenses decreased $15.5 million, or 36%, over fiscal year 2002. The decrease was primarily due to a 32% or $7.5 million decrease in salary and benefit expenses which resulted from reduced headcounts of 22%; a 54% or $3.0 million decrease in outside purchases such as consulting and professional services, tax services, bank fees

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      Research and development expenses: Research and development expenses in fiscal year 2003 decreased $7.5 million, or 59%, from fiscal year 2002. These decreases were primarily attributable to decreases in salary and benefit expenses of $4.1 million resulting from a 47% headcount reduction over fiscal year 2002, decreases in project costs of $0.9 million, decreases in rent, utilities, repair and maintenance expenses, depreciation, insurance and property tax expenses of $2.0 million, decreases in travel and lodging, consulting and loss on disposal of fixed assets of $0.4 million, and decreases in communication expenses of $0.1 million. As part of our change in business model we have changed our emphasis from the sale of MTI-branded products to the sale of co-branded solutions serving the storage and enhanced data protection market. Our focus towards EMC networked storage systems will result in limited partnering of products beyond the EMC line of products and those products related to backup functions. The primary goal of the restructuring was to refocus on the design and implementation of storage solutions at a significantly lower cost. In support of this, our Engineering department has been redeployed within our professional services organization.

      Other income, net: Other income, net, which includes interest income and expense, in fiscal year 2003 decreased $3.2 million, or 76%, over fiscal year 2002. This decrease was primarily due to an absence of income from sale of patents to EMC as we received the final annual payment in advance of $5.0 million from the sale of certain patents in January 2001 and recorded the payments as other income proportionately during the fourth quarter of fiscal year 2001 and the first nine months of fiscal year 2002. Thus, we recorded other income of $0 related to the sale of patents in fiscal year 2003, as compared to $3.6 million in fiscal year 2002. Other factors contributing to the decrease in other income, net, were decreases in interest income and sales tax refund. These decreases were partially offset by a gain on the sale of a security investment of $1.2 million in fiscal year 2003.

      Equity in net loss and write-down of net investment of affiliate: Equity in net loss of affiliate for fiscal year 2002 represents our proportionate share of The SCO Group, Inc.’s (“SCO”) net losses and amortization of the goodwill related to the investment made in SCO in August 1999. The original investment in SCO was $7.6 million and included: (a) cash payment of $3.0 million, (b) note payable of $3.0 million bearing interest at the prime rate plus one percent per annum and payable in two equal semi-annual payments beginning February 2000 and (c) investment costs of $1.6 million, including the issuance of a warrant to purchase 150,000 shares of our common stock. The excess of our investment in SCO over the related underlying equity in net assets of $6.9 million was being amortized on a straight-line basis over seven years. However, we adopted Statement 142 as of April 8, 2001, the beginning of fiscal year 2002, and therefore, ceased to amortize the remaining balance of goodwill related to the investment in SCO of $4.2 million, which was written off during the third quarter of fiscal year 2002 due to an other than temporary decline in value and recognizing our proportional share of SCO’s net loss. Such loss has been included in “Equity in net loss and write-down of net investmentof affiliate” in our fiscal year 2002 Consolidated Statement of Operations.

      Gain (loss) on foreign currency transactions: We recorded a $0.6 million gain on foreign currency transactions during fiscal year 2003, as compared to a $0.5 million loss in fiscal year 2002. The $1.1 million increase in the gain on foreign currency transactions was primarily due to the weakening U.S. dollar against the Euro.

      Income taxes: We recorded a net tax expense of $0.2 million for fiscal year 2003, as compared to a net tax expense of $24.6 million for fiscal year 2002. In fiscal year 2002, we recorded a net tax expense of $24.6 million of which $24.3 million was related to the valuation allowance for deferred-tax assets recorded in the first quarter of fiscal year 2002. Because of the continued decline in the market value of our investment in SCO and continued softness in the domestic and European markets for our products, management believed

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Liquidity and Capital Resources

      As of April 3, 2004, working capital was $2.7 million, as compared to $2.1 million at the end of the prior fiscal year, and we had cash and cash equivalents of $3.0 million as of April 3, 2004, as compared to $9.8 million as of April 5, 2003. The $6.8 million decrease in cash and cash equivalents was the result of net cash used in operating and investing activities of $11.0 million and $0.1 million, respectively, partially offset by net cash provided by financing activities of $3.4 million and $0.9 million from the effect of exchange rate changes on cash and cash equivalents.

      Net cash used in operating activities was $11.0 million in fiscal year 2004 compared to net cash provided by operating activities in fiscal year 2003. Contributing to the net cash used in operating activities was the current year net loss of $3.9 million as well as changes in operating assets and liabilities of $9.2 million. This usage was partially offset by $2.1 million in non-cash expenses. If we are able to execute our growth strategy, we expect cash used in operations to decrease significantly in fiscal 2005, primarily as a result of increased revenue generated from sales of EMC products as well as increased revenue from our professional services organization.

      Net cash used in investing activities was $0.1 million in fiscal year 2004 compared to net cash provided by investing activities of $0.7 million in fiscal year 2003. Capital expenditures in fiscal year 2004 used cash of $0.2 million. This usage was partially offset by proceeds from the sale of property, plant and equipment of $0.1 million. Due to our plan to increase headcount in fiscal year 2005, we expect that our capital expenditures will increase mainly due to the purchase of additional computer equipment.

      Net cash provided by financing activities was $3.4 million in fiscal year 2004 compared to cash used in financing activities of $0.2 million in fiscal year 2003. Current year borrowings on the line of credit provided cash of $5.4 million which was partially offset by payments on the line of credit and capital lease obligations of $3.2 million and $0.2 million, respectively. Proceeds from the issuance of shares and exercise of options and warrants provided cash of $1.3 million.

      In November 2002, we entered into a loan agreement with Comerica Bank for a line of credit of $7.0 million at an interest rate equal to the prime rate. The line of credit is secured by a letter of credit that is guaranteed by the Canopy Group, Inc. (“Canopy”), our major stockholder. Canopy’s guarantee was to mature on November 30, 2003, but on June 30, 2003, we received an extension on the $7.0 million letter of credit until June 30, 2004. The Comerica loan agreement was to mature on October 31, 2003, but on June 30, 2003, we received a renewal on the line of credit for $7.0 million until May 31, 2004. On June 18, 2004, we received an additional extension on the letter of credit until June 30, 2005. Also on June 18, 2004, we received an additional renewal on the Comerica line of credit until May 31, 2005. Ralph J. Yarro, III, one of our Directors, is also a Director, President and Chief Executive Officer of Canopy. Darcy G. Mott, one of our Directors, is also a Vice President, Treasurer and Chief Financial Officer of Canopy. Canopy beneficially owns approximately 44% of our outstanding common stock.

      The Comerica loan agreement contains negative covenants placing restrictions on our ability to engage in any business other than the businesses currently engaged in, suffer or permit a change in control, and merge with or acquire another entity. Although we are currently in compliance with all of the terms of the Comerica loan agreement, and believe that we will remain in compliance, there can be no assurance that we will be able to continue to borrow under the Comerica loan agreement through the expiration date. Upon an event of default, Comerica may terminate the Comerica loan agreement and declare all amounts outstanding immediately due and payable. As of April 3, 2004, there was $3.9 million outstanding and $3.1 million available for borrowing under the Comerica line of credit.

      On June 17, 2004, the Company sold 566,797 shares of Series A Convertible Preferred Stock in a private placement financing at $26.46 per share, which raised $15 million in gross proceeds, before consideration of professional fees. The sale included issuance to the investors of warrants to purchase 1,624,308 shares of the

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      The Company’s principal source of liquidity is cash and cash equivalents, the Comerica line of credit under the Comerica loan agreement and expected cash flows from operations. Fiscal year 2004 represented our first full year of operations under our reseller agreement with EMC. Since the inception of this relationship, we have recorded sequential quarterly growth in both product revenues and total revenues and reduced our operating loss by 39%. We believe that as we continue to execute our growth strategy, we will see increased liquidity through cash generated by operating activities. We believe that our current working capital, coupled with the borrowing ability under the Comerica line of credit as well as the cash generated from the sale of the Series A Convertible Preferred Stock is adequate to fund operations for at least the next 12 months. We believe that the increase in liquidity as a result of the Series A Convertible Preferred Stock offering will provide us with the required capital to grow our business and improve profitability. Using the proceeds from the offering, we plan to add experienced sales professionals in our sales organization and add technical professionals in our professional services organization. Our future growth is dependent upon many factors, including but not limited to, recruiting, hiring, training and retaining significant numbers of qualified personnel, forecasting revenues, controlling expenses and managing assets. In particular, significant growth will require that we train, integrate and retain qualified sales personnel in various geographic regions. The inability to recruit, train and retain additional personnel in a timely manner could have a material adverse effect on our results of operations. See “Factors That May Affect Future Results.”

      The following represents a comprehensive list of our contractual obligations and commitments as of April 3, 2004:

Inflation and Foreign Currency Exchange

      We recorded a $0.03 million foreign exchange gain during fiscal year 2004, which resulted from the weakening U.S. dollar against the Euro, partially offset by the appreciation of the British Pound Sterling against the Euro. In fiscal 2004, approximately 50% of total revenue was generated outside the United States, particularly in Germany, France and the United Kingdom. Sales denominated in currencies other than the U.S. dollar expose us to market risk from unfavorable movements in foreign exchange rates between the U.S. dollar and the foreign currency, particularly the British Pound Sterling and the Euro. In fiscal year 2004, we did not enter into forward exchange contracts to sell foreign currency to fix the U.S. dollar amount we will receive on sales denominated in that currency. Historically, in order to minimize the risk of foreign exchange loss, we have entered into foreign currency forward contracts. However, in order to conserve cash, we ended our hedging program in fiscal year 2003.

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      The Company has assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates. Assets and liabilities outside the United States are primarily located in Ireland, Germany, France and the United Kingdom. The Company’s investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company does not hedge these net investments.

Factors That May Affect Future Results

      This Annual Report on Form 10-K contains forward-looking statements. Statements in this document that are not historical facts, including statements relating to future plans and developments, financial goals and operating performance that are based on our management’s current beliefs and assumptions constitute forward-looking statements and are subject to change based on a number of factors, including those outlined in this section. Any other statements contained herein (including without limitation statements to the effect that we “estimate,” “expect,” “anticipate,” “plan,” “believe,” “project,” “continue,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. Our actual results may differ materially from those discussed in these statements. The sections entitled “Factors That May Affect Future Results,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” contain a discussion of some of the factors that could contribute to those differences. Factors that could contribute to these differences include those discussed below and elsewhere in this Form 10-K.

      Effective March 31, 2003, we became a reseller of EMC storage products. Therefore, we depend on EMC to manufacture and supply us with their storage products. We may fail to obtain required storage products in a timely manner or to obtain it in the quantities we desire in the future. If EMC were to decide to modify their channel strategy, they may cease supplying us with their storage products. If EMC were to unexpectedly cancel the reseller agreement, we may be unable to find other vendors as a replacement in a timely manner. Any interruption or delay in the supply of EMC storage products, or the inability to obtain these products at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders. This lost storage product revenue could harm our business, financial condition and operating results rendering us unable to continue operation at our current level of operations.

      The market for data storage products is characterized by rapid technology changes. The market is sensitive to changes in customer demands and very competitive with respect to timely innovation. New product introductions representing new or improved technology or industry standards may cause our existing products to be obsolete. When we became a reseller of EMC disk-based storage products, we agreed to not sell data storage hardware platforms that compete with EMC products. EMC’s ability to introduce new or enhanced products into the market on a timely basis at competitive price levels will affect our future results.

      Our business depends on general economic and business conditions. The downturn of the economy and delays or reductions in information technology spending in prior years had adversely affected our operating results. If economic conditions deteriorate, our business could be materially adversely affected.

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      The market for our products and services are intensely competitive. If we fail to maintain or enhance our competitive position, we could experience pricing pressures and reduced sales, margins, profits and market share, each of which could materially harm our business. Furthermore, new products and technologies developed by third parties may depress the sales of existing products and technologies. Our customers’ requirements and the technology available to satisfy those requirements are continually changing. Therefore, we must be able to respond to these changes in order to remain competitive. Since we have placed emphasis on integrating third party products, our ability to respond to new technologies will be substantially dependent upon our contractual relationships with such manufacturers. In addition, we must be able to quickly and effectively train our employees with respect to any new products or technologies developed by our third party suppliers and resold by us. Since the third party products we sell are available from a large number of sources, we must distinguish ourselves by the quality of our service and support. The principal elements of competition in our markets include:

	•	quality of professional services consulting and support;
	•	responsiveness to customer and market needs;
	•	product price, quality, reliability and performance; and
	•	ability to sell, service and deploy new technology.

      We have a number of competitors in various markets, including: Hewlett-Packard, Sun Microsystems, IBM, Hitachi and Network Appliance, each of which has substantially greater name recognition, marketing capabilities, financial, technological, and personnel resources than we do.

      We have implemented restructuring activities in an effort to reduce costs. These measures included reductions in our workforce and the partial or complete closure of certain under-utilized facilities, including offices in Sunnyvale, California, Boston, Massachusetts, Austin, Texas, Denver, Colorado, Orlando, Florida, Westmont, Illinois, Raleigh, North Carolina, Dublin, Ireland, Godalming, England, and Chatou, France. We reduced the number of our full-time employees by approximately 54% within the last two fiscal years (from 549 as of April 7, 2001, to 254 as of April 3, 2004). Our cost reduction initiatives may fail to reduce expenses significantly enough to compensate for decreases in margin and revenue. Please see “Significant Business Developments — Financial Restructurings and Reductions in Staff.”

      We cannot predict with any certainty the long-term impact of our workforce reductions. Reductions in our workforce could negatively impact our financial condition and results of operations, as well as make it difficult to motivate and retain the remaining employees, which would affect our ability to deliver our products in a timely fashion and otherwise negatively affect our business. We also cannot assure you that these measures will be successful in achieving the expected benefits within the expected time frames or that the workforce reductions will not impair our ability to achieve our current or future business objectives.

      We require substantial working capital to fund our operations. We use cash generated from our operations, equity capital and bank financings to fund capital expenditures, as well as to invest in and operate our existing operations.

      We believe that our working capital, expected cash flow from operating activities and amounts available under the Comerica loan agreement will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months. Projections for our capital requirements are subject to numerous uncertainties, including the cost savings expected to be realized from the restructuring, the amount of service and product revenue generated in fiscal 2005 and general economic conditions. If we do not realize substantial

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      If additional financing is required but not available to us, we would have to implement additional measures to conserve cash and reduce costs, which may include, among other things, making additional cost reductions. However, there is no assurance that such measures would be successful. Our failure to raise required additional funds or to secure an additional credit facility would adversely affect our ability to:

	•	grow the business;
	•	maintain or enhance our product offerings;
	•	respond to competitive pressures; or
	•	continue operations.

      Additional funds raised through the issuance of equity securities or securities convertible into our common stock may have the following negative effects on the then current holders of our common stock:

	•	dilution in percentage of ownership in MTI; and
	•	subordination of the rights, preferences or privileges of common stockholders to the rights, preferences or privileges of new security holders.

      We have experienced, historically, a significant portion of our orders, sales and shipments in the last month or weeks of each quarter. We expect this pattern to continue, and possibly to increase, in the future. This uneven pattern makes our ability to forecast revenues, earnings and working capital requirements for each quarter extremely difficult and uncertain. If we do not receive orders that we have anticipated or complete shipments within a given quarter, our results of operations could be harmed materially for that quarter.

      Additionally, due to receiving a significant portion of our orders in the last month of the quarter, we may experience a situation in which we have exceeded our credit limits with our vendors thereby making our ability to ship to our customers impossible. If we experience such situations and are unable to extend our credit limits with our vendors, this could materially harm our results of operations.

      We have experienced quarterly fluctuations in operating results and we anticipate that these fluctuations may continue into the future. These fluctuations have resulted from, and may continue to be caused by, a number of factors, including:

	•	the introduction of new products by our competitors and competitive pricing pressures;
	•	the size, timing and terms of customer orders;
	•	the timing of the introduction of new products and new versions of best-of-breed products;
	•	shifts in our product or services mix;
	•	changes in our operating expenditures; and
	•	decreases in our gross profit as a percentage of revenues for mature products.

      Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indications of our future performance. We cannot assure you that we will be profitable on a quarter-to-quarter basis or that our future revenues and

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      We believe that our ability to sell, deploy and service new, innovative products with features that respond to our customers’ changing demands and that incorporate new technological standards will be critical to our future success. We are dependent upon our ability to contract with manufacturers to sell their existing products, as well as new product introductions that address customer needs or achieve market acceptance. Any significant delay or failure by us to update our product offerings, train our staff to support and service such products or effectively manage the transitions to new products or new technologies could harm our business materially.

      Undetected software or hardware errors frequently occur in networking products when they are first introduced or as new versions of products are released. Our solutions are complex and are a combination of products from the third party manufacturers whose products we represent and sell, and from time to time there may be errors in these products. These errors could:

	•	adversely affect our sales;
	•	cause us to incur significant warranty and repair costs;
	•	cause significant customer relations problems;
	•	harm our competitive position;
	•	hurt our reputation; and
	•	cause purchase delays.

Any of these effects could materially harm our business or results of operations.

      Both MTI-US and its U.S. employees have the right to terminate employment at any time, with or without advance notice, and with or without cause. We believe that our success is dependent, to a significant extent, upon the efforts and abilities of our salespeople, technical staff and senior management team, particularly our executive officers. The loss of the services of our key personnel, especially to our competitors, could materially harm our business. The failure to retain key personnel, or to implement a succession plan to prepare qualified individuals to join us upon the loss of a member of our key personnel, could materially harm our business.

      International sales and services represent a significant portion of our total revenue. International sales and service revenue represented 50% of our total sales and service revenue for fiscal year 2004. If we are unable to maintain international market demand for our products and services, our results of operations could be materially harmed. Our international business is subject to the financial and operating risks of conducting business internationally, including:

	•	unexpected changes in, or impositions of, legislative or regulatory requirements;
	•	fluctuating exchange rates, tariffs and other barriers;
	•	difficulties in staffing and managing foreign subsidiary operations;
	•	import or export restrictions;

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	•	greater difficulties in accounts receivable collection and longer payment cycles;
	•	potentially adverse tax consequences;
	•	potential hostilities and changes in diplomatic and trade relationships;
	•	changes in a country’s economic or political conditions; and
	•	differing customer and/or technology standards requirements.

      All of our sales and services in international markets are priced in the applicable local currencies and are subject to currency exchange rate fluctuations. From time to time, we enter into foreign currency exchange contracts on a limited basis in an attempt to minimize foreign currency exposure. Such contracts can be costly or limited in their effectiveness. If we are faced with significant changes in the regulatory and business climate in our international markets, our business and results of operations could suffer.

      The continued threat of terrorism within the U.S. and Europe and acts of war may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, delays in collecting cash, a general decrease in corporate spending on information technology, or our inability to effectively market, manufacture or ship our products, our business and results of operations could be materially and adversely affected. We are unable to predict whether war and the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have any long-term material adverse effect on our business, results of operations or financial condition.

      We believe our EMC relationship positions us to grow in the mid-range storage market because EMC is the leading disk subsystem vendor and both companies are pure play storage providers, accustomed to selling and servicing similar customer bases, supporting mission-critical environments, providing fully integrated value-added solutions and offering 24x7x365 support on those installations. Our facilities, personnel and operating and financial systems may not be sufficient to effectively manage our future growth and, as a result, we may lose our ability to respond to new opportunities promptly. Additionally, our expected revenue growth may not materialize and increases in our operating expenses in response to the expected revenue growth may harm our operating results and financial condition. Our future growth is dependent upon many factors, including but not limited to, recruiting, hiring, training and retaining significant numbers of qualified personnel, forecasting revenues, controlling expenses and managing assets. In particular, significant growth will require that we train, integrate and retain qualified sales personnel in various geographic regions. As we are in a highly competitive growth market, the loss of a significant number of such persons, as well as the failure to recruit and train additional personnel in a timely manner, could have a material adverse effect on our results of operations.

      A majority of our future sales are sales of third party products. As such, we are open to the risk factors affecting our vendors’ results of operations including, but not limited to:

	•	that their business could be adversely affected by the general economic conditions and/or decreasing demand in the information technology market;
	•	their failure to keep pace with the rapid industry and technological changes;
	•	their failure to be competitive in terms of product pricing;
	•	that their research and development efforts may not be successful;

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	•	their inability to compete effectively or meet future capital requirements;
	•	that their suppliers may not be able to meet their requirements;
	•	their difficulty in managing their operation or any future growth;
	•	their inability to retain or attract key personnel;
	•	financial difficulty they may experience;
	•	that their business could be adversely affected as a result of the risks associated with acquisitions, investments, alliances, litigation and changes in regulations; and
	•	that their business may suffer if they cannot protect their intellectual property.

      Our business activities may infringe upon the proprietary rights of others, and other parties may assert infringement claims against us. Though the majority of our future product sales will be third party products, and the applicable third party manufacturers will defend their own intellectual property rights, in the event such claims are made against our suppliers, we may be faced with a situation in which we cannot sell the products and thus our results of operations could be significantly adversely affected. In addition, in the future, we may receive communications from other parties asserting that our own intellectual property infringes on their proprietary rights. If we become liable to any third party for infringing its intellectual property rights, we could be required to pay substantial damage awards and to develop non-infringing technology, obtain licenses, or to cease selling the applications that contain the infringing intellectual property. Litigation is subject to inherent uncertainties, and any outcome unfavorable to us could materially harm our business. Furthermore, we could incur substantial costs in defending against any intellectual property litigation, and these costs could increase significantly if any dispute were to go to trial. Our defense of any litigation, regardless of the merits of the complaint, likely would be time-consuming, costly, and a distraction to our management personnel. Adverse publicity related to any intellectual property litigation also could harm the sale of our products and damage our competitive position.

      Our solutions must comply with current industry standards and government regulations in the U.S. and internationally. Any new products and product enhancements that we sell in the future also must meet industry standards and government regulations at the time they are introduced. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals could materially harm our business. In addition, such compliance may be time-consuming and costly.

      Our solutions integrate SAN, NAS, DAS and CAS technologies into single storage architecture. Components of these architectures must comply with evolving industry standards. We also depend upon our supporters that provide us with products to sell to meet these standards. If our suppliers or customers do not support the same industry standards that we do, or if competing standards emerge that we do not support, market acceptance of our products could suffer.

      Ralph J. Yarro III, one of our Directors, is also the Director and President and Chief Executive Officer of Canopy which beneficially owns approximately 44% of our outstanding common stock. Canopy is able to substantially affect our actions which require stockholder approval, including the election of the Board of Directors and the approval of significant corporate transactions. This concentration of ownership may delay or prevent a change in control of the Company and will make some transactions difficult or impossible without Canopy’s support.

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      The value of an investment in our company could decline due to the impact of any of the following factors upon the market price of our common stock:

	•	variations between our actual and anticipated earnings;
	•	the timing and announcement of new products or services by us, our partners or by our competitors;
	•	services or technological innovations by us, our partners or by our competitors;
	•	failure of our results from operations to meet the expectations of public market analysts and investors;
	•	changes in revenue or earnings estimates by the investment community;
	•	speculation in the press or investment community about our business or our competitive position;
	•	the volume of trading in our common stock; and
	•	market conditions broadly and the trading price of shares of technology companies generally.

      In addition, stock markets, particularly the Nasdaq SmallCap Market, have experienced extreme price and volume fluctuations, and the market prices of securities of companies such as ours have been highly volatile. These fluctuations have often been unrelated to the operating performance of such companies. Fluctuations such as these may affect the market price of our common stock. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and could divert our management’s attention and resources.

      Our securities have been trading on the Nasdaq SmallCap Market since August 16, 2002. We are currently in compliance with Nasdaq SmallCap Market continued listing requirements. However, we failed to comply with Nasdaq Marketplace Rules particularly with the minimum bid price requirement in fiscal year 2002, and may once again fail to comply with the minimum bid price requirement, or other continued listing requirements of the Nasdaq SmallCap Market. If that happens and we do not regain compliance by the end of the applicable grace period to regain compliance, our stock will be delisted and we would likely seek listing of our common stock on the over-the-counter market, which is viewed by many investors as a less liquid marketplace. As a result, the price per share of our common stock would likely decrease materially and, the trading market for our common stock, our ability to issue additional securities and our ability to secure additional financing would likely be materially and adversely affected.

      Our restated certificate of incorporation and amended and restated bylaws contain various provisions, including notice provisions, provisions for staggered terms of office of the board of directors, and provisions authorizing us to issue preferred stock, that may make it more difficult for a third party to acquire, or may discourage acquisition bids for, our company. Also, the rights of holders of our common stock may be affected adversely by the rights of holders of any preferred stock that we may issue in the future that would be senior to the rights of the holders of our common stock. Furthermore, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

      Our European operations transact in foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound Sterling and the Euro. In the prior year, in order to minimize the risk of foreign exchange loss, we entered into foreign currency forward contracts. However, in order to conserve cash, we ended our hedging program in fiscal year 2003.

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      Our exposure to short-term interest rate fluctuations is limited to our short-term borrowings under our line of credit. Our line of credit allows borrowings up to $7.0 million and therefore a 1% increase in interest rates would increase annual interest expense by $0.07 million if the line of credit were fully utilized.

      The information required by this Item is incorporated herein by reference to the consolidated financial statements and supplementary data listed in Item 15(a)(1) and 15(a)(2) of Part IV of this report.

      Effective September 25, 2003, we dismissed KPMG LLP (“KPMG”) as our certifying accountants. Our Audit Committee and Board of Directors approved this action.

      The reports of KPMG on our financial statements for the past two fiscal years ended April 6, 2002, and April 5, 2003, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

      During our two most recent fiscal years ended April 6, 2002, and April 5, 2003, and the subsequent interim period through September 25, 2003, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference thereto in connection with its reports on the financial statements for such years.

      On September 30, 2003, we engaged Grant Thornton LLP as our new independent accountant. Our Audit Committee and Board of Directors approved this action.

      We have agreed to indemnify and hold KPMG harmless against and from any and all legal costs and expenses incurred by KPMG in a successful defense of any legal action or proceeding that arises as a result of KPMG’s consent to the inclusion of its audit report on the Company’s past financial statements included in this Form 10-K.

Evaluation of Disclosure Controls and Procedures

      The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic filings.

Changes in Internal Control Over Financial Reporting

      There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

      The information required hereunder is incorporated by reference from the information contained in the sections entitled “Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in MTI’s definitive Proxy Statement for its 2004 Annual Meeting of the Stockholders to be held on September 8, 2004, to be filed with the Securities and Exchange Commission.

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      The information required hereunder is incorporated by reference from the information contained in the sections entitled “Compensation of Directors and Executive Officers and Other Information,” in MTI’s definitive Proxy Statement for its 2004 Annual Meeting of the Stockholders to be held on September 8, 2004, to be filed with the Securities and Exchange Commission.

      The information required hereunder is incorporated by reference from the information contained in the section entitled “Voting Securities and Principal Holders Thereof” in MTI’s definitive Proxy Statement for its 2004 Annual Meeting of the Stockholders to be held on September 8, 2004, to be filed with the Securities and Exchange Commission.

Securities Authorized for Issuance

      The following table sets forth certain information as of April 3, 2004, with respect to equity compensation plans under which our equity securities are authorized for issuance:

(1)	The 2001 Non-Employee Director Option Program functions as part of the 2001 Stock Incentive Plan.
(2)	5,757,098 shares and 375,000 shares related to the 2001 Stock Incentive Plan (the “SIP”) and the 2001 Non-Employee Director Option Program (the “Program”), respectively.

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(3)	The maximum aggregate number of shares allocated for the SIP increases by 3% annually, subject to terms and conditions of the SIP. 1,095,385 shares and 66,666 shares related to the SIP and the Program, respectively.

      The information required hereunder is incorporated by reference from the information contained in the section entitled “Certain Transactions and Related Transactions” in MTI’s definitive Proxy Statement for its 2004 Annual Meeting of the Stockholders to be held on September 8, 2004, to be filed with the Securities and Exchange Commission.

      The information required hereunder is incorporated by reference from the information contained in the section entitled “Ratification of the Appointment by the Audit Committee of Independent Auditors” in MTI’s definitive Proxy Statement for its 2004 Annual Meeting of the Stockholders to be held on September 8, 2004, to be filed with the Securities and Exchange Commission.

PART IV

      The following Consolidated Financial Statements of MTI and the Reports of Independent Registered Public Accounting Firms are attached hereto beginning on pages 37 and 34, respectively.

      (a)(1) Consolidated Financial Statements:

      Report of Independent Certified Public Accountants — Grant Thornton LLP

      Independent Auditors’ Report — BDO Simpson Xavier

      Report of Independent Registered Public Accounting Firm — KPMG LLP

      Consolidated Balance Sheets as of April 3, 2004 and April 5, 2003

      Consolidated Statements of Operations for the fiscal years ended 2004, 2003 and 2002

      Consolidated Statements of Stockholders’ Equity for the fiscal years ended 2004, 2003 and 2002

      Consolidated Statements of Cash Flows for the fiscal years ended 2004, 2003 and 2002

      Notes to Consolidated Financial Statements

      (2) The following financial statement schedule for fiscal years 2004, 2003 and 2002 is submitted herewith:

	Schedule II — Valuation and Qualifying Accounts (See page 63)
	All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.

      (3) Exhibits

	An exhibit index has been filed as part of this report and is incorporated herein by this reference.

      (b) Reports on Form 8-K

      A Current Report on Form 8-K, dated February 17, 2004, was filed during the fourth quarter of 2004 pursuant to Item 12 containing the press release relating to the Company’s financial results for the quarterly period ended January 3, 2004. (The information in the foregoing report on Form 8-K, including all exhibits thereto, was furnished pursuant to Item 9 or 12 of Form 8-K and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference herein.)

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of July 2004.

	MTI TECHNOLOGY CORPORATION

	By:	/s/ THOMAS P. RAIMONDI, JR.

	Thomas P. Raimondi, Jr.
	Chairman, President and Chief Executive Officer

POWER OF ATTORNEY

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below, constitutes and appoints Thomas P. Raimondi, Jr. and Todd Schaeffer, jointly and severally, attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities to sign any and all amendments to this Report, and to file the same, and all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, and his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

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INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders

      We have audited the accompanying consolidated balance sheet of MTI Technology Corporation and subsidiaries as of April 3, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of MTI France SA, a consolidated subsidiary, which statements reflect total assets and revenue constituting 18% and 16%, respectively, in 2004 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for MTI France SA, is based solely on the report of the other auditors.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MTI Technology Corporation and subsidiaries as of April 3, 2004, and the results of their consolidated operations and their consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

      We have also audited Schedule II of MTI Technology Corporation for the year ended April 3, 2004. In our opinion, this schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

	/s/     GRANT THORNTON LLP

Irvine, California

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders

      We have audited the balance sheet of MTI France SA as of April 3, 2004, and the related statements of operations, stockholders’ equity and cash flows for year ended April 3, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of April 3, 2004, and the results of its operations and cash flows for the year ended April 3, 2004, in conformity with accounting principles generally accepted in the United States of America.

	/s/     BDO SIMPSON XAVIER

Dublin, Ireland

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

      We have audited the accompanying consolidated balance sheet of MTI Technology Corporation and subsidiaries as of April 5, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended April 5, 2003. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule of Valuation and Qualifying Accounts for the years ended April 5, 2003 and April 6, 2002. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTI Technology Corporation and subsidiaries as of April 5, 2003 and the results of their operations and their cash flows for each of the years in the two-year period ended April 5, 2003, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      As discussed in note 1 to the consolidated financial statements, effective April 8, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

	/s/     KPMG LLP

Costa Mesa, California

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MTI TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS