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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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