MTI TECHNOLOGY CORP - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2004

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

For the transition period from to

Commission file number 0-23418

MTI TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		95-3601802
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

14661 Franklin Avenue
Tustin, California 92780
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (714) 481-7800

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

The number of shares outstanding of the issuer’s common stock, $.001 par value, as of July 3, 2004 was 34,581,655.

PART I

FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

MTI TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	July 3,			April 3,
	2004			2004
	(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents	$	15,752		$	3,017
Accounts receivable, less allowance for doubtful accounts and sales returns of $440 and $437 at July 3, 2004 and April 3, 2004, respectively		19,998			22,352
Inventories		6,839			6,186
Income tax refund and interest receivable		55			2,464
Prepaid expenses and other receivables		6,346			5,792

Total current assets		48,990			39,811
Property, plant and equipment, net		1,223			1,401
Goodwill, net		5,184			5,184
Other		221			216

	$	55,618		$	46,612

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	3,933		$	3,933
Current portion of capital lease obligations		181			176
Accounts payable		11,686			13,650
Accrued liabilities		6,569			6,097
Accrued restructuring charges		1,649			1,830
Deferred revenue		10,119			11,382

Total current liabilities		34,137			37,068
Capital lease obligations, less current portion		44			95
Deferred revenue		2,685			2,308

Total liabilities		36,866			39,471

Redeemable convertible preferred stock, 567 and 0 shares issued and outstanding at July 3, 2004 and April 3, 2004, respectively		13,408			—

Commitments and contingencies		—			—

Stockholders’ equity:
Preferred stock, $.001 par value; authorized 5,000 shares; issued and outstanding 567 and 0 shares at July 3, 2004 and April 3, 2004, respectively, included in redeemable convertible preferred stock above		—			—
Common stock, $.001 par value; authorized 80,000 shares; issued (including treasury shares) and outstanding 34,582 and 34,473 shares at July 3, 2004 and April 3, 2004, respectively		34			34
Additional paid-in capital		142,146			136,316
Accumulated deficit		(133,461	)		(126,149	)
Accumulated other comprehensive loss		(3,176	)		(3,060	)
Deferred compensation		(199	)		—

Total stockholders’ equity		5,344			7,141

	$	55,618		$	46,612

See accompanying notes to condensed consolidated financial statements.

MTI TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	THREE MONTHS ENDED
	JULY 3,			JULY 5,
	2004			2003
Net product revenue	$	17,204		$	8,328
Service revenue		8,832			9,450

Total revenue, including $0 and $58 from related parties in fiscal 2005 and 2004, respectively		26,036			17,778

Product cost of revenue		13,096			5,982
Service cost of revenue		6,893			6,384

Total cost of revenue		19,989			12,366

Gross profit		6,047			5,412

Operating expenses:
Selling, general and administrative		7,744			7,144
Research and development		—			776
Restructuring charges		—			40

Total operating expenses		7,744			7,960

Operating loss		(1,697	)		(2,548	)

Interest and other expense, net		(147	)		(30	)
Gain (loss) on foreign currency transactions		53			(273	)

Loss before income taxes		(1,791	)		(2,851	)
Income tax expense (benefit)		(2	)		6

Net loss		(1,789	)		(2,857	)

Beneficial conversion feature related to preferred stock		(5,471	)		—
Dividend on preferred stock		(53	)		—

Net loss applicable to common shareholders	$	(7,313	)	$	(2,857	)

Net loss per share applicable to common shareholders:
Basic and diluted	$	(0.21	)	$	(0.09	)

Weighted-average shares used in per share computations:
Basic and diluted		34,555			32,974

See accompanying notes to condensed consolidated financial statements.

MTI TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	THREE MONTHS ENDED
	JULY 3,			JULY 5,
	2004			2003
Cash flows from operating activities:
Net loss	$	(1,789	)	$	(2,857	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		252			496
Provision for (recovery of) sales returns and losses on accounts receivable, net		(9	)		20
Provision for inventory obsolescence		408			500
Loss on disposal of fixed assets		—			253
Restructuring charges		—			40
Changes in assets and liabilities:
Accounts receivable		2,285			1,370
Inventories		(1,074	)		(60	)
Prepaid expenses, other receivables and other assets		1,813			(343	)
Accounts payable		(2,007	)		(2,146	)
Accrued and other liabilities		(799	)		299
Deferred revenue		(960	)		(1,218	)

Net cash used in operating activities		(1,880	)		(3,646	)

Cash flows from investing activities:
Capital expenditures for property, plant and equipment		(101	)		(197	)
Proceeds from the sale of property, plant and equipment		31			—

Net cash used in investing activities		(70	)		(197	)

Cash flows from financing activities:
Proceeds from issuance of common stock, treasury stock and exercise of options and warrants		126			28
Proceeds from issuance of preferred stock, net of transaction costs		14,556			—
Payment of capital lease obligations		(46	)		(42	)

Net cash provided by (used in) financing activities		14,636			(14	)

Effect of exchange rate changes on cash		49			664

Net increase (decrease) in cash and cash equivalents		12,735			(3,193	)

Cash and cash equivalents at beginning of period		3,017			9,833

Cash and cash equivalents at end of period	$	15,752		$	6,640

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	113		$	40
Income taxes		—			—
Non-cash investing and financing activities:
Accrued dividends on preferred stock	$	53		$	—

See accompanying notes to condensed consolidated financial statements.

MTI TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited – dollar amounts in thousands)

1. Summary of Significant Accounting Policies

Company

MTI Technology Corporation (“MTI” or the “Company”) is a system integrator providing storage solutions for the mid-range enterprise market. Historically, the Company partnered with independent storage technology companies to develop, integrate and maintain high-performance, high-availability storage solutions for mid-range and Global 2000 companies worldwide. The Company continues to service select third party hardware and software, and its Professional Services organization provides planning, consulting and implementation support for storage products from other leading vendors. The Company believes 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, the Company entered into a reseller agreement with EMC Corporation, a global leader in information storage systems, software, networks and services, and has become a reseller and service provider of EMC Automated Networked Storage^TM systems and software. Although the Company intends to focus primarily on EMC products, it will continue to support and service customers that continue to use MTI-branded RAID controller technology and partnered independent storage technology. The Company believes that it can differentiate itself through its 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.

Overview

The interim condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such SEC rules and regulations; nevertheless, the management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended April 3, 2004. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position of the Company as of July 3, 2004 and the results of operations and cash flows for the three-month periods ended July 3, 2004 and July 5, 2003. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.

References to dollar amounts in this financial statement section are in thousands, except per share data, unless otherwise specified. Certain prior year amounts have been reclassified to conform with the fiscal year 2005 presentation.

Revenue recognition

The Company records product sales after the inventory has cleared customs, if necessary, and upon pickup 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. The Company records revenue from equipment maintenance contracts as deferred revenue when billed and recognizes the revenue as earned over the period in which the services are provided, primarily straight-line over the term of the contract.

The Company considers 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, the Company employs the residual method, whereby it defers the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined by examining renewed service contracts and based upon the price charged when the element is sold separately or prices provided by vendors if sufficient standalone sales information is not available. Undelivered elements typically include installation, training, warranty, maintenance and professional services.

For sales transactions that include software products which are more than incidental to the overall product solution, the Company applies 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 its part related to the sale and the resulting receivable is deemed collectible, net of an allowance for returns and cancellations. The Company recognizes 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.

For certain sales transactions, an escrow account is utilized to facilitate payment obligations between all parties involved in the transaction. In these transactions, generally the end-user or lessor will fund payment into the escrow account and the bank will distribute the payment to each party in the transaction pursuant to mutually agreed upon escrow instructions. The Company only receives cash which represents the net margin on the sales transaction. For these transactions, the Company recognizes revenue on a net basis as the Company does not bear credit risk in the transaction.

The Company may allow customers that 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 in accordance with EITF 00-21. Thus, product revenue from trade-in transactions is recognized net of trade-in value.

The Company considers sales transactions that are initiated by EMC and jointly negotiated and closed by EMC and MTI’s sales-force as Partner Assisted Transactions (“PATs”). The Company recognizes revenue from PATs on a gross basis because it bears the risk of returns and collectability of the full accounts receivable. Product revenue of the delivered items is recorded at residual value upon pickup by a common carrier for FOB origin shipments. For FOB destination shipments, product revenue is recorded upon delivery to the customer. If the Company subcontracts the undelivered items such as maintenance and professional services to EMC or other third parties, it records the costs of those items as deferred costs and amortizes the costs using the straight-line method over the life of the contract. The Company defers the revenue for the undelivered items at fair value based upon list prices with EMC according to EITF 00-21. At times, MTI’s customers prefer to enter into service agreements directly with EMC. In this instance, the Company assigns the obligation to perform services to EMC, or other third parties, and therefore, it does 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 MTI. In this case, the Company defers the revenue for the professional services at fair value according to EITF 00-21.

Accounting for stock-based compensation

The Company accounts for its stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations, rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards No. (Statement) 123, “Accounting for Stock Based Compensation.” APB 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of stock options granted and the Company

recognizes compensation expense in its statement of operations using the straight-line method over the vesting period for fixed awards. Under Statement 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Statement 148 amends Statement 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. The Company adopted the disclosure provisions of Statement 148 as of April 5, 2003, and continues to follow APB 25 for stock-based employee compensation.

The following table shows pro forma net loss as if the fair value method of Statement 123 had been used to account for stock-based compensation expense:


	THREE MONTHS ENDED
	JULY 3,			JULY 5,
	2004			2003
Net loss applicable to common shareholders, as reported	$	(7,313	)	$	(2,857	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		—			—
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(903	)		(1,623	)

Pro forma net loss applicable to common shareholders	$	(8,216	)	$	(4,480	)

Net loss per share applicable to common shareholders:
Basic and diluted, as reported	$	(0.21	)	$	(0.09	)

Basic and diluted, pro forma	$	(0.25	)	$	(0.14	)

The fair value of the options granted has been estimated at the date of grant using the Black-Scholes option-pricing model. The following represents the weighted-average fair value of options granted and the assumptions used for the calculations:


	JULY 3,			JULY 5,
	2004			2003
Weighted-average fair value of options granted	$	2.07		$	0.69
Expected volatility		0.7			0.9
Risk-free interest rate		3.62	%		2.63	%
Expected life (years)		5.0			5.0
Dividend yield		—			—

The Black-Scholes option valuation model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility.

2. Restructuring and Other Reductions in Staff

The activity in accrued restructuring for the three-months ended July 3, 2004, was as follows:


Abandoned facilities:
Balance as of April 3, 2004	$	1,830
Less: Current quarter utilization		(181	)

Balance as of July 3, 2004	$	1,649

The remaining accrual at July 3, 2004 is related to remaining lease payments at abandoned or under-utilized office facilities.

3. Inventories

Inventories are summarized as follows:


	JULY 3,		APRIL 3,
	2004		2004
Service spares and components	$	3,008	$	3,147
Work-in-process		53		2
Finished goods		3,778		3,037

	$	6,839	$	6,186

The above amounts are shown net of an inventory reserve for slow moving and obsolete items of $4,698 and $5,387 as of July 3, 2004 and April 3, 2004, respectively, of which $3,551 and $4,219 related to service spares and component inventory.

4. Composition of Certain Financial Statement Captions

Prepaid expenses and other receivables are summarized as follows:


	JULY 3,		APRIL 3,
	2004		2004
Prepaid maintenance contracts	$	4,235	$	4,455
Other		2,111		1,337

	$	6,346	$	5,792

Accrued liabilities are summarized as follows:


	JULY 3,		APRIL 3,
	2004		2004
Salaries and benefits	$	2,816	$	2,546
Commissions		366		478
Sales tax		1,369		2,038
Warranty costs		449		603
Accrued stock issuance fees (note 12)		1,049		—
Other		520		432

	$	6,569	$	6,097

Product warranties

For proprietary hardware products, the Company provides its customers with a warranty against defects for one year domestically and for two years internationally. Currently, the Company is selling most EMC hardware products with up to 3-year 24x7 warranties and EMC software products with 90-day warranties. The Company accrues warranty expense at the time revenue is recognized and maintains a warranty accrual for the estimated future warranty obligation based upon the relationship between historical and anticipated costs and sales volumes. Upon expiration of the warranty, the Company may sell extended maintenance contracts to its customers. The Company records revenue from equipment maintenance contracts as deferred revenue when billed and it recognizes this revenue as earned over the period in which the services are provided, primarily straight-line over the term of the contract.

The changes in the Company’s warranty obligation are as follows:


	THREE MONTHS ENDED
	JULY 3,			April 3,
	2004			2004
Balance at beginning of period	$	603		$	876
Current period warranty charges		—			513
Current period utilization		(154	)		(786	)

	$	449		$	603

In the third quarter of fiscal year 2004, the Company reviewed its historical costs of warranty for EMC products sold since the inception of the reseller agreement with EMC on March 31, 2003. The Company updated this review in the fourth quarter of fiscal year 2004 and in the first quarter of fiscal year 2005. Based on the reviews, and given the favorable warranty rate experienced on EMC products to date, the Company 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 and in the first quarter of fiscal year 2005. The Company will continue to assess the adequacy of the warranty accrual each quarter and, based upon the Company’s current analysis and expected future revenue, plans to record warranty provision on EMC products sold beginning in the second quarter of fiscal year 2005.

5. Line of Credit

On December 5, 2002, the Company paid off the outstanding $1,685 loan with the Canopy Group, Inc. (“Canopy”). This loan agreement remains in effect, but with a zero balance and the Company may not re-borrow any funds thereunder. However, pursuant to the loan agreement, as amended in June 2004, Canopy has guarantied a letter of credit in support of the Company’s obligations to Comerica Bank discussed below and the Company’s obligations to Canopy are secured by a security interest in substantially all of the Company’s assets.

In November 2002, the Company entered into an agreement (the “Comerica Loan Agreement”) with Comerica Bank for a line of credit of $7,000 at an interest rate equal to the prime rate. The line of credit is secured by a letter of credit that is guaranteed by Canopy. Canopy’s guaranty matured on June 30, 2004 and has been extended until June 30, 2005. On June 18, 2004, the Company received an extension on the letter of credit for $7,000 until June 30, 2005. Also on June 18, 2004, the Company received an additional renewal on the Comerica line of credit for $7,000 million until May 31, 2005. As of July 3, 2004, there was $3,933 outstanding under the Comerica Loan Agreement.

The Comerica Loan Agreement contains negative covenants placing restrictions on the Company’s 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.

6. Income Taxes

On August 13, 2002, the Company received a notice of deficiency in its federal income tax due for fiscal year 1992 in the amount of $1,119. The notice of deficiency also advised the Company of related examination changes to its taxable income as reported for fiscal years 1993 through fiscal year 1995. The Company filed a timely petition in the United States Tax Court asking for a review of the IRS determinations. During the fourth quarter of fiscal year 2004, the Company received a decision from the United States Tax Court which obligated the Company to pay an additional $193 in income tax due for fiscal year 1992. The Company had accrued income taxes of $1,655 related to the IRS audits for fiscal years 1992 through fiscal year 1996. During the third quarter of fiscal year 2004, the Company reduced this accrual to $193 and recognized an income tax benefit of $1,462. Additionally, the Company was to receive income tax refunds for fiscal years 1982 through 1990 totaling $1,665. The income tax refunds allowed by the

IRS are based upon the carryback of the net operating losses which were confirmed by the IRS for fiscal years 1993, 1994 and 1995. During the third quarter of fiscal year 2004, the Company accrued the income tax refunds of $1,668 and recorded an income tax benefit in the same amount. In the fourth quarter of fiscal year 2004, the Company received the interest calculation from the IRS and accrued the interest receivable of $741 related to the income tax refunds and recognized interest income in the same amount. During the first quarter of fiscal year 2005, the Company received all outstanding receivables from the IRS related to these matters.

The IRS is conducting an examination of the Company’s fiscal years 1996 and 1997 federal income tax returns. During May 2004, the Company received notice from the IRS of proposed adjustments for fiscal year 1996. The Company, after consultation with tax counsel, continues to believe in the propriety of its positions as set forth in its tax return and plans to file a protest with the IRS regarding these proposed adjustments. The Company believes the ultimate resolution of the examination will not result in a material impact on the Company’s consolidated financial position, results of operations or liquidity.

In the third quarter of fiscal year 2004, the Company received notice of re-assessment from the French Treasury. The French tax authorities have argued that the Company’s French subsidiary should have paid VAT on the waiver of intercompany debts granted by its U.S. parent company and by its Irish subsidiary. The amount of re-assessment is $79 and $605 related to fiscal years 2002 and 2001, respectively, plus penalties and interest. Through discussions with its tax advisors, the Company believes that intercompany debt waivers are not subject to VAT and therefore believes that this re-assessment is without merit and it is not probable that it will be required to pay the re-assessed amounts. Therefore, the Company has not recorded a liability for such amounts at July 3, 2004. The Company has appealed this re-assessment.

7. Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share:


	THREE MONTHS ENDED
	JULY 3,			JULY 5,
	2004			2003
Numerator:
Net loss	$	(1,789	)	$	(2,857	)
Beneficial conversion feature related to preferred stock		(5,471	)		—
Dividend on preferred stock		(53	)		—

Net loss applicable to common shareholders	$	(7,313	)	$	(2,857	)

Denominator:
Denominator for net loss per share, basic and diluted weighted-average shares used in per share computations		34,555			32,974

Net loss per share applicable to common shareholders, basic and diluted	$	(0.21	)	$	(0.09	)

Options and warrants to purchase 12,493 shares of common stock were outstanding at July 3, 2004, but were not included in the computation of diluted net loss per share for the three months ended July 3, 2004, because the effect would be antidilutive.

Options and warrants to purchase 10,286 shares of common stock were outstanding at July 5, 2003, but were not included in the computation of diluted net loss per share for the three months ended July 5, 2003, because the effect would be antidilutive.

8. Business Segment and International Information

The Company is a systems integrator providing storage solutions for the mid-range enterprise market and has one reportable business segment. The Company’s operations are structured to achieve consolidated objectives. As a result, significant interdependence and overlap exists among the Company’s geographic areas. Accordingly, revenue, operating loss and identifiable assets shown for each geographic area may not be the


			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of July 3, 2004 and April 3, 2004		3
		Condensed Consolidated Statements of Operations for the Three Months Ended July 3, 2004 and July 5, 2003		4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 3, 2004 and July 5, 2003		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		22
	Item 4.	Controls and Procedures		23
PART II.	OTHER INFORMATION
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		24
	Item 6.	Exhibits and Reports on Form 8-K		24
SIGNATURES				25
EXHIBIT INDEX				26
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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

1.		Summary of Significant Accounting Policies

		*Company*

		MTI Technology Corporation (“MTI” or the “Company”) is a system integrator providing storage solutions for the mid-range enterprise market. Historically, the Company partnered with independent storage technology companies to develop, integrate and maintain high-performance, high-availability storage solutions for mid-range and Global 2000 companies worldwide. The Company continues to service select third party hardware and software, and its Professional Services organization provides planning, consulting and implementation support for storage products from other leading vendors. The Company believes 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, the Company entered into a reseller agreement with EMC Corporation, a global leader in information storage systems, software, networks and services, and has become a reseller and service provider of EMC Automated Networked Storage^TM systems and software. Although the Company intends to focus primarily on EMC products, it will continue to support and service customers that continue to use MTI-branded RAID controller technology and partnered independent storage technology. The Company believes that it can differentiate itself through its 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.

		*Overview*

		The interim condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such SEC rules and regulations; nevertheless, the management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended April 3, 2004. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position of the Company as of July 3, 2004 and the results of operations and cash flows for the three-month periods ended July 3, 2004 and July 5, 2003. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.

		References to dollar amounts in this financial statement section are in thousands, except per share data, unless otherwise specified. Certain prior year amounts have been reclassified to conform with the fiscal year 2005 presentation.

		*Revenue recognition*

		The Company records product sales after the inventory has cleared customs, if necessary, and upon pickup 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. The Company records revenue from equipment maintenance contracts as deferred revenue when billed and recognizes the revenue as earned over the period in which the services are provided, primarily straight-line over the term of the contract.

		The Company considers 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, the Company employs the residual method, whereby it defers the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined by examining renewed service contracts and based upon the price charged when the element is sold separately or prices provided by vendors if sufficient standalone sales information is not available. Undelivered elements typically include installation, training, warranty, maintenance and professional services.

		For sales transactions that include software products which are more than incidental to the overall product solution, the Company applies 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 its part related to the sale and the resulting receivable is deemed collectible, net of an allowance for returns and cancellations. The Company recognizes 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.

		For certain sales transactions, an escrow account is utilized to facilitate payment obligations between all parties involved in the transaction. In these transactions, generally the end-user or lessor will fund payment into the escrow account and the bank will distribute the payment to each party in the transaction pursuant to mutually agreed upon escrow instructions. The Company only receives cash which represents the net margin on the sales transaction. For these transactions, the Company recognizes revenue on a net basis as the Company does not bear credit risk in the transaction.

		The Company may allow customers that 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 in accordance with EITF 00-21. Thus, product revenue from trade-in transactions is recognized net of trade-in value.

		The Company considers sales transactions that are initiated by EMC and jointly negotiated and closed by EMC and MTI’s sales-force as Partner Assisted Transactions (“PATs”). The Company recognizes revenue from PATs on a gross basis because it bears the risk of returns and collectability of the full accounts receivable. Product revenue of the delivered items is recorded at residual value upon pickup by a common carrier for FOB origin shipments. For FOB destination shipments, product revenue is recorded upon delivery to the customer. If the Company subcontracts the undelivered items such as maintenance and professional services to EMC or other third parties, it records the costs of those items as deferred costs and amortizes the costs using the straight-line method over the life of the contract. The Company defers the revenue for the undelivered items at fair value based upon list prices with EMC according to EITF 00-21. At times, MTI’s customers prefer to enter into service agreements directly with EMC. In this instance, the Company assigns the obligation to perform services to EMC, or other third parties, and therefore, it does 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 MTI. In this case, the Company defers the revenue for the professional services at fair value according to EITF 00-21.

		*Accounting for stock-based compensation*

		The Company accounts for its stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations, rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards No. (Statement) 123, “Accounting for Stock Based Compensation.” APB 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of stock options granted and the Company

		recognizes compensation expense in its statement of operations using the straight-line method over the vesting period for fixed awards. Under Statement 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Statement 148 amends Statement 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. The Company adopted the disclosure provisions of Statement 148 as of April 5, 2003, and continues to follow APB 25 for stock-based employee compensation.

		The following table shows pro forma net loss as if the fair value method of Statement 123 had been used to account for stock-based compensation expense:

		The above amounts are shown net of an inventory reserve for slow moving and obsolete items of $4,698 and $5,387 as of July 3, 2004 and April 3, 2004, respectively, of which $3,551 and $4,219 related to service spares and component inventory.

4.		Composition of Certain Financial Statement Captions

		Prepaid expenses and other receivables are summarized as follows:

		*Product warranties*

		For proprietary hardware products, the Company provides its customers with a warranty against defects for one year domestically and for two years internationally. Currently, the Company is selling most EMC hardware products with up to 3-year 24x7 warranties and EMC software products with 90-day warranties. The Company accrues warranty expense at the time revenue is recognized and maintains a warranty accrual for the estimated future warranty obligation based upon the relationship between historical and anticipated costs and sales volumes. Upon expiration of the warranty, the Company may sell extended maintenance contracts to its customers. The Company records revenue from equipment maintenance contracts as deferred revenue when billed and it recognizes this revenue as earned over the period in which the services are provided, primarily straight-line over the term of the contract.

		In the third quarter of fiscal year 2004, the Company reviewed its historical costs of warranty for EMC products sold since the inception of the reseller agreement with EMC on March 31, 2003. The Company updated this review in the fourth quarter of fiscal year 2004 and in the first quarter of fiscal year 2005. Based on the reviews, and given the favorable warranty rate experienced on EMC products to date, the Company 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 and in the first quarter of fiscal year 2005. The Company will continue to assess the adequacy of the warranty accrual each quarter and, based upon the Company’s current analysis and expected future revenue, plans to record warranty provision on EMC products sold beginning in the second quarter of fiscal year 2005.

5.		Line of Credit

		On December 5, 2002, the Company paid off the outstanding $1,685 loan with the Canopy Group, Inc. (“Canopy”). This loan agreement remains in effect, but with a zero balance and the Company may not re-borrow any funds thereunder. However, pursuant to the loan agreement, as amended in June 2004, Canopy has guarantied a letter of credit in support of the Company’s obligations to Comerica Bank discussed below and the Company’s obligations to Canopy are secured by a security interest in substantially all of the Company’s assets.

		In November 2002, the Company entered into an agreement (the “Comerica Loan Agreement”) with Comerica Bank for a line of credit of $7,000 at an interest rate equal to the prime rate. The line of credit is secured by a letter of credit that is guaranteed by Canopy. Canopy’s guaranty matured on June 30, 2004 and has been extended until June 30, 2005. On June 18, 2004, the Company received an extension on the letter of credit for $7,000 until June 30, 2005. Also on June 18, 2004, the Company received an additional renewal on the Comerica line of credit for $7,000 million until May 31, 2005. As of July 3, 2004, there was $3,933 outstanding under the Comerica Loan Agreement.

		The Comerica Loan Agreement contains negative covenants placing restrictions on the Company’s 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.

6.		Income Taxes

		On August 13, 2002, the Company received a notice of deficiency in its federal income tax due for fiscal year 1992 in the amount of $1,119. The notice of deficiency also advised the Company of related examination changes to its taxable income as reported for fiscal years 1993 through fiscal year 1995. The Company filed a timely petition in the United States Tax Court asking for a review of the IRS determinations. During the fourth quarter of fiscal year 2004, the Company received a decision from the United States Tax Court which obligated the Company to pay an additional $193 in income tax due for fiscal year 1992. The Company had accrued income taxes of $1,655 related to the IRS audits for fiscal years 1992 through fiscal year 1996. During the third quarter of fiscal year 2004, the Company reduced this accrual to $193 and recognized an income tax benefit of $1,462. Additionally, the Company was to receive income tax refunds for fiscal years 1982 through 1990 totaling $1,665. The income tax refunds allowed by the

		IRS are based upon the carryback of the net operating losses which were confirmed by the IRS for fiscal years 1993, 1994 and 1995. During the third quarter of fiscal year 2004, the Company accrued the income tax refunds of $1,668 and recorded an income tax benefit in the same amount. In the fourth quarter of fiscal year 2004, the Company received the interest calculation from the IRS and accrued the interest receivable of $741 related to the income tax refunds and recognized interest income in the same amount. During the first quarter of fiscal year 2005, the Company received all outstanding receivables from the IRS related to these matters.

		The IRS is conducting an examination of the Company’s fiscal years 1996 and 1997 federal income tax returns. During May 2004, the Company received notice from the IRS of proposed adjustments for fiscal year 1996. The Company, after consultation with tax counsel, continues to believe in the propriety of its positions as set forth in its tax return and plans to file a protest with the IRS regarding these proposed adjustments. The Company believes the ultimate resolution of the examination will not result in a material impact on the Company’s consolidated financial position, results of operations or liquidity.

		In the third quarter of fiscal year 2004, the Company received notice of re-assessment from the French Treasury. The French tax authorities have argued that the Company’s French subsidiary should have paid VAT on the waiver of intercompany debts granted by its U.S. parent company and by its Irish subsidiary. The amount of re-assessment is $79 and $605 related to fiscal years 2002 and 2001, respectively, plus penalties and interest. Through discussions with its tax advisors, the Company believes that intercompany debt waivers are not subject to VAT and therefore believes that this re-assessment is without merit and it is not probable that it will be required to pay the re-assessed amounts. Therefore, the Company has not recorded a liability for such amounts at July 3, 2004. The Company has appealed this re-assessment.

7.		Net Loss per Share

		The following table sets forth the computation of basic and diluted net loss per share:

		Options and warrants to purchase 12,493 shares of common stock were outstanding at July 3, 2004, but were not included in the computation of diluted net loss per share for the three months ended July 3, 2004, because the effect would be antidilutive.

		Options and warrants to purchase 10,286 shares of common stock were outstanding at July 5, 2003, but were not included in the computation of diluted net loss per share for the three months ended July 5, 2003, because the effect would be antidilutive.

8.		Business Segment and International Information

		The Company is a systems integrator providing storage solutions for the mid-range enterprise market and has one reportable business segment. The Company’s operations are structured to achieve consolidated objectives. As a result, significant interdependence and overlap exists among the Company’s geographic areas. Accordingly, revenue, operating loss and identifiable assets shown for each geographic area may not be the

		amounts which would have been reported if the geographic areas were independent of one another.

		Revenues are generally priced to recover cost, plus an appropriate mark-up for profit. Operating loss is revenue less cost of revenues and direct operating expenses.

		A summary of the Company’s operations by geographic area is presented below: