##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended April 6,
    2002                                                     
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to           .                                     

Commission file number 0-23418

MTI Technology Corporation

(Exact name of registrant as specified in its
charter)


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

4905 East La Palma Avenue

Anaheim, California 92807


(Address of principal executive offices, Zip
Code)


Registrants telephone number, including
area code:

(714) 970-0300


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

None


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

Common stock, $0.001 par value


(Title of class)


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 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

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
Registrant was $9,500,630 on June 14, 2002, based on the
closing sale price of such stock on The Nasdaq National Market.
The number of shares outstanding of Registrants Common
Stock, $0.001 par value, was 32,733,728 on June 14, 2002.

DOCUMENTS INCORPORATED BY REFERENCE:

|                                                            |  |           |     | 
|----------------------------------------------------------- |  | --------- | --- | 
|Document                                                    |  | Form 10-K
|                                                            |  |          
|Proxy Statement for 2002 Annual Meeting of
    Stockholders |  |           | III | 



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TABLE OF CONTENTS



|                              |                                                                                                       |  |  |  |  |  |  | 
|----------------------------- | ----------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                       
|                              | Item 1. Business                                                                                     
|                              | Item 2. Description of Property                                                                      
|                              | Item 3. Legal Proceedings                                                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                          
|PART II                      
|                              | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                    
|                              | Item 6. Selected Financial Data                                                                      
|                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations        
|                              | Item 7A. Quantitative and Qualitative Disclosures About Market Risks                                 
|                              | Item 8. Financial Statements and Supplementary Data                                                  
|                              | Item 9. Changes in and Disagreements with Independent Auditors on Accounting and Financial Disclosure
|PART III                     
|                              | Item 10. Directors and Executive Officers of the Registrant                                          
|                              | Item 11. Executive Compensation                                                                      
|                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                              
|                              | Item 13. Certain Relationships and Related Transactions                                              
|PART IV                      
|                              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                            
|SIGNATURES                   
|INDEX TO FINANCIAL STATEMENTS
|EXHIBIT 10.56                
|EXHIBIT 10.57                
|EXHIBIT 10.58                
|EXHIBIT 10.59                
|EXHIBIT 10.60                
|EXHIBIT 21                   
|EXHIBIT 23                   



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PART I




Item
1.     Business

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
4905 East La Palma Avenue, Anaheim, California 92807. Our
telephone number at that location is (714) 970-0300.
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 4, 1998, April 3, 1999, April 1,
2000, April 7, 2001 and April 6, 2002, 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

MTI Technology Corporation is a provider of
high-availability, fault-tolerant solutions for the mid-range
and enterprise-storage marketplace. We offer a complete line of
integrated products and sophisticated professional services that
provide customers with a full range of hardware, software and
networking components and support, which we combine into one
solution. We have historically sold our products and services to
Global 2000 companies for their data center computing
environments. In an effort to restore profitability and improve
liquidity, we plan to shift our focus away from our proprietary
products to a broader range of third-party integrated products.

The products we sell and support are compatible
with Sun Solaris, HP-UX, Windows NT, Novell Netware, IBM AIX,
and Linux operating systems, which enable us to address a broad
range of customer applications and markets.

Our customers represent a cross section of
industries and governmental agencies and range from Fortune
500 companies to small businesses. No single customer
accounted for more than 10 percent of total revenue during
fiscal years 2002, 2001 and 2000.

Significant Business Developments



| |              
| | -------------
| | Restructuring

We continue to restructure our operations (the
Restructuring) in an effort to reduce operating
expenses. Over the past two years, we have reduced our workforce
headcount by approximately 45% and have recently shut down our
facilities in Sunnyvale, California; Boston, Massachusetts;
Austin, Texas; Denver, Colorado; Florida and North Carolina. We
have begun the process, which we expect to complete by the
second quarter of fiscal 2003, of consolidating all
manufacturing and assembly operations into our facility in
Dublin, Ireland. We also anticipate reducing the amount of space
leased for our corporate headquarters after our Anaheim lease
expires in January 2003.

As part of the Restructuring, we plan to
emphasize our expertise in the design, deployment and servicing
of integrated solutions for the enterprise-storage marketplace.
We anticipate changing our product sales mix away from
proprietary products to integrated products, such as
Vivant 400, an IBM/ Mylex-based product. We also anticipate
selling a higher proportion of non-MTI branded products.
Although we expect to continue to develop and manufacture
proprietary products, we plan to do so at significantly reduced
levels, resulting in lower research and development expenditures.

The primary goal of the Restructuring is to
reduce costs. We believe the Restructuring may have other
benefits as well, including: the ability to offer a wider range
of products; greater flexibility in designing solutions for our
customers; and the ability to react more quickly to changing
technologies.

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We face significant risks and uncertainties in
connection with the Restructuring and we have incurred
substantial charges in connection with the Restructuring, more
fully described in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Despite the Restructuring activities that have taken place to
date, we have continued to incur recurring losses from
operations. There can be no assurance that the Restructuring
will be successful or that the anticipated cost savings will be
realized. Please see Risk Factors for additional
risks related to the Restructuring.



| |                      
| | ---------------------
| | Canopy Loan Agreement

In February 2002, The Canopy Group, Inc.
(Canopy), our largest stockholder, lent us
$1.9 million. We then entered into a Loan Agreement (the
Canopy Loan Agreement) with Canopy on June 27,
2002, allowing us to borrow, subject to certain conditions, up
to $7.0 million under a revolving line of credit. The line
will mature on June 30, 2003, bearing an interest rate of
nine percent per annum and will be secured by a security
interest in substantially all of our assets. The outstanding
$1.9 million loan has been converted to borrowings against
this line of credit. The Canopy Loan Agreement contains negative
covenants placing certain restrictions on our ability to
repurchase capital stock, pay dividends or make distributions,
purchase or sell assets, incur liens on our assets, incur
additional debt, merge with another entity, make loans or
investments, amend our charter Certificate of Incorporation or
bylaws or issue stock. Although we are currently in compliance
with all of the terms of the Canopy Loan Agreement, and believe
that we will remain in compliance, there can be no assurance
that we will be able to borrow under the Canopy Loan Agreement.
Canopy may terminate the Canopy Loan Agreement and declare all
amounts outstanding immediately due and payable upon an event of
default, including upon 30 days notice in the event that
Canopy in good faith deems its interest in MTI to be insecure,
the value of the collateral to have significantly declined, or
the prospect of timely payment or performance to be impaired.
Canopy owns approximately 14,463,000 shares, or 44.7%, of our
issued and outstanding common stock. Raymond Noorda, Chairman of
MTI, is also Chairman of the Canopy Group and the beneficial
owner of the majority interest in the Canopy Group. See
Note 7 of Notes to Consolidated Financial Statements.

In addition, on June 27, 2002, we entered
into a termination agreement with Silicon Valley Bank, dated as
of June 25, 2002, terminating our $15 million credit
facility. Due to certain financial covenant restrictions, with
which we were not in compliance, we were unable to borrow under
this credit facility and thus, had no outstanding borrowings as
of June 27, 2002 under our facility with Silicon Valley
Bank.



| |                         
| | ------------------------
| | Caldera Stock Repurchase

On June 26, 2002, we entered into an
agreement with Caldera International, Inc.
(Caldera), whereby Caldera agreed to purchase all of
the approximately 1.19 million shares of Caldera common
stock held by us at a per share purchase price of $.90, for a
total of approximately $1.1 million. The transaction is
scheduled to close on or before July 8, 2002, subject to
the satisfaction of certain closing conditions. There can be no
assurance that such conditions will be satisfied.

EMC Agreement

Effective February 9, 1996, we entered into
an agreement (the EMC Agreement) with EMC
Corporation (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 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 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 thirty
days of the first anniversary of the effective date of the EMC
Agreement, and within thirty 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 Agreement in five
equal annual installments. We received the

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first three annual installments in March 2000,
March 2001 and March 2002, and are expecting to receive the two
remaining annual installments of $3.0 million in March 2003
and 2004.


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 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 Agreement for a period of five years, which expired
February, 2001. See Note 12 of Notes to Consolidated Financial
Statements.

Our Market

In the last decade, there has been a dramatic
increase in the volume of data created, stored, processed and
accessed throughout business organizations and this growth is
projected to continue in the long term. In addition,
organizations have recognized the increasing value of their data
as strategic, competitive and often mission-critical assets.
These organizations are demanding rapid and reliable access to
this data 24 hours-a-day, 7 days-a-week and
365 days-a-year.

We have historically sold our products and
services to Global 2000 companies for their data center
computing environments. During fiscal 2000, our markets expanded
to include Internet Related Businesses (IRBs) such as content
providers, online retailers and web-based advertisers. However,
during fiscal 2001, because of the lack of liquidity and
resulting higher risk of success of the IRBs, we experienced a
decrease in demand for our proprietary products from IRBs and
thus, we elected to pursue sales from Fortune 1000 and Global
2000 customers. In an effort to restore profitability and
improve liquidity, we plan to shift our focus away from our
proprietary products to a broader range of third-party
integrated products.

The information technology industry has been
negatively affected by global economic slowdown, the terrorist
attacks of September 11, 2001, and reductions in
information technology expenditures. As a result, the demand for
our products has decreased. Continued adverse changes in the
economy would negatively impact revenues and margins in fiscal
year 2003.

Our Solution

Our professional services staff evaluates our
customers storage management needs and designs
comprehensive, individualized storage solutions. We integrate
various third-party products into a comprehensive, flexible
storage solution. Our goal is to enable customers to purchase a
single, integrated storage system, rather than multiple
components requiring integration by the customer.

Our data storage solutions are designed to
provide our customers with continuous access to their
mission-critical data, while enhancing performance of their
applications and reducing their information-technology
staffs management and support tasks. We provide these
benefits to customers through the delivery of advanced
technology, extensive services and broad support.

Key elements of our solution include:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an international support and service organization
    that assists customers in determining their data storage needs,
    designing, implementing and maintaining their systems, and
    training their personnel; and
|
| |  | our certification for interoperability among
    multiple operating systems.                                                                                                                                          

We refer to our complete integrated enterprise
storage solutions as MTI Data Services, which are delivered
through our principal product line, Vivant. The Vivant solution
is based upon a combination of various third-party products, as
well as our proprietary Fibre Channel data-storage servers for
Storage Area Network (SAN) and Network Attached
Storage (NAS) connectivity. Vivant systems include
the necessary networking components to create sophisticated
fabric-based configurations; application software to

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enable backup, replication, management and high
availability options; and a service and support offering
designed to ensure that our systems perform to the
specifications to which they were designed.


As discussed above, pursuant to the
Restructuring, we anticipate that our product offerings will
place less emphasis on MTIs proprietary products and will
integrate more third-party products. Thus, we may sell fewer
Vivant-branded systems or may integrate more third-party
products into the Vivant line.

Our integration of technology, services and
support into a single storage solution is designed to reduce the
complexity and cost of building and managing discrete SAN and
NAS systems. This combination also increases the efficiency of
data-storage usage by giving an information technology manager
the flexibility to allocate storage across heterogeneous
platforms. Furthermore, our cross-platform interoperability is
designed to help protect a customers investment in the
event of migrating to a new server platform.

Our Products

Our product offerings include storage solutions
consisting of Redundant Array of Independent Disks
(RAID) storage subsystems, high-performance storage
servers and high-speed switches for fiber channel fabric
connections, tape-library systems and data-management software.
In the past, we have sold MTI-branded products, which included
our proprietary software and architecture. As part of our
Restructuring, we plan to focus on the design, sale and
servicing of solutions in which we integrate third-party
products, and place less emphasis on the development of
proprietary solutions.



| |                        
| | -----------------------
| | Storage Server Products

Our storage server products include the
Vivant 400 family, a highly modular architecture that
scales from the mid-range to the enterprise and the Vivant
S-Series family, which is designed for use in departments and
divisions of larger organizations. These products are used
primarily with Sun Solaris, HP-UX, Windows NT/2000, Novell
NetWare, Linux and IBM AIX.



| |                     
| | --------------------
| | Tape Library Systems

Tape library systems provide a lower-cost,
slower-access method of recording and retrieving large amounts
of data, in comparison to magnetic disk systems. Tape libraries
typically are used for recording a secondary backup copy of the
data, thus providing extra data protection. We market and sell
tape library systems that are used primarily with Sun Solaris,
HP-UX, Windows NT/200, Novell NetWare, Linux and IBM AIX.



| |                         
| | ------------------------
| | Data Management Software

We developed our data-management software to be
employed for the direct support and management of stored data
and data-storage devices. In addition to our own proprietary
software, we market and sell Veritas, Legato and FalconStor
products to create a comprehensive, cross-platform approach for
enterprise-wide solutions for network data protection and
storage management.

Revenue from server products represented
approximately 65%, 61% and 74% of net product revenue in fiscal
years 2002, 2001 and 2000, respectively. Revenues from
tape-library systems represented approximately 26%, 32% and 20%
of net product revenue in fiscal years 2002, 2001 and 2000,
respectively. Revenues from data-management software represented
approximately 9%, 7% and 6% of net product revenue in fiscal
years 2002, 2001 and 2000, respectively. See Note 11 of Notes to
Consolidated Financial Statements.

Customer Service and Support

The quality and reliability of our products and
the continuing support of these products are important elements
of our business. Pursuant to the Restructuring, we believe that
the expertise of our professional services staff and the
delivery of high quality customer service will be of even
greater importance, as we intend to emphasize our capabilities
in the design, deployment and service of storage management
systems.

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As of May 27, 2002, we provide direct
service for all of our products through a service organization
of 156 people, who are located in more than 20 service
locations in the United States and Europe. We currently offer a
variety of customer services that include system and software
maintenance of MTI-manufactured products, as well as other
open-system platforms, consulting services, storage-management
integration and training. We offer on-site service response
within four hours, 24 hours-a-day, seven-days-week,
365 days-a-year. We provide our customers with a warranty
against defects in proprietary hardware products for one year
domestically and for two years internationally. As of
April 6, 2002, approximately 71% of our customers who
purchased our products have entered into post-warranty
maintenance contracts with us. Service revenue represented
approximately 41%, 31% and 22% of our total revenue in fiscal
years 2002, 2001 and 2000, respectively.

Sales and Marketing

In the United States, we primarily market and
sell our products directly to end users through our field sales
organization and indirectly through selected distributors and
resellers. As of May 27, 2002, our domestic sales
organization consisted of 56 people, located in 11 sales
offices in 11 states. This sales organization includes a
technical field support staff of approximately 11 systems
consultants, who provide consulting services and have experience
in the management of complex data and implementing distributed
client-server systems. As of May 27, 2002, we marketed our
products internationally through our field sales organization of
32 people, with five offices located in Germany, France and
the United Kingdom, and indirectly through independent
distributors. International sales represented 34%, 36% and 28%
of our total revenue in fiscal years 2002, 2001 and 2000,
respectively. See Note 11 of Notes to Consolidated
Financial Statements.

Order Backlog

We generally ship products within 30 days
after receipt of a purchase order. Historically, we have had
relatively little backlog at any given time and do not consider
backlog to be a significant or important measure of sales for
any future period. As a result, our net product revenue in any
given quarter is dependent upon orders booked and products
shipped during that quarter.

Product Development

The computer industry is characterized by rapid
technological change and is highly competitive with respect to
product innovation and introduction. To develop the many
different technologies that support our product development
strategy, we have assembled several engineering teams with
complementary expertise, consisting of approximately 38 people
as of May 27, 2002. During fiscal years 2002, 2001 and
2000, our research and development spending was approximately
$12,700, $19,100 and $16,000, respectively. Pursuant to our plan
to integrate more third party products, we may reduce staffing
levels and expenditures for product development.

We have two separate primary product development
centers: one is located at our corporate headquarters in
Anaheim, California, and a second, the System Engineering
Center, is located in Westmont, Illinois. Pursuant to the
Restructuring, we plan to devote fewer resources in developing
proprietary products and plan to consolidate the operations to
avoid redundancy at the two facilities, with the Westmont
facility serving as our interoperability center while the
Anaheim center will become our sustaining and software
development facility.

Manufacturing

Our manufacturing operations are located in
Dublin, Ireland and in our Anaheim facility. We have begun the
process, which we expect to complete by the second quarter of
fiscal 2003, of consolidating all manufacturing and assembly
operations to our facility in Dublin, Ireland. Manufacturing
operations consist primarily of final systems integration and
reliability testing and rely principally upon outside production
companies for the fabrication and assembly of circuit boards.
These outside production companies contract with us to produce
and assemble products in accordance with our specifications.
This turnkey approach to

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product manufacturing reduces our capital and
employee requirements and allows us to adopt manufacturing
technologies as they emerge.


The principal components used in our products
include networking components, circuit boards, disk drives and
chassis. We procure all of our principal components from outside
suppliers and have established manufacturing relationships with
a number of key vendors. We generally use parts and components
available from multiple vendors. However, for our Vivant product
line, we currently purchase disk drives from Seagate Technology,
Inc. and Xyratex Corporation, chip sets solely from QLogic
Corporation and RAID controllers for the Vivant S/D and
Vivant 400 series solely from IBM/ Mylex Corporation.
To date, we have been able to obtain these components and we
believe that adequate quantities are available for our needs.
Disruptions in supply or significant increases in component
costs from these vendors would have an adverse effect on our
results from operations. See Risk Factors  We
are dependent on limited source suppliers for principal
components used in our products, and disruptions in supply or
significant increases in component costs could materially harm
our business.

Competition

The market for our products is extremely
competitive. We have a number of competitors in various markets,
including EMC, Hewlett-Packard Company, Sun Microsystems, Inc.,
IBM, and Network Appliance, Inc., each of which has
substantially greater name recognition, engineering,
manufacturing and marketing capabilities, and greater financial
and personnel resources than we have. We expect to experience
increased competition from established and emerging computer
storage hardware and management software companies, particularly
Hewlett-Packard, Sun Microsystems, IBM, and EMC. As we focus
more on the integration of third party products, we may face
even greater competition from manufacturers and resellers, both
in terms of product sales and providing maintenance services for
such products.

Since our goal is to enable customers to purchase
a single, integrated storage system, rather than multiple
components requiring integration by the customer, we believe the
principal elements of competition include quality of service and
support and responsiveness to customer 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 Risk Factors  The
markets for our products are intensely competitive which may
lead to reduced sales of our products, reduced profits and
reduced market share for our business.

Proprietary Rights

We rely 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. Although we continue to take
appropriate measures to protect our proprietary rights, there
can be no assurance that these measures will be successful.
Also, the laws of certain foreign countries may not protect our
intellectual property to the same extent as the laws of the
United States. See Risk Factors  Our
intellectual property is critical to our business and, if we are
unable to protect our intellectual property, the success of our
business and our results of operations could be materially
harmed.

Pursuant to the EMC 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. As part of the EMC Agreement, MTI and EMC granted to
each other the 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 agreement for a period of five
years. Such licenses expired in February 2001.

Although we often seek patents on our products,
we believe that patents are of less significance in our industry
than other items such as technical expertise, timeliness and
quality of the support services that we provide.

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Employees

As of May 27, 2002 we had 392 full-time
employees worldwide, including 7 in marketing, 88 in sales, 156
in service support, 48 in manufacturing and quality assurance,
38 in engineering and research and development and 55 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.






|        |                        
|------- | -----------------------
|Item 2. | Description of Property

Our corporate offices, including marketing, sales
and support, research and development, general administration,
finance functions and manufacturing, are located in Anaheim,
California, in a leased facility consisting of approximately
131,000 square feet. These premises are occupied under a lease
agreement that expires on January 31, 2003. As part of our
consolidation of manufacturing and assembly operations to our
facility in Dublin, Ireland, we plan to cease manufacturing
activities in Anaheim. Due to the transfer of manufacturing
activities, as well as the previous reductions in the number of
employees at our corporate headquarters, we anticipate requiring
less space and plan to reduce the amount of space leased for our
corporate headquarters after the Anaheim lease expires.

We abandoned our 21,700-square-foot facility
located in Sunnyvale, California, in the fourth quarter of
fiscal year 2002; however, we are still obligated under the
lease agreement that expires on July 31, 2006. We are
seeking a sub-tenant in order to realize cost savings from the
closure of the Sunnyvale facility, however, due to the current
market conditions in the area, there can be no assurance that we
will be able to sub-lease the facility in a timely manner. We
have a 28,500-square-foot facility in Dublin, Ireland, in which
we perform assembly and testing on a limited number of products,
for which the lease expires in 2023. In addition, we have an
18,600 square foot facility in Westmont, Illinois, used for
sales and sales technical support, under a lease expiring on
June 30, 2005.

We also lease approximately 17 sales and
support offices located throughout the U.S. and Europe.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

From July through September 2000, several class
action complaints were filed against us and several of our
officers, alleging that we were aware of adverse information
that we failed to disclose primarily during fiscal 2000 and,
hence, that we violated specified provisions of the Securities
Exchange Act of 1934 and the rules promulgated thereunder. The
plaintiffs in those cases filed a consolidated amended complaint
in the federal court for the Central District of California on
or about December 5, 2000, making similar allegations. This
consolidated complaint alleges a class period from July 22,
1999 to July 27, 2000 and alleges that the defendants were
aware of certain adverse information that they failed to
disclose during that period. We filed a motion to dismiss the
complaint which the district court granted. However, the
plaintiffs filed a Second Amended Complaint, and, on
October 9, 2001, the district court denied our motion to
dismiss that complaint. The Second Amended Complaint alleges a
class period from July 22, 1999 to July 12, 2000. The
trial date is August 19, 2003.

The plaintiffs have not specified the amount of
damages they seek. Although we believe the alleged claims in
this lawsuit are without merit and are defending the lawsuit
vigorously, due to the inherent uncertainties of the litigation
process and the judicial system, we are unable to predict the
outcome of this litigation. This litigation may result in
substantial costs and distract managements attention and
resources. As of April 6, 2002, we met the deductible of
our insurance policy. In addition, a judgment against us in this
case could have a material adverse effect on our results of
operations and liquidity.

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 financial
position, results of operations or liquidity.

7



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

No matter was submitted to a vote of MTIs
stockholders during the fourth quarter of fiscal year 2002.

Executive Officers of the Registrant

The following table sets forth the names and ages
of all executive officers of the Registrant as of June 14,
2002. A summary of the background and experience of each of
these individuals is set forth below.

|                        |  |     |    |             |  |                                                                         
|----------------------- |  | --- | -- | ----------- |  | ------------------------------------------------------------------------
|Name                    |  | Age |    | Position(s)
|                        |  |     |    |            
|Thomas P. Raimondi, Jr. |  |     | 44 |             |  | Vice Chairman, President and Chief Executive
    Officer                
|Keith Clark             |  |     | 48 |             |  | Senior Vice President and General Manager Europe                        
|Mark A. Franzen         |  |     | 57 |             |  | Chief Financial Officer and Secretary                                   
|Venki Venkataraman      |  |     | 53 |             |  | Senior Vice President, Product Planning                                 
|Kenneth D. Simpson      |  |     | 49 |             |  | Vice President, Information Technology and Chief
    Information Officer

Thomas P. Raimondi, Jr.was named our President and Chief
Executive Officer in December 1999 and Vice Chairman of the
Board of Directors in April 2001. From July 1998 to December
1999, Mr. Raimondi was our Chief Operating Officer.
Mr. Raimondi served as Senior Vice President and General
Manager from May 1996 until July 1998 and was Vice President,
Strategic Planning, Product Marketing, and Director of Marketing
from 1987 until May 1996. Mr. Raimondi resigned from
Caldera Systems, Inc. Board of Directors in July 2002.

Keith Clarkwas
named our Senior Vice President and General Manager Europe in
April 2000. Mr. Clark was our Vice President European
Operations from June 1994 to April 2000. Mr. Clark joined
us in January 1990 as European Client Services Manager. Before
joining us, Mr. Clark served in a number of
senior-management positions within Europe during a ten-year
period for System Industries, Inc., a data-storage company in
the DEC marketplace.

Mark A. Franzenwas
named our Chief Financial Officer and Secretary in June 2002.
Before joining MTI, from November 1999 to June 2002,
Mr. Franzen was Chief Financial Officer of Y Media
Corporation, a start-up company in the digital imaging fabless
semiconductor industry. Mr. Franzen served as Chief
Financial Officer for various hi-tech companies from March 1980
to June 1999 including Storage Concepts, Level One
Communications and Micro Peripherals, Inc. He served as Chief
Financial Officer for R&G Sloane Manufacturer, a
manufacturer of molded and excluded plastic from August 1975 to
March 1980, and Senior Audit Manager for Price Waterhouse from
January 1967 to July 1975.

Venki Venkataramanwas named Senior Vice President of
Product Planning in February 2002. Mr. Venkataraman served
as Senior Vice President of Operations and Services from
September 2000 to January 2002, as Senior Vice President of
Manufacturing from June 1998 to August 2000 and as Vice
President of Operations from April 1996 to June 1998. Before
joining MTI, Mr. Venkataraman served in several capacities
for The Foxboro Company, a division of Siebe PLC, from August
1988 to April 1996. His most recent position with Foxboro was
Manager of Product Development for the systems products
division, a post he held for two years.

Kenneth D. Simpsonwas named Vice President, Information
Technology and Chief Information Officer in March 2001. Before
joining MTI, Mr. Simpson was a consultant in SAP National
Practice for marchFirst, a full-service information-systems
consulting firm, from January 2000 to March 2001.
Mr. Simpson served as Director of Information Technology
for Digital Generation Systems, a leading provider of electronic
delivery of commercials from the advertising industry to the
broadcast industry, from September 1998 to December 1999. Before
joining Digital Generation, Mr. Simpson served as Director
of Information Systems for Tri Valley Growers, a food
manufacturing company, from July 1995 to September 1998.

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PART II




Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Principal Market and Prices

Our common stock is quoted on the Nasdaq National
Market. 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 for the periods
indicated. The price of our common stock at the close of
business on June 14, 2002 was $0.5200. See Risk
Factors  Our securities may be removed from Nasdaq
listing.

|                 |  |              |         |     |  |  |        | 
|---------------- |  | ------------ | ------- | --- |  |  | ------ | 
|                 |  |             
|                 |  | Sales Prices
|                 |  |             
|                 |  | High         |         | Low
|                 |  |              |         |    
|Fiscal Year 2001 |  |              |         |     |  |  |        | 
|First Quarter    |  |              | 27.6250 |     |  |  | 6.8130 | 
|Second Quarter   |  |              | 8.2500  |     |  |  | 3.5630 | 
|Third Quarter    |  |              | 9.6250  |     |  |  | 3.0630 | 
|Fourth Quarter   |  |              | 5.3750  |     |  |  | 1.6560 | 
|Fiscal Year 2002 |  |              |         |     |  |  |        | 
|First Quarter    |  |              | 2.6000  |     |  |  | 1.4500 | 
|Second Quarter   |  |              | 1.8600  |     |  |  | 0.6800 | 
|Third Quarter    |  |              | 2.6700  |     |  |  | 0.7400 | 
|Fourth Quarter   |  |              | 2.2300  |     |  |  | 0.8700 | 

Number of Common Stockholders

The approximate number of record holders of our
common stock as of June 14, 2002 was 376.

Dividends

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

Warrants

No warrants were exercised during fiscal year
2002.

9



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##### Table of Contents



Securities Authorized for Issuance

The following table sets forth certain
information as of April 6, 2002 with respect to equity
compensation plans under which our equity securities are
authorized for issuance:

|                                                                |                                                                                 |                      |  |                   |     |                           |   |       |  |  |  |       |    
|--------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------- |  | ----------------- | --- | ------------------------- | - | ----- |  |  |  | ----- | ---
|                                                                |                                                                                 | Number of Securities |  | Weighted-Average  |     | Number of Securities     
|                                                                |                                                                                 | to be Issued         |  | Exercise Price    |     | Remaining Available for  
|                                                                |                                                                                 | Upon the Exercise of |  | of Outstanding    |     | Future Issuance Under    
|                                                                |                                                                                 | Outstanding Options, |  | Options, Warrants |     | Equity Compensation Plans
|                                                                |                                                                                 | Warrants and Rights  |  | and Rights        |     | (Excluding Securities    
|Plan Category                                                   |                                                                                 | (A)                  |  | (B)               |     | Reflected in Column(A))  
|                                                                |                                                                                 |                      |  |                   |     |                          
|Equity Compensation Plans Approved by Security
    Holders:     |                                                                                 |                      |  |                   |     |                           |   |       |  |  |  |      
|                                                                | 1987 Stock Option Plan                                                          |                      |  | 15.5              |     |                           | $ | 2.25  |  |  |  |      |    
|                                                                | 1992 Stock Option Plan                                                          |                      |  | 481.0             |     |                           |   | 7.13  |  |  |  |      |    
|                                                                | 1996 Stock Option Plan                                                          |                      |  | 7,981             |     |                           |   | 7.86  |  |  |  |      |    
|                                                                | 1994 Directors Non-Qualified Stock Option
    Plan                             |                      |  | 80                |     |                           |   | 13.13 |  |  |  |      |    
|                                                                | 2001 Stock Inventive Plan and 2001 Non- Employee
    Director Option Program(1) |                      |  | 2,051             | (2) |                           |   | 1.32  |  |  |  | 2,942 | (3)
|                                                                | 2001 Employee Stock Purchase Plan                                               |                      |  |                  |     |                           |   |      |  |  |  | 1,200 |    
|Warrants:                                                       |                                                                                 |                      |  |                   |     |                           |   |       |  |  |  |      
|                                                                | Ralph Yarro                                                                     |                      |  | 150               |     |                           |   | 18.75 |  |  |  |      |    
|                                                                | GB Storage                                                                      |                      |  | 56                |     |                           |   | 12.00 |  |  |  |      |    
|                                                                | Silicon Valley Bank                                                             |                      |  | 191               |     |                           |   | 2.36  |  |  |  |      |    
|Equity Compensation Plans Not Approved by
    Security Holders: |                                                                                 |                      |  |                   |     |                           |   |       |  |  |  |      
|                                                                | None.                                                                           |                      |  |                   |     |                           |   |       |  |  |  |       |    



---



|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2001 Non-Employee Director Option Program
    functions as part of the 2001 Stock Incentive Plan.                                       
|   
|(2) | 2,001 shares and 50 shares related to the 2001
    Stock Incentive Plan and the 2001 Non-Employee Director Option
    Program, respectively.
|   
|(3) | The maximum aggregate number of shares allocated
    for the SIP increases by 3% annually, subject to terms and
    conditions of the SIP.  

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##### Table of Contents






Item
6.     Selected Financial
Data

|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |        |         | 
|-------------------------------------------------------------------- | ----------------------------------- | --------------------------------- | ------ | -------- | ------- | -------- | ------- | -------- | ------- | -------- | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                     |                                     |                                  
|                                                                     |                                     | Fiscal Year Ended                
|                                                                     |                                     |                                  
|                                                                     |                                     | April 6,                          |        | April 7, |         | April 1, |         | April 3, |         | April 4,
|                                                                     |                                     | 2002                              |        | 2001     |         | 2000     |         | 1999     |         | 1998    
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |         
|Selected Statement of Operations
    Data:                           |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Net product revenue                                                  |                                     | $                                 | 69,519 |          |         | $        | 111,820 |          |         | $        | 177,770 |        |         | $ | 157,456 |        |         | $ | 163,707 |       
|Service revenue                                                      |                                     |                                   | 48,399 |          |         |          | 49,870  |          |         |          | 49,327  |        |         |   | 44,193  |        |         |   | 36,304  |       
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     |                                     | Total revenue                     |        |          | 117,918 |          |         |          | 161,690 |          |         |        | 227,097 |   |         |        | 201,649 |   |         |        | 200,011 | 
|Product gross profit                                                 |                                     |                                   | 13,053 |          |         |          | 39,291  |          |         |          | 71,202  |        |         |   | 50,689  |        |         |   | 56,747  |       
|Service gross profit                                                 |                                     |                                   | 18,648 |          |         |          | 14,628  |          |         |          | 18,871  |        |         |   | 16,276  |        |         |   | 14,262  |       
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     |                                     | Gross profit                      |        |          | 31,701  |          |         |          | 53,919  |          |         |        | 90,073  |   |         |        | 66,965  |   |         |        | 71,009  | 
|Operating expenses:                                                  |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     | Selling, general and administrative |                                   |        | 43,211   |         |          |         | 66,249   |         |          |         | 64,506 |         |   |         | 45,657 |         |   |         | 40,818 |        
|                                                                     | Research and development            |                                   |        | 12,742   |         |          |         | 19,095   |         |          |         | 16,017 |         |   |         | 12,765 |         |   |         | 12,475 |        
|                                                                     | Restructuring charges               |                                   |        | 4,911    |         |          |         | 393      |         |          |         |       |         |   |         |       |         |   |         |       |        
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     |                                     | Total operating expenses          |        |          | 60,864  |          |         |          | 85,737  |          |         |        | 80,523  |   |         |        | 58,422  |   |         |        | 53,293  | 
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     |                                     | Operating income (loss)           |        |          | (29,163 | )        |         |          | (31,818 | )        |         |        | 9,550   |   |         |        | 8,543   |   |         |        | 17,716  | 
|Other income, net                                                    |                                     |                                   | 4,182  |          |         |          | 4,258   |          |         |          | 3,822   |        |         |   | 3,739   |        |         |   | 2,557   |       
|Equity in net loss and write-down of net
    investment of affiliate |                                     |                                   | (9,504 | )        |         |          | (4,800  | )        |         |          | (2,824  | )      |         |   |        |        |         |   |        |       
|Loss on foreign currency transactions                                |                                     |                                   | (542   | )        |         |          | (552    | )        |         |          | (323    | )      |         |   | (669    | )      |         |   | (237    | )     
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     |                                     | Income (loss) before income taxes |        |          | (35,027 | )        |         |          | (32,912 | )        |         |        | 10,225  |   |         |        | 11,613  |   |         |        | 20,036  | 
|Income tax expense (benefit)                                         |                                     |                                   | 24,598 |          |         |          | 3,529   |          |         |          | (15,095 | )      |         |   | 1,521   |        |         |   | 2,020   |       
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     |                                     | Net income (loss)                 |        | $        | (59,625 | )        |         | $        | (36,441 | )        |         | $      | 25,320  |   |         | $      | 10,092  |   |         | $      | 18,016  | 
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Net income (loss) per share:                                         |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     | Basic                               |                                   | $      | (1.83    | )       |          | $       | (1.13    | )       |          | $       | 0.84   |         |   | $       | 0.35   |         |   | $       | 0.68   |        
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     | Diluted                             |                                   | $      | (1.83    | )       |          | $       | (1.13    | )       |          | $       | 0.76   |         |   | $       | 0.34   |         |   | $       | 0.62   |        
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Weighted average shares used in per share
    computations:          |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     | Basic                               |                                   |        | 32,548   |         |          |         | 32,233   |         |          |         | 30,268 |         |   |         | 28,451 |         |   |         | 26,674 |        
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|                                                                     | Diluted                             |                                   |        | 32,548   |         |          |         | 32,233   |         |          |         | 33,232 |         |   |         | 29,710 |         |   |         | 29,112 |        
|                                                                     |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Selected Balance Sheet Data:                                         |                                     |                                   |        |          |         |          |         |          |         |          |         |        |         |   |         |        |         |   |         |       
|Cash and cash equivalents                                            |                                     | $                                 | 8,420  |          |         | $        | 16,320  |          |         | $        | 8,791   |        |         | $ | 7,213   |        |         | $ | 7,768   |       
|Working capital                                                      |                                     |                                   | 3,269  |          |         |          | 27,514  |          |         |          | 51,434  |        |         |   | 29,997  |        |         |   | 16,711  |       
|Total assets                                                         |                                     |                                   | 61,698 |          |         |          | 128,960 |          |         |          | 180,947 |        |         |   | 113,778 |        |         |   | 105,091 |       
|Short-term debt                                                      |                                     |                                   | 2,035  |          |         |          | 127     |          |         |          | 1,500   |        |         |   | 5,824   |        |         |   | 7,904   |       
|Long-term debt, less current maturities                              |                                     |                                   | 461    |          |         |          | 621     |          |         |          |        |        |         |   |        |        |         |   |        |       
|Total stockholders equity                                           |                                     |                                   | 20,113 |          |         |          | 78,750  |          |         |          | 113,495 |        |         |   | 54,141  |        |         |   | 42,146  |       



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##### Table of Contents






Item
7.     Managements Discussion
and Analysis of Financial Condition and Results of
Operations

Certain statements set forth herein are not
historical or based on historical facts and constitute
forward-looking statements involving 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 such
forward-looking statements. Forward-looking statements include,
but are not limited to, statements about the our Restructuring,
revenue, markets, margin, the effect of accounting changes,
attempts to raise additional funds or to secure an additional
credit facility, proprietary product sales, customers, service
and support costs, investment in research and development,
foreign currency hedging activity, anticipated decreases in
spending, dependence on new products, international sales and
quarterly fluctuations. Our transition to sales of integrated
solutions and focus of sales efforts on Global 2000 accounts may
not be successful. We may fail to achieve anticipated revenue
levels and efficiencies of operation. Given these uncertainties,
investors in our common stock are cautioned not to place undue
reliance on such forward-looking statements. Recent terrorist
attacks in the United States, as well as future events occurring
in response to or in connection with them, including, without
limitation, future terrorist attacks against United States
targets, actual conflicts involving the United States or its
allies, or military or trade disruptions could negatively impact
our business, financial condition, results of operations and may
result in increased volatility in the market price of our common
stock. See Risk Factors. 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.

Restructuring

We are continuing to implement our Restructuring
activities in an effort to reduce operating expenses. Over the
past two years, we have reduced our workforce headcount by
approximately 45% and have recently shut down our facilities in
Sunnyvale, California; Boston, Massachusetts; Austin, Texas;
Denver, Colorado; Florida and North Carolina. We have begun the
process, which we expect to complete by the second quarter of
fiscal 2003, of consolidating all manufacturing and assembly
operations into our facility in Dublin, Ireland. We also
anticipate reducing the amount of space leased for our corporate
headquarters after our Anaheim lease expires in January 2003.

As part of the Restructuring, we plan to
emphasize our expertise in the design, deployment and servicing
of integrated solutions for the enterprise-storage marketplace.
We anticipate changing our product sales mix away from
proprietary products to integrated products, such as Vivant 400,
an IBM/ Mylex-based product. We also anticipate selling a higher
proportion of non-MTI branded products. Although we expect to
continue to develop and manufacture proprietary products, we
plan to do so at significantly reduced levels, including lower
research and development expenditures. The transition to
integrated products is expected to have a negative impact on our
gross margins.

The primary goal of the Restructuring is to
reduce costs. We believe the Restructuring may have other
benefits as well, including: the ability to offer a wider range
of products; greater flexibility in designing solutions for our
customers; and the ability to react more quickly to changing
technologies.

We face significant risks and uncertainties in
connection with the Restructuring and we have incurred
substantial charges in connection with the Restructuring,
described below. Despite the Restructuring activities that have
taken place to date, we have continued to incur recurring losses
from operations. There can be no assurance that the
Restructuring will be successful or that the anticipated cost
savings will be realized. Please see Risk Factors
for additional risks related to the Restructuring.

Critical Accounting Policies

Managements Discussion and Analysis of
Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, revenues
and expenses and related disclosure of contingent assets and
liabilities as of the date of our financial statements.

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##### Table of Contents



We based our estimates and judgments on
historical experience and on various other factors that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties,
and could potentially produce materially different results under
different assumptions and conditions. We believe the following
critical accounting policies, among others, reflect significant
judgments and estimates used in the preparation of our
consolidated financial statements. For a detailed discussion of
the application of these and other accounting policies, see
notes to the consolidated financial statements.

Revenue Recognition.Sales of our equipment are recorded upon shipment, 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 amount is determinable. Product
sales are not contingent upon customer testing, approval and/or
acceptance. Revenue from equipment maintenance contracts is
recorded as deferred income when billed and is recognized as
earned over the period in which the services are provided,
primarily straight-line over the term of the contract. We accrue
for warranty expense at the time revenue is recognized and
maintain a warranty accrual for the estimated future warranty
obligation based upon the relationship between historical and
anticipated warranty costs and sales volumes.

We apply Statement of Position (SOP)
97-2, Software Revenue Recognition as amended by
SOP 98-9, Modification of SOP 97-2 with Respect
to Certain Transactions, whereby 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 at
fair value and there are no significant obligations on our part
related to the sale and the resulting receivable is deemed
collectible, net of an allowance for returns, cancellations and
maintenance, including vendor and post-contract support
obligations. Revenue from maintenance agreements is recognized
ratably over the term of the related agreement. Revenue from
consulting and other software-related services is recognized as
the services are rendered.

Allowance for Doubtful
Accounts.We maintain an allowance for
doubtful accounts for estimated losses resulting from the
inability of our customers to make payments for services. We
analyze accounts receivable, customer credit-worthiness, current
economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts.
If the financial condition of our customers deteriorates,
resulting in an inability to make payments, additional
allowances may be required.

Income Taxes.We are
required to estimate our income taxes which includes estimating
our current income taxes as well as measuring the temporary
differences resulting from different treatment of items for tax
and accounting purposes. These temporary differences result in
deferred tax assets or liabilities. We apply Statement 109,
Accounting for Income Taxes; under the asset and
liability method, deferred tax assets and liabilities are
determined based on differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse, net of a
valuation allowance. We have recorded a full valuation allowance
against our deferred tax assets as management has determined
that it is more likely than not that these assets will not be
utilized. In the event that actual results differ from our
estimates, our provision for income taxes could be materially
impacted.

Valuation of Goodwill and Other Intangible
Assets.We assess the impairment of
goodwill and other intangible assets in accordance with
Financial Accounting Standards Board Statement No. 142 on
an annual basis or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review
include significant under-performance relative to expected
historical or projected future operating results, significant
changes in the manner of our use of acquired assets or the
strategy for our overall business, and significant negative
industry or economic trends. Upon the adoption of Statement
No. 142 in fiscal 2002, the carrying value of our goodwill
and other intangible assets was determined to not be impaired.
Changes in assumptions and estimates included within this
analysis could produce significantly different results than
those identified above and those recorded in the consolidated
financial statements.

13



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##### Table of Contents



Inventories.Inventories are valued at the lower of cost (first-in,
first-out) or market, net of an allowance for obsolete,
slow-moving, and unsalable inventory. The allowance is based
upon managements review of inventories on-hand, historical
product sales, and forecasts. We use rolling forecasts based
upon anticipated product orders to determine our component and
product inventory requirements. Lead times for products,
materials and components that we order may vary significantly
and depend upon factors such as specific supplier requirements,
contract terms and current market demand. As a result, our
product and component requirement forecasts may not be accurate.
If we overestimate our product or component requirements, we may
have excess inventory, which could lead to additional excess and
obsolete charges.

Results of Operations

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

|                                      |                         |                   |       |          |    |          |      |       |    |  |      |       |  
|------------------------------------- | ----------------------- | ----------------- | ----- | -------- | -- | -------- | ---- | ----- | -- |  | ---- | ----- | -
|                                      |                         |                  
|                                      |                         | Fiscal Year Ended
|                                      |                         |                  
|                                      |                         | April 6,          |       | April 7, |    | April 1,
|                                      |                         | 2002              |       | 2001     |    | 2000    
|                                      |                         |                   |       |          |    |         
|Net product revenue                   |                         |                   | 59.0  | %        |    |          | 69.2 | %     |    |  | 78.3 | %    
|Service revenue                       |                         |                   | 41.0  |          |    |          | 30.8 |       |    |  | 21.7 |      
|                                      |                         |                   |       |          |    |          |      |       |    |  |      |      
|                                      | Total revenue           |                   |       | 100.0    |    |          |      | 100.0 |    |  |      | 100.0 |  
|Product gross profit                  |                         |                   | 18.8  |          |    |          | 35.1 |       |    |  | 40.1 |      
|Service gross profit                  |                         |                   | 38.5  |          |    |          | 29.3 |       |    |  | 38.3 |      
|                                      |                         |                   |       |          |    |          |      |       |    |  |      |      
|                                      | Gross profit            |                   |       | 26.9     |    |          |      | 33.3  |    |  |      | 39.7  |  
|Selling, general and administrative   |                         |                   | 36.6  |          |    |          | 41.0 |       |    |  | 28.4 |      
|Research and development              |                         |                   | 10.8  |          |    |          | 11.8 |       |    |  | 7.1  |      
|Restructuring charges                 |                         |                   | 4.2   |          |    |          | 0.2  |       |    |  |     |      
|                                      |                         |                   |       |          |    |          |      |       |    |  |      |      
|                                      | Operating income (loss) |                   |       | (24.7    | )  |          |      | (19.7 | )  |  |      | 4.2   |  
|Other income, net                     |                         |                   | 3.6   |          |    |          | 2.6  |       |    |  | 1.7  |      
|Equity in net loss of affiliate       |                         |                   | (8.1  | )        |    |          | (3.0 | )     |    |  | (1.2 | )    
|Loss on foreign currency transactions |                         |                   | (0.5  | )        |    |          | (0.3 | )     |    |  | (0.1 | )    
|Income tax (expense) benefit          |                         |                   | (20.9 | )        |    |          | (2.2 | )     |    |  | 6.6  |      
|                                      |                         |                   |       |          |    |          |      |       |    |  |      |      
|                                      | Net income (loss)       |                   |       | (50.6    | )% |          |      | (22.6 | )% |  |      | 11.2  | %
|                                      |                         |                   |       |          |    |          |      |       |    |  |      |      

Net Product Revenue:Net product revenue for fiscal year 2002 decreased
$42.3 million, or 38% from fiscal year 2001. This decrease
was the result of decreased revenue of $22.8 million,
$17.6 million and $1.9 million from server products,
tape libraries and software products, respectively. Server
products revenue in fiscal year 2002 from the Vivant product
family was $36.0 million, down from $42.7 million in
fiscal 2001. The decrease was primarily due to the decrease in
sales volume, mainly from the decrease in sales of our
proprietary products resulting from the global economic slowdown
and our inability to penetrate Global 2000 customers. Increased
competition has also contributed to the decline in revenue. Our
business is greatly affected by general economic and business
conditions. Continued softness in the information technology
market in both the United States and in Europe and
consumers uncertainty about the global economic condition
could result in further reduced demand for our products and
services. As a result of the weakened global economy, consumers
are postponing or reducing expenditures, causing our revenue,
our operating results and our financial condition to decline.
The downturn also has led to Restructuring actions such as, but
not limited to, the relocation of manufacturing activities,
complete or partial abandonment of underutilized facilities,
headcount reduction, fixed asset write offs and inventory write
offs. As a result, we are shifting to integrated third party
products. Further delays or reductions in information technology
spending could have a material adverse effect on demand for our
products and services, and thus, our operating results.

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Net product revenue for fiscal year 2001
decreased $66.0 million, or 37% from fiscal year 2000. This
decrease was primarily the result of decreased revenues of
$63.7 million and $2.1 million from server products
and software products, respectively. Server products revenues in
fiscal year 2001 from the Vivant product family was
$42.7 million, down from $67.7 million in fiscal 2000.
We transitioned our sales focus during fiscal 2000 towards our
proprietary products and away from our third party resale
products. As a result of this transition, we increased our sales
efforts with IRBs. However, during fiscal 2001, because of the
lack of liquidity and resulting higher risk of success of the
IRBs, we experienced a decrease in demand for our proprietary
products from IRBs. We elected to pursue sales to Fortune 1000
and Global 2000 customers. These customers typically have a
longer procurement cycle, which adversely affected net product
revenue during fiscal year 2001. Moreover, the secondary effect
of the many IRB collapses affected our ability to grow revenues.
Furthermore, a weakening economy resulted in a decreasing demand
for the information-storage systems, software and services.

Service Revenue:Service revenue was $48.4 million for fiscal year 2002, a
decrease of $1.5 million, or 3%, from fiscal year 2001.
This decrease was primarily due to our inability to fully offset
lost revenue from maintenance contract that expired with revenue
from renewed and new maintenance contracts. The lower number of
renewals is attributable to the loss of customers to competitors
during the fiscal year. Due to concerns about our financial
position, existing customers may be more reluctant to renew
their maintenance contracts.

Service revenue was $49.9 million for fiscal
year 2001, an increase of $0.5 million, or 1%, from fiscal
year 2000. Increased revenue from maintenance contracts for
increased field population was the main cause of this increase.

Product Gross
Profit:Product gross profit was
$13.1 million for fiscal year 2002, a decrease of
$26.2 million, or 67%, from fiscal year 2001. The gross
profit percentage of net product sales was 19% for fiscal year
2002 as compared to 35% for fiscal year 2001. This decrease was
primarily due to additional inventory reserves of
$4.9 million in the first quarter and $2.1 million in
the fourth quarter of fiscal year 2002, which consisted
primarily of additional reserves for Gladiator 6700, 8700 and
8900 inventories. Furthermore, increased pricing competition and
reduced manufacturing efficiencies resulting from lower
production volumes as well as changes in product mix contributed
to the lower product gross margin. Although our Restructuring
activities are designed to lower our cost structure and increase
product gross profit at lower production volumes, there can be
no assurance that such activities will be successful. In
addition, product gross profit may decline further in connection
with our shift to integrated third party products, as we may
face increased pricing competition for such products from a
greater number of competitors selling the same third party
products.

Product gross profit was $39.3 million for
fiscal year 2001, a decrease of $31.9 million, or 45%, from
fiscal year 2000. The gross profit percentage of net product
sales was 35% for fiscal year 2001 as compared to 40% for fiscal
year 2000. This decrease resulted from a domestic increase in
revenue concentration from back-up products, which historically
carry a significantly lower margin than our proprietary storage
products. This decrease was partly offset by a European increase
in revenue concentration from proprietary products, primarily
Vivant. Also, lower operating volumes caused a significant
decrease in our ability to absorb our manufacturing overhead,
which reduced our product gross margin.

Service Gross
Profit:Service gross profit for
fiscal year 2002 increased $4.0 million, or 27%, from
fiscal year 2001. The gross profit percentage for service
revenue was 39% in fiscal year 2002, as compared to 29% for
fiscal year 2001. The increase in service-gross profit was
primarily attributable to decreased infrastructure costs
resulting from reduced manpower, mandatory pay cuts, mandatory
vacations, and cost control on travel-related expenses.

Service gross profit for fiscal year 2001
decreased $4.2 million, or 22%, from fiscal year 2000. The
gross-profit percentage for service revenue was 29% in fiscal
year 2001, as compared to 38% for fiscal year 2000. The decrease
in service-gross profit was primarily attributable to increased
employment costs from the hiring of additional staff anticipated
for service offerings. We expected the number of installed
Vivant units to increase in fiscal year 2001 over fiscal 2000
levels. During the first nine months of fiscal year 2001, we
hired more service-and-support staff. We were upgrading the
skills of our staff to support the increased volume of
proprietary product and service offerings. As a result, service
cost of revenue increased in fiscal year 2001. This cost did not
continue to increase in fiscal year 2002 because we now have
sufficient field-service staff.

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Selling, General and Administrative
Expenses:Selling, general and
administrative expenses in fiscal year 2002 decreased
$23.0 million, or 35%, over fiscal year 2001. The decrease
in selling, general and administrative expenses was due to
substantial reduction in salary and benefit expenses by
$11.1 million which resulted from reduced headcounts,
elimination of amortization of goodwill of $2.7 million,
reduction in bad debt expense by $3.4 million, reduction in
communication and freight charges by $ 0.5 million,
reduction in marketing and promotional expenses by
$0.3 million, reduction in professional and consulting fees
by $0.6 million, and reduction in travel and lodging
expenses by $4.4 million. Please see Critical
Accounting Policies for greater detail regarding goodwill
accounting.

Selling, general and administrative expenses in
fiscal year 2001 increased $1.7 million, or 3%, over fiscal
year 2000. This increase was because of bad debt expense of
$4.3 million, primarily as a result of internet-related
customer non-payments, and a $2.2 million charge to write
down goodwill related to the purchase of certain product lines
from RAXCO, Inc. There were other expenses of $.9 million
in legal. These increases were partly offset by lower salary,
commission and bonus expense of $5.0 million.

Research and Development
Expenses:Research and development
expenses in fiscal year 2002 decreased $6.4 million, or
33%, from fiscal year 2001. This decrease was primarily due to
headcount reductions, substantially lower project costs, reduced
travel and lodging expenses and consulting fees. During the
fourth quarter of fiscal year 2002, we abandoned our
under-utilized research and development facility in Sunnyvale,
California, and consolidated our research and development
activities in the Anaheim, California and Westmont, Illinois
facilities. Pursuant to the Restructuring, we plan to devote
fewer resources developing proprietary products and plan to
consolidate our operations to avoid redundancy at the two
facilities, with the Westmont facility serving as our
interoperability center while the Anaheim center will become our
sustaining and software development facility. As a result,
research and development expenses are expected to continue to
decrease in fiscal year 2003.

Research and development expenses in fiscal year
2001 increased $3.1 million, or 19%, from fiscal year 2000. This
increase was primarily for increased development costs
associated with hiring more staff to complete expansion of the
Vivant product line at the high end and also to expand our reach
to the mid-range product line.

Restructuring:During the fourth quarter of fiscal year 2002, we recorded a
restructuring charge of $4.9 million which consisted of
$4.3 million, $0.3 million and $0.3 million
charges related to abandonment of either underutilized or
historically unprofitable facilities, headcount reduction of
56 employees or 13%, and disposal of fixed assets,
respectively. Of the 56 employees terminated, 15, 8, 6, 10,
14 and 3 were from Sales, Marketing, General and Administrative,
Field Services, Research and Development and Manufacturing
departments, respectively. The expected cash impact of the
restructuring charge is $0.28 million, related to
severance, of which $0.07 million was paid in fiscal year
2002. The remaining $0.21 million will be paid in fiscal
year 2003. We are attempting to complete transitioning our
manufacturing facility to Dublin, Ireland by the end of the
second quarter of fiscal year 2003. In order to further reduce
expenses, in June 2002, we approved additional Restructuring
actions such as, but not limited to, additional facility and
headcount reductions in the first half of fiscal year 2003. As a
result of the Restructuring, we expect to reduce our domestic
and European quarterly expense run-rate by approximately
$1.4 million and $0.04 million, respectively. However,
there can be no assurance that our expenses will be reduced to
this extent.

The amount accrued for the fourth quarter fiscal
year 2002 Restructuring activities as of April 6, 2002, was
as follows:

|                     |       |             |     |     | 
|-------------------- | ----- | ----------- | --- | --- | 
|                     |       | In Millions
|                     |       |            
|Abandoned facilities |       | $           | 4.3 |    
|Workforce reduction  |       |             | 0.2 |    
|                     |       |             |     |    
|                     | Total |             | $   | 4.5 | 
|                     |       |             |     |    

During the fourth quarter of fiscal year 2001, we
included a charge of $0.4 million for severance in
operating expenses. Of this charge, $0.3 million and
$0.1 million were paid during fiscal year 2001 and fiscal

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year 2002, respectively. The Restructuring
included an aggregate net reduction of the workforce by
86 employees or 13%. As a result of the Restructuring, we
realized quarterly expense savings of $1.3 million
beginning in the second quarter of fiscal 2002.


Other Income, Net:Other income, net in fiscal year 2002 decreased
$0.07 million, or 2%, over fiscal year 2001. This decrease
was primarily due to decreased income from EMC as we received
the last payment for a patent sale in fiscal 2001, coupled with
a decrease in interest expense. These decreases were partially
offset by a favorable sales tax refund of $0.7 million in
fiscal year 2002.

Other income, net in fiscal year 2001 increased
$0.4 million, or 11%, over fiscal year 2000. This increase
was primarily from increased interest income and decreased
interest expense in fiscal year 2001 as compared to the prior
year. This was a result of increased average cash balance during
the year and eliminated credit line balances.

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

Income Taxes:We
recorded a net tax expense of $24.6 million for fiscal year
2002, $24.3 million related to the valuation allowance for
deferred-tax assets recorded in the first quarter of fiscal year
2002. Because of the continued decline in the market value of
our investment in Caldera and continued softness in the domestic
and European markets for our products, management believes that
it is more likely than not that we will not realize the benefits
of the net deferred tax assets existing on April 6, 2002.

We recorded a net tax expense of
$3.5 million for fiscal year 2001, as compared to a net tax
benefit of $15.1 million in fiscal year 2000. The increase
was primarily because of the recording of a net
$9.0 million expense related to the valuation allowance for
deferred-tax assets. The net $9.0 million tax expense was
partly offset by $5.5 million of tax benefit recorded in
the first three quarters of fiscal year 2001. Our management
believed, at the time base on our historical profitability, that
it was more likely than not that we would realize the benefits
of the net deferred tax asset existing at April 7, 2001
based on projected financial results and available tax planning
strategies, including the realizable value of our Caldera
investment. See Note 8 of Notes to Consolidated Financial
Statements.

Liquidity and Capital Resources

We had cash and cash equivalents of
$8.4 million and $16.3 million at April 6, 2002
and April 7, 2001, respectively, which was a decrease of
$7.9 million. Net operating activities used cash of
$6.4 million in fiscal year 2002, an increase in cash used
of $24.6 million as compared to fiscal year 2001, primarily
because of the net loss of $59.6 million which resulted
from decreased revenues and margins. The net loss was partially
offset by non-cash expenses of $49.2 million and cash
provided by changes in operating assets and liabilities of
$4.0 million. Net investing activities used cash of
$3.3 million primarily as a result of capital equipment
purchases. As of June 30, 2002, we had cash and cash
equivalents of approximately $6.2 million.

Net cash provided by financing activities was
$2.2 million primarily because of borrowings from Canopy of
$1.9 million, the exercise of stock options and the
issuance of treasury shares, providing cash of
$0.5 million, offset by capital lease payments of
$0.2 million.

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We have experienced recurring decreases in
revenues and margins, which have resulted in significant losses
and cash used in operations and have significantly reduced
available working capital. As of April 6, 2002, working
capital was $3.3 million, as compared to $27.5 million
at the end of the prior fiscal year. In response, we have taken
the following actions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of fiscal 2002, we
    implemented further Restructuring activities (see note 2),
    consisting primarily of a reduction in headcount and a complete
    or partial abandonment of under utilized facilities and fixed
    assets. As a result, we expect to reduce our quarterly cash
    outlays by approximately $2.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In June 2002, the management approved additional
    Restructuring activities such as, but not limited to, a
    reduction in headcount of approximately 60 individuals
    domestically and consolidation of under utilized facilities,
    particularly exiting unused portions of the Anaheim, California
    facility. Of the 60 people, 16, 1, 7, 15 and 21 are from
    Sales, Marketing, General and Administration, Research and
    Development and Manufacturing departments, respectively. As a
    result, we will record a restructuring charge of approximately
    $1.0 million in the first quarter of fiscal year 2003 and
    expect to reduce our quarterly cash outlay by $1.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In February 2002, we borrowed $1.9 million
    from Canopy, our largest stockholder. On June 27, 2002, in
    response to limited borrowing ability, we replaced our
    $15.0 million line of credit with Silicon Valley Bank with
    a $7.0 million revolving line of credit from Canopy. The
    outstanding $1.9 million loan has been converted to
    borrowings against this line of credit. The new line will mature
    on June 30, 2003, bearing an interest rate of nine percent
    per annum and will be secured by a security interest in
    substantially all of our assets. The Canopy Loan Agreement
    contains negative covenants placing certain restrictions on our
    ability to repurchase capital stock, pay dividends or make
    distributions, purchase or sell assets, incur liens on our
    assets, incur additional debt, merge with another entity, make
    loans or investments, amend our charter Certificate of
    Incorporation or bylaws or issue stock. Although we are
    currently in compliance with all of the terms of the Canopy Loan
    Agreement, and believe that we will remain in compliance, there
    can be no assurance that we will be able to borrow under the
    Canopy Loan Agreement. Canopy may terminate the Canopy Loan
    Agreement and declare all amounts outstanding immediately due
    and payable upon an event of default, including upon
    30 days notice in the event that Canopy in good faith deems
    its interest in MTI to be insecure, the value of the collateral
    to have significantly declined, or the prospect of timely
    payment or performance to be impaired. Canopy owns approximately
    14,463,000 shares, or 44.7%, of our issued and outstanding
    common stock. Raymond Noorda, Chairman of MTI, is also Chairman
    of the Canopy Group and the beneficial owner of the majority
    interest in the Canopy Group.

We plan to undertake the following actions in the
first half of fiscal 2003:



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sell our remaining shares of Caldera Corporation
    common stock. We entered into an agreement on June 26,
    2002, to sell our remaining shares to Caldera and we expect to
    collect approximately $1.1 million in net proceeds.         
|
| |  | Transition manufacturing from our Anaheim,
    California headquarters to our Dublin, Ireland facility further
    consolidating our Anaheim, California operations. All excess
    fixed assets and inventory will be brokered or re-deployed.

Effective February 9, 1996, we entered into
an agreement (the EMC Agreement) with EMC
Corporation (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 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 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 thirty
days of the first anniversary of the effective date of the EMC
Agreement, and within thirty days of each subsequent anniversary
thereof. As of March 2001, we had received all such
installments. Also, as a result of a computer and technology
agreement between EMC

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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
Agreement in five equal annual installments. We received the
first three annual installments in March 2000, March 2001 and
March 2002, and are expecting to receive the two remaining
annual installments of $3.0 million in March 2003 and 2004.


We believe that revenues and margins are at
sustainable levels and working capital is adequate to fund
operations for at least the next twelve months. If, however,
revenues and margins continue to decrease, we may seek
additional financing alternatives such as additional bank
borrowings and/or public or private offerings of equity or debt
securities. No assurance can be given that additional sources of
financing will be available or that if available, such financing
will be on terms favorable to us. If additional sources of
financing are not available, we intend to implement additional
measures to conserve cash and reduce costs, which may include,
among other things, making additional cost reductions. However,
there is no assurance that such measures would be successful.
See Risk Factors  We will need additional
financing to continue to carry on our existing operations, and
such additional financing may not be available.

The following represents a comprehensive list of
our contractual obligations and commitments as of April 6,
2002:

|                  |  |                        |       |      |  |      |      |      |  |      |      |      |  |            |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|----------------- |  | ---------------------- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---------- | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                  |  |                       
|                  |  | Payments Due by Period
|                  |  |                       
|                  |  | Total                  |       | 2003 |  | 2004 |      | 2005 |  | 2006 |      | 2007 |  | Thereafter
|                  |  |                        |       |      |  |      |      |      |  |      |      |      |  |           
|                  |  |                       
|                  |  | (In millions)         
|Note Payable      |  | $                      | 1.90  |      |  | $    | 1.90 |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|Lease Obligations |  | $                      | 10.92 |      |  | $    | 4.39 |      |  | $    | 2.78 |      |  | $          | 2.24 |  |  | $ | 1.09 |  |  | $ | 0.41 |  |  | $ | 0.01 | 
|                  |  |                        |       |      |  |      |      |      |  |      |      |      |  |            |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|                  |  | $                      | 12.82 |      |  | $    | 6.29 |      |  | $    | 2.78 |      |  | $          | 2.24 |  |  | $ | 1.09 |  |  | $ | 0.41 |  |  | $ | 0.01 | 
|                  |  |                        |       |      |  |      |      |      |  |      |      |      |  |            |      |  |  |   |      |  |  |   |      |  |  |   |      | 

Recent Accounting Pronouncements

The FASB recently issued Statement No. 143,
Accounting for Asset Retirement Obligations addressing financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. Statement 143 requires an
enterprise to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of a tangible
long-lived asset. Statement 143 also requires the enterprise to
record the contra to the initial obligation as an increase to
the carrying amount of the related long-lived asset and to
depreciate that cost over the remaining useful life of the
asset. The liability is changed at the end of each period to
reflect the passage of time and changes in the estimated future
cash flows underlying the initial fair value measurement.
Statement 143 is effective for fiscal years beginning after
June 15, 2002. We are currently examining the impact of
this pronouncement on the results of our operations and
financial position, but currently believe the impact will not be
material.

On October 3, 2001, the FASB issued
Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes Statement No. 121.
Statement 144 retains many of the fundamental provisions of
Statement 121. Statement 144 also supersedes the accounting and
reporting provisions of Accounting Principle Board Opinion 30,
Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30), for the disposal of a
segment of a business. However, it retains the requirement in
APB 30 to report separately discontinued operations and extends
that reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. Statement 144 is
effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. We will
adopt Statement 144 in fiscal year 2003. The adoption is not
expected to have a material impact on our results of operations
or financial position.

On April 30, 2002, the FASB issued Statement
No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement updates, clarifies and

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simplifies existing accounting pronouncements.
Statement 145 rescinds Statement 4, which required all
gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of
related income tax effect. As a result, the criteria in
Opinion 30 will now be used to classify those gains and
losses. Statement 64 amended Statement 4, and is no
longer necessary because Statement 4 has been rescinded.
Statement 44 was issued to establish accounting
requirements for the effects of transition to the provisions of
the Motor Carrier Act of 1980. Because the transition has been
completed, Statement 44 is no longer necessary.
Statement 145 amends Statement 13 to require that
certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. This amendment is
consistent with the FASBs goal of requiring similar
accounting treatment for transactions that have similar economic
effects. The Company will adopt Statement 145 in fiscal
2003. Statement 145 is not expected to have a material
impact on the Companys results of operations or financial
position.


Inflation and Foreign Currency
Exchange

We recorded $0.5 million in foreign exchange
losses during fiscal year 2002, which resulted from European
currency exchange rate fluctuations. In order to minimize our
exposure to foreign currency fluctuations, we have used hedging
programs, currency forward contracts, currency options and/or
other derivative financial instruments commonly used to reduce
financial-market risks, none of which were outstanding at
April 6, 2002. There can be no assurance, however, that
such actions successfully will reduce our exposure to
financial-market risks.

Risk Factors

The non-historical information in this
Form 10-K constitute forward-looking statements and involve
risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements
may be identified by the use of words such as
believes, expects, may,
will, should, seeks,
anticipates, intends, plans
and similar expressions. Our actual results may differ
materially from those discussed in these statements. The
sections entitled Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business contain a discussion of some of the factors
that could contribute to those differences. Factors that could
contribute to these differences include those discussed below
and elsewhere in this Form 10-K.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We cannot predict the long-term impact of
    our recent Restructuring and cost reduction
    activities.

We recently implemented Restructuring activities
in an effort to reduce costs. These measures included reductions
in our workforce and the elimination of certain under-utilized
facilities, including offices in Sunnyvale, California, Boston,
Massachusetts, Austin, Texas, Denver, Colorado, Florida and
North Carolina. We reduced the number of our full-time employees
from 549 on April 7, 2001 to 392 as of May 27, 2002.
Please see Significant Business Developments 
Restructuring.

We may be unsuccessful in implementing the
Restructuring. The Restructuring may fail to reduce expenses,
fail to reduce expenses significantly enough or have other,
unintended consequences, such as the loss of key employees,
customers or a reduction of revenue. We may lose competitive
advantages by shifting our focus away from proprietary products
to third party, integrated products and may face greater
competition for such product sales. We may be unsuccessful in
differentiating ourselves from our competitors by emphasizing
our service and support capabilities and could lose customers to
the extent they have concerns about our financial viability. We
may face increased competition for our services, especially with
respect to customers purchasing third party products, who may
perceive other companies as having comparable or greater
expertise with respect to such products. Such customers may be
less likely to enter support and maintenance contracts with us
than customers who purchased our proprietary solutions.

We cannot predict with any certainty the
long-term impact of our workforce reductions and any reductions
we are compelled to make in the future. Reductions in our
workforce could negatively impact our financial condition and
results of operations, as well as make it difficult to motivate
and retain remaining

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employees, which would affect our ability to
deliver our products in a timely fashion and otherwise
negatively affect our business. We also cannot assure you that
these measures will be successful in achieving the expected
benefits within the expected time frames or that the workforce
reductions will not impair our ability to achieve our current or
future business objectives.


In the fourth quarter of fiscal 2002, we incurred
$4.9 million in charges relating to the Restructuring and
will incur additional charges in the first quarter of fiscal
2003 associated with additional restructuring actions. We also
may incur additional or unexpected costs associated with the
Restructuring, such as ongoing lease obligations at closed
facilities or severance costs for terminated employees. By
focusing more on third party, instead of proprietary products,
we may become more reliant on third parties to supply us with
products. In addition, we may incur additional costs associated
with negotiating new contractual relationships to broaden our
offering of third party products. There can be no assurance that
we will be able to successfully negotiate contracts with third
party manufacturers necessary to implement the Restructuring. A
failure to successfully implement the Restructuring would have a
material adverse impact on our operations.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional financing to
    continue to carry on our existing operations, and such
    additional financing may not be available.

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

We believe that our working capital, cash flow
from operating activities and amounts available under the Canopy
Loan Agreement, assuming our ability to borrow the full amount
under the Canopy Loan Agreement, will be sufficient to meet our
operating and capital expenditure requirements for at least the
next twelve months. However, Canopy may terminate the Canopy
Loan Agreement and declare all amounts outstanding immediately
due and payable upon an event of default, including upon
30 days notice in the event that Canopy in good faith deems
itself to be insecure, the value of the collateral to have
significantly declined from the date of the Canopy Loan
Agreement, or the prospect of timely payment or performance to
be impaired. If the Canopy Loan Agreement were terminated and
all outstanding amounts declared immediately due and payable, we
would require additional financing. In addition, projections for
our capital requirements are subject to numerous uncertainties,
including the cost savings expected to be realized from the
Restructuring, the amount of service and product revenue
generated in fiscal 2003 and general economic conditions.
Despite the Restructuring activities that have taken place to
date, we have continued to incur recurring losses from
operations. There can be no assurance that the Restructuring
will be successful or that the anticipated cost savings will be
realized. Also, in the longer term, if we do not realize
substantial cost savings from our Restructuring and achieve
profitability, we will require additional funds in order to
carry on our operations, and may seek to raise such funds
through bank borrowings or public or private offerings of equity
or debt securities or from other sources. No assurance can be
given that additional financing will be available or that, if
available, will be on terms favorable to us.

We may need additional sources of financing in
order to carry on our operations as presently conducted, which
may include bank borrowings or public or private offerings of
equity or debt securities. We cannot assure you that such
additional sources of financing will be available on acceptable
terms, if at all. If additional financing is required but not
available to us, we would have to implement additional measures
to conserve cash and reduce costs, which may include, among
other things, making additional cost reductions. However, there
is no assurance that such measures would be successful. Our
failure to raise required additional funds or to secure an
additional credit facility would adversely affect our ability to:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | maintain, develop or enhance our product
    offerings;
|
| |  | take advantage of future opportunities;                
|
| |  | respond to competitive pressures; or                   
|
| |  | continue operations.                                   

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



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | dilution in percentage of ownership in MTI; and                                                                             
|
| |  | the rights, preferences or privileges of the new
    security holders may be senior to those of the common
    stockholders.



| |                                                       
| | ------------------------------------------------------
| | Our securities may be removed from Nasdaq
    listing.

Our securities are currently listed and traded on
the Nasdaq National Market. To maintain our listing, we must
meet Nasdaqs required continued listing standards
including minimum stockholders equity, number of
shareholders and bid price. On May 30, 2002, we received
notice from Nasdaq that we were not in compliance with
Nasdaqs continued listing standards because the bid price
of our common stock closed below $1.00 per share for
30 consecutive trading days. If we are not in compliance by
August 28, 2002, we will be delisted. There can be no
assurance that we will be in compliance with the continued
listing standards in the future. If we are delisted, we may not
be able to secure listing on other exchanges or quotation
systems. This would materially adversely affect the price and
liquidity of our common stock.



| |                                                   
| | --------------------------------------------------
| | We are exposed to general economic
    conditions.

Our business depends on general economic and
business conditions. Continued softness in the information
technology market in both the United States and in Europe and
consumers uncertainty about the global economic condition
could result in reduced demand for our products and services. As
a result of the weakened global economy, consumers are
postponing or reducing expenditures, causing our revenue, our
operating results, and our financial condition to decline. The
downturn also has led to restructuring actions. Further delays
or reductions in information technology spending could have a
material adverse effect on demand for our products and services,
and thus, our operating results.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Our business is affected adversely as a
    result of a weakening demand in the technology
    market.

Our profitability depends upon the demand for
information storage hardware, software and services as a whole.
A decreasing demand for information-storage systems, software
and services because of a weakening economy or otherwise, will
result in decreased earnings.



| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A significant portion of our sales occurs
    in the last month of a given quarter and we operate without a
    significant backlog of orders. Consequently, our results of
    operations for that quarter may not meet our
    expectations.

We have experienced historically a significant
portion of our orders, sales and shipments in the last month or
weeks of each quarter. We expect this pattern to continue, and
possibly to increase, in the future. This uneven pattern makes
our ability to forecast revenues, earnings and working capital
requirements for each quarter extremely difficult and uncertain.
If we do not receive orders that we have anticipated or complete
shipments within a given quarter, our results of operations
could be harmed materially for that quarter. Also, we operate
without a significant backlog of orders. As a result, our
quarterly sales and operating results in any given quarter are
dependent, in large part, upon the volume and timing of orders
booked and products shipped during that quarter. Accordingly, we
may be unable to adjust spending in a timely manner to
compensate for any unanticipated decrease in our orders, sales
or shipments. Therefore, any decline in the demand for our
products and services, in relation to our forecast for any given
quarter, could materially harm our results of operations.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The markets for our products and services
    are intensely competitive which may lead to reduced sales of our
    products, reduced profits and reduced market share for our
    business.

The markets for our products and services are
intensely competitive, and we expect competition to intensify in
the future. If we fail to maintain or enhance our competitive
position, we could experience pricing

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




| |   |                                                             
| | - | ------------------------------------------------------------
| |  | quality of service and support;                             
|
| |  | responsiveness to customer and market needs;                
|
| |  | product price, quality, reliability and
    performance; and
|
| |  | ability to sell, service and deploy new
    technology.     

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



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly results may fluctuate from
    period to period. Therefore, historical results may not be
    indicative of future results or helpful in evaluating the
    results of our business.

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



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | changes in demand for our Vivant and S-Series
    lines of products and services;         
|
| |  | the introduction of new products by our
    competitors and competitive pricing pressures;
|
| |  | the size, timing and terms of customer orders;                                            
|
| |  | the timing of the introduction of new products
    and new versions of our products;      
|
| |  | shifts in our product or services mix;                                                    
|
| |  | changes in our operating expenditures;                                                    
|
| |  | the timing of sales, marketing research and
    development expenditures; and             
|
| |  | decreases in our gross profit as a percentage of
    revenues for mature products.        

Accordingly, we believe that quarter to quarter
comparisons of our operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as
indications of our future performance. We cannot assure you that
we will be profitable on a quarter to quarter basis or that our
future revenues and operating results will meet or exceed the
expectations of securities analysts and investors, any of which
could cause a significant adverse change in the trading price of
our common stock.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | The success of our business depends upon
    our ability to sell new products on a timely
    basis.

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

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products or effectively manage the transitions to
new products or new technologies could harm our business
materially.




| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our systems are complex and may contain
    undetected software or hardware errors that could be difficult,
    costly, and time consuming to repair.

Undetected software or hardware errors frequently
occur in networking products when they are first introduced or
as new versions of products are released. Our systems are
complex, and from time to time we may find errors in our
existing, new, or enhanced products. Also, our systems are
combined with products and components made by other vendors, and
if errors occur, it may be difficult to identify the source of
the problem. These errors, whether caused by our or another
vendors products, could:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | adversely affect sales of our products;                                                    
|
| |  | cause us to incur significant warranty and repair
    costs;                               
|
| |  | divert the attention of our engineering personnel
    from our product development efforts;
|
| |  | cause significant customer relations problems;                                             
|
| |  | harm our competitive position;                                                             
|
| |  | hurt our reputation; and                                                                   
|
| |  | cause purchase delays.                                                                     

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



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent upon limited source
    suppliers for principal components used in our products, and
    disruptions in supply or significant increases in component
    costs could harm our business materially.

We currently purchase several key materials used
in the manufacture of our products from single or limited source
suppliers. For example, for our Vivant product line, we
currently purchase disk drives from Seagate Technology, Inc. and
Xyratex Corporation, chipsets from Arrow Electronics, a
distributor of the QLogic chipsets, and RAID controllers for the
Vivant S series from Xyratex, an original
equipment manufacturer for IBM/ Mylex. We may fail to obtain
required materials in a timely manner in the future, or could
experience delays from evaluating and testing the products of
potential alternative suppliers. The recent softening of demand
in the telecommunications industry could adversely impact the
financial condition of our suppliers, many of whom have limited
financial resources. We have in the past, and may in the future,
be required to provide advance payments in order to secure key
materials from financially limited suppliers. Financial or other
difficulties faced by these suppliers could limit the
availability of key components or materials. Additionally,
financial difficulties could impair our ability to recover
advances made to these suppliers. Any interruption or delay in
the supply of any of these materials, or the inability to obtain
these materials from alternate sources at acceptable prices and
within a reasonable amount of time, would impair our ability to
meet scheduled product deliveries to our customers and could
cause customers to cancel orders.



| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We order products, components and materials
    based upon rolling forecasts which could cause us to
    overestimate or underestimate our actual requirements. This
    could cause us to increase our costs needlessly or prevent us
    from meeting customer demand.

We use rolling forecasts based upon anticipated
product orders to determine our component and product inventory
requirements. Lead times for products, materials and components
that we order vary significantly and depend upon factors such as
specific supplier requirements, contract terms and current
market demand for such products or components. As a result, our
product and component requirement forecasts may not be accurate.
If we overestimate our product or component requirements, we may
have excess inventory, which would increase our costs. If we
underestimate our product or component requirements, we may have
inadequate inventory, which could interrupt our manufacturing
and integration and delay delivery of our

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products to our customers. Any of these
occurrences would unfavorably affect our business and results of
operations.




| |                                      
| | -------------------------------------
| | We depend upon our key
    personnel.

We believe that our success is dependent, to a
significant extent, upon the efforts and abilities of our senior
management team, particularly our executive officers. The loss
of the services of our executive officers could harm materially
our business. The failure to retain key members of our senior
management team, or to implement a succession plan to prepare
qualified individuals to join us upon the loss of a member of
our senior management team, could materially harm our business.
In addition, a number of the members of our senior management
team joined us recently, as we replaced certain management
personnel, including the recent termination of Paul Emery, our
Chief Operating Officer and the hiring of Mark Franzen as Chief
Financial Officer. Thus, our management team has had limited
time to work together and as a result, may have difficulty
working together to successfully manage our business.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We are subject to financial and operating
    risks associated with international sales and
    services.

International sales and services represent a
significant portion of our total revenue. For example,
international sales and service revenue represented 34% of our
total sales and service revenue for fiscal year 2002. If we are
unable to maintain international market demand for our products
and services, our results of operations could be materially
harmed. Our international business is subject to the financial
and operating risks of conducting business internationally,
including:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | unexpected changes in, or impositions of,
    legislative or regulatory requirements;
|
| |  | fluctuating exchange rates, tariffs and other
    barriers;                          
|
| |  | difficulties in staffing and managing foreign
    subsidiary operations;             
|
| |  | import or export restrictions;                                                       
|
| |  | greater difficulties in accounts receivable
    collection and longer payment cycles;
|
| |  | potentially adverse tax consequences;                                                
|
| |  | potential hostilities and changes in diplomatic
    and trade relationships;         
|
| |  | changes in a countrys economic or political
    conditions; and                     
|
| |  | differing customer and/or technology standards
    requirements.                     

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



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Terrorist activities and resulting military
    and other actions could adversely affect our
    business.

The terrorist attacks in New York and Washington,
D.C. have disrupted commerce throughout the United States and
Europe. The continued threat of terrorism within the United
States and Europe and the military action and heightened
security measures in response to such threat may cause
significant disruption to commerce throughout the world. To the
extent that such disruptions result in delays or cancellations
of customer orders, delays in collecting cash, a general
decrease in corporate spending on information technology, or our
inability to effectively market, manufacture or ship our
products, our business and results of operations could be
materially and adversely affected. We are unable to predict
whether the threat of terrorism or the responses thereto will
result in any long-term commercial disruptions or if such
activities or responses will have any long-term material adverse
effect on our business, results of operations or financial
condition.

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| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our intellectual property is critical to
    our business and, if we are unable to protect our intellectual
    property, the success of our business and our results of
    operations could be harmed materially.

Our intellectual property includes patents,
proprietary technology, trade secrets, copyrights, and
trademarks. We rely upon a combination of intellectual property
laws and employee and third-party non-disclosure agreements to
protect our intellectual property rights. Third parties may
infringe upon our intellectual property rights, and we may be
unable to detect this unauthorized usage or to enforce our
rights effectively. Any legal action that we may bring to
protect our intellectual property rights could be expensive and
distract our management from day-to-day operations. Further, the
laws of some countries in which we sell our products do not
protect our intellectual property rights to the same extent as
do the laws in the United States. Unauthorized usage or
misappropriation of our intellectual property could harm our
business materially.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We may face costly damages or litigation
    costs if third parties claim that we infringe upon their
    intellectual property rights.

Our business activities may infringe upon the
proprietary rights of others, and other parties may assert
infringement claims against us. In addition, in the future, we
may receive communications from other parties asserting that our
intellectual property infringes on their proprietary rights. If
we become liable to any third party for infringing its
intellectual property rights, we could be required to pay
substantial damage awards and to develop non-infringing
technology, obtain licenses, or to cease selling the
applications that contain the infringing intellectual property.
We could have to redesign our products, which could be costly
and time consuming and could substantially delay product
shipments, assuming that a redesign is feasible. We may be
unable to develop non-infringing technology or to obtain
licenses on commercially-reasonable terms, if at all. Litigation
is subject to inherent uncertainties, and any outcome
unfavorable to us could materially harm our business.
Furthermore, we could incur substantial costs in defending
against any intellectual-property litigation, and these costs
could increase significantly if any dispute were to go to trial.
Our defense of any litigation, regardless of the merits of the
complaint, likely would be time-consuming, costly, and a
distraction to our management personnel. Adverse publicity
related to any intellectual property litigation also could harm
the sale of our products and damage our competitive position.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to comply with evolving
    industry standards and government regulations, we may be unable
    either to sell our systems or to be competitive in the
    marketplace.

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

Our systems integrate SAN and NAS technologies
into single storage architecture. Components of the SAN and NAS
must comply with evolving industry standards. We also depend
upon companies that provide other components of the SAN and NAS
to meet these standards. If our vendors or customers do not
support the same industry standards that we do, or if competing
standards emerge that we do not support, market acceptance of
our products could suffer.



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An adverse judgment in the securities class
    action litigation in which we, and several of our officers are
    defendants could have a material adverse effect on our results
    of operations and liquidity.

From July through September 2000, several class
action complaints were filed against us and several of our
officers, alleging that we were aware of adverse information
that we failed to disclose primarily during fiscal 2000 and,
hence, that we violated specified provisions of the Securities
Exchange Act of 1934 and the rules promulgated thereunder. The
plaintiffs in those cases filed a consolidated amended complaint
in the federal court for the Central District of California on
or about December 5, 2000, making similar allegations. This
consolidated complaint alleges a class period from July 22,
1999 to July 27, 2000 and alleges that the defendants were
aware of certain adverse information that they failed to
disclose during that period. We filed a

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motion to dismiss the complaint, which the
district court granted. However, the plaintiffs filed a Second
Amended Complaint, and, on October 9, 2001, the district
court denied our motion to dismiss that complaint. The Second
Amended Complaint alleges a class period from July 22, 1999
to July 12, 2000. The trial date is August 19, 2003.


The plaintiffs have not specified the amount of
damages they seek. Although we believe the alleged claims in
this lawsuit are without merit and are defending the lawsuit
vigorously, due to the inherent uncertainties of the litigation
process and the judicial system, we are unable to predict the
outcome of this litigation. This litigation may result in
substantial costs and distract managements attention and
resources. As of April 6, 2002, we met the deductible of
our insurance policy. In addition, this litigation may
negatively impact our ability to attract new officers or
directors. A judgment against us in this case could have a
material adverse effect on our results of operations and
liquidity.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock ownership is concentrated in a
    single stockholder, and other stockholders may not be able to
    influence corporate decisions.

Raymond J. Noorda,our Chairman of the Board, is also the
Chairman of the Board of Canopy and Ralph J.
Yarro III, one of our Directors, is also the Director and
President and Chief Executive Officer of Canopy. Canopy
beneficially owns approximately 45% of our outstanding common
stock and is able to substantially affect our actions which
require stockholder approval, including the election of the
Board of Directors and the approval of significant corporate
transactions. This concentration of ownership may delay or
prevent a change in control of us and will make some
transactions difficult or impossible without
Mr. Noordas or Mr. Yarros support.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our stock price may be volatile, which
    could lead to losses by investors and to securities
    litigation.

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



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

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



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We have adopted anti-takeover defenses that
    could affect the price of our common stock.

Our restated certificate of incorporation and
amended and restated bylaws contain various provisions,
including notice provisions, provisions for staggered terms of
office of the board of directors, and provisions authorizing us
to issue preferred stock, that may make it more difficult for a
third party to acquire, or may discourage acquisition bids for,
our company. Also, the rights of holders of our common stock may
be affected adversely by the rights of holders of any preferred
stock that we may issue in the future that would be senior to

27



---



##### Table of Contents



the rights of the holders of our common stock.
Furthermore, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. These provisions could also
limit the price that investors might be willing to pay in the
future for shares of our common stock.







|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risks

Our European operations transact in foreign
currencies and may be exposed to financial-market risk resulting
from fluctuations in foreign-currency exchange rates,
particularly the British Pound Sterling and the Euro. We have
used and may continue to use hedging programs, currency forward
contracts, currency options and/or other derivative financial
instruments commonly used to reduce financial-market risks, none
of which were outstanding at April 6, 2002. There can be no
assurance that such actions successfully will reduce our
exposure to financial-market risks.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The information required by this Item is
incorporated herein by reference to the consolidated financial
statements and supplementary data listed in Item 14(a)(1)
and 14(a)(2) of Part IV of this report.






|        |                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Independent Auditors on Accounting and Financial
    Disclosure

None.




PART III






Item
10.     Directors and Executive
Officers of the Registrant


Information with respect to our directors is
incorporated by reference to the information set forth in our
2002 Proxy Statement under the caption Directors.
Information with respect to our executive officers is set forth
in Part I, above, under the caption Executive
Officers of the Registrant.




Item
11.     Executive
Compensation

The information set forth under the caption
Compensation of Directors and Executive Officers and Other
Information in our 2002 Proxy Statement is incorporated
herein by reference.




Item
12.     Security Ownership of
Certain Beneficial Owners and Management

The information set forth under the caption
Voting Securities and Principal Holders Thereof in
our 2002 Proxy Statement is incorporated herein by reference.




Item
13.     Certain Relationships and
Related Transactions

The information set forth under the caption
Certain Transactions and Related Transactions in our
2002 Proxy Statement is incorporated herein by reference.




PART IV






Item
14.     Exhibits, Financial
Statement Schedules, and Reports on Form 8-K


The following Consolidated Financial Statements
of MTI and the Independent Auditors Report are attached
hereto beginning on pages 38 and 37.

(a)(1) Consolidated Financial Statements:



| |                                                                      
| | ---------------------------------------------------------------------
| | Independent Auditors Report                                         
|
| | Consolidated Balance Sheets as of April 6,
    2002 and April 7, 2001

28



---



##### Table of Contents





| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Consolidated Statements of Operations for fiscal
    years 2002, 2001 and 2000          
|
| | Consolidated Statements of Stockholders
    Equity for fiscal years 2002, 2001 and 2000
|
| | Consolidated Statements of Cash Flows for fiscal
    years 2002, 2001 and 2000          
|
| | Notes to Consolidated Financial Statements                                              

(2) The following financial statement
schedule for fiscal years 2002, 2001 and 2000 is submitted
herewith:



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

(3) Exhibits included herewith (numbered in
accordance with Item 601 of Regulation S-K):

|        |       |             |  |                                                                                                                                                                                                                                                                                                                       
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Restated Certificate of Incorporation of the
    Company, incorporated by reference to Exhibit 3.1 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                                                                        
|        | 3.2   |             |  | Certificate of Amendment of Restated Certificate
    of Incorporation of the Company, incorporated by reference to
    Exhibit A of the Companys Information Statement on
    Schedule 14C filed with the Commission on April 3,
    2000.                                                                           
|        | 3.3   |             |  | Amended and Restated Bylaws of the Company, dated
    January 18, 2002, incorporated by reference to
    exhibit 3.3 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended January 5,
    2002.                                                                                           
|        | 4.1   |             |  | Form of Registration Rights Agreement between the
    Company and certain Purchasers, and schedule of such Purchasers,
    incorporated by reference to Exhibit 4.1 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                       
|        | 4.2   |             |  | Registration Rights Agreement among the Company,
    Dialogic System Corporation and NFT Ventures, Inc., dated
    June 15, 1992, as amended as of April 1, 1993 and as
    of February 11, 1994, incorporated by reference to
    Exhibit 4.2 of the Companys Registration Statement on
    Form S-1 (No. 33-75180).
|        | 4.3   |             |  | Registration Rights Agreement between the Company
    and NFT Ventures, Inc., dated November 30, 1992,
    incorporated by reference to Exhibit 4.3 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                       
|        | 4.4   |             |  | Registration Rights Agreement between the Company
    and Dialogic Systems Corporation, dated November 30, 1992,
    incorporated by reference to Exhibit 4.11 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                            
|        | 4.5   |             |  | Amended and Restated Registration Rights
    Agreement between the Company and Silicon Valley Bank, dated
    January 11, 2002, incorporated by reference to
    Exhibit 4.8 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended January 5,
    2002.                                   
|        | 4.6   |             |  | Specimen of Amended Stock Certificate,
    incorporated by reference to Exhibit 4.6 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended quarterly period ended April 7, 2001.                                                                                                               
|        | 10.1  |             |  | Triple Net Lease between the Company and Catellus
    Development Corporation effective December 20, 1991,
    incorporated by reference to Exhibit 10.2 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                  
|        | 10.2  |             |  | Owner Participation Agreement between the
    Company, Catellus Development Corporation and Anaheim
    Redevelopment Agency, dated as of January 7, 1992,
    including exhibits, incorporated by reference to
    Exhibit 10.3 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).              
|        | *10.3 |             |  | Form of Nonqualified Stock Option Agreement under
    the Stock Incentive Plan, incorporated by reference to
    Exhibit 10.14 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                
|        | *10.4 |             |  | Form of Indemnification Agreement, incorporated
    by reference to Exhibit 10.16 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                                                                             

29



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                                                   
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | *10.5  |             |  | Micro Technology, Inc. Incentive Stock Option
    Plan  1985, incorporated by reference to
    Exhibit 10.20 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                             
|        | *10.6  |             |  | 1987 Incentive Stock Option and Nonqualified
    Stock Option Plan of the Company (the 1987 Stock Option
    Plan), incorporated by reference to Exhibit 10.21 of
    the Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                      
|        | *10.7  |             |  | Form of Incentive Common Stock Option Agreement
    under the 1987 Stock Option Plan, incorporated by reference to
    Exhibit 10.22 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                      
|        | *10.8  |             |  | Form of Nonqualified Common Stock Option
    Agreement under the 1987 Stock Option Plan, incorporated by
    reference to Exhibit 10.23 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                   
|        | *10.9  |             |  | Stock Incentive Plan of the Company, incorporated
    by reference to Exhibit 10.24 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                                                                       
|        | *10.10 |             |  | 1988 Stock Option Plan, as amended
    August 12, 1991, of SF2 Corporation, incorporated by
    reference to Exhibit 10.25 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                                
|        | 10.11  |             |  | Form of Consultant/ Employee Confidentiality
    Agreement, incorporated by reference to Exhibit 10.28 of
    the Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                                                                
|        | 10.12  |             |  | Lease between Oak Creek Delaware, Inc., and the
    Company, dated December 18, 1993, incorporated by reference
    to Exhibit 10.29 of the Companys Registration
    Statement on Form S-1 (No. 33-75180).                                                                                                      
|        | *10.13 |             |  | Form of Incentive Stock Option Agreement under
    the Stock Incentive Plan, incorporated by reference to
    Exhibit 10.30 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                               
|        | *10.14 |             |  | MTI Technology Corporation 1994 Employee Stock
    Purchase Plan, as amended, incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 2, 1994.                                                                                             
|        | 10.15  |             |  | MTI Technology Corporation Directors
    Non-Qualified Stock Option Plan, incorporated by reference to
    Exhibit 10.32 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                 
|        | 10.16  |             |  | Asset Purchase Agreement, dated February 9,
    1995, between EMC Corporation and the Company (confidential
    treatment granted pursuant to Rule 24b-2), incorporated by
    reference to Exhibit 10.36 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    December 30, 1995.
|        | 10.17  |             |  | Loan and Security Agreement between the Company
    and Silicon Valley Bank and General Electric Capital
    Corporation, as Co-Lenders, and Schedules thereto, incorporated
    by reference to Exhibit 10.28 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended July 4, 1998.
|        | 10.18  |             |  | Amendment to the 1996 Stock Incentive Plan,
    incorporated by reference to Exhibit 10.29 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 2, 1999.                                                                                                                 
|        | *10.19 |             |  | Severance Agreement dated as of July 15,
    1998, between Thomas P. Raimondi, Jr. and Company,
    incorporated by reference to Exhibit 10.30 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended quarterly period ended April 3, 1999.                                                
|        | *10.20 |             |  | Severance and Release Agreement dated as of
    July 7, 2000, between Dale Boyd and Company, incorporated
    by reference to Exhibit 10.20 of the Companys Annual
    Report on Form 10-K for the fiscal year ended April 7,
    2001.                                                                          
|        | *10.21 |             |  | Severance and Release Agreement dated as of
    April 29, 2001, between Guy M. Cheney and Company,
    incorporated by reference to Exhibit 10.21 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 7, 2001.                                                                    
|        | *10.22 |             |  | Severance and Release Agreement dated as of
    September 20, 2000, between Daniel Brown and Company,
    incorporated by reference to Exhibit 10.22 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 7, 2001.                                                                 

30



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                             
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | *10.23 |             |  | Severance Agreement dated as of February 7,
    2001, between Keith Clark and Company, incorporated by reference
    to Exhibit 10.24 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 7, 2001.                              
|        | *10.24 |             |  | Severance Agreement dated as of May 30,
    2001, between Kenneth D. Simpson and Company, incorporated
    by reference to Exhibit 10.26 of the Companys Annual
    Report on Form 10-K for the fiscal year ended April 7,
    2001.                       
|        | *10.25 |             |  | Severance Agreement dated as of May 31,
    2001, between Venki Venkatarman and Company, incorporated by
    reference to Exhibit 10.27 of the Companys Annual
    Report on Form 10-K for the fiscal year ended April 7,
    2001.                        
|        | *10.26 |             |  | Severance Agreement dated as of February 7,
    2001, between Keith Clark and Company, incorporated by reference
    to Exhibit 10.24 of the Companys Annual Report on
    Form 10-K for the fiscal year ended quarterly period ended
    April 7, 2001.   
|        | *10.27 |             |  | Severance Agreement dated as of May 30,
    2001, between Kenneth D. Simpson and Company, incorporated
    by reference to Exhibit 10.26 of the Companys Annual
    Report on Form 10-K for the fiscal year ended quarterly
    period ended April 7, 2001.
|        | *10.28 |             |  | Severance Agreement dated as of May 31,
    2001, between Venki Venkataraman and Company, incorporated by
    reference to Exhibit 10.27 of the Companys Annual
    Report on Form 10-K for the fiscal year ended quarterly
    period ended April 7, 2001.
|        | *10.29 |             |  | MTI Technology Corporation 2001 Stock Incentive
    Plan, incorporated by reference to Exhibit 10.30 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended quarterly period ended April 7, 2001.                                    
|        | *10.30 |             |  | MTI Technology Corporation 2001 Non-Employee
    Directors Option Program, incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on
    Form 10-K for the fiscal year ended quarterly period ended
    April 7, 2001.               
|        | *10.31 |             |  | MTI Technology Corporation 2001 Employee Stock
    Purchase Plan, incorporated by reference to Exhibit 10.32
    of the Companys Annual Report on Form 10-K for the
    fiscal year ended quarterly period ended April 7, 2001.                            
|        | *10.32 |             |  | Severance and Release Agreement dated as of
    July 31, 2001, between Richard L. Ruskin and Company,
    incorporated by reference to Exhibit 10.39 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001. 
|        | *10.33 |             |  | Consulting Agreement dated as of August 1,
    2001, between Richard L. Ruskin and Company, incorporated
    by reference to Exhibit 10.40 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended October 6, 2001.           
|        | *10.34 |             |  | Severance and Release Agreement dated as of
    August 20, 2001, between Dale Wight and Company,
    incorporated by reference to Exhibit 10.41 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.      
|        | *10.35 |             |  | Consulting Agreement dated as of August 21,
    2001, between Dale Wight and Company, incorporated by reference
    to Exhibit 10.40 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended October 6,
    2001.                 
|        | 10.36  |             |  | Indemnification Agreement dated as of
    October 15, 2001, between Kent Smith and the Company,
    incorporated by reference to Exhibit 10.43 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.       
|        | 10.37  |             |  | Warrant to Purchase 10,500 shares of Common
    Stock, issued to John E. Osborne, dated May 27, 2001
    incorporated by reference to Exhibit 10.44 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.  
|        | 10.38  |             |  | Warrant to Purchase 4,500 shares of Common Stock,
    issued to Kenneth J. Virnig, dated May 27, 2001,
    incorporated by reference to Exhibit 10.45 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.
|        | 10.39  |             |  | Statement of Work under PilotCenter Master
    Services Agreement, incorporated by reference to
    Exhibit 10.46 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended October 6,
    2001.                                    

31



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.40 |             |  | Master Lease Agreement No. 20011 between
    WebUseNet Corporation and the Company, dated September 28,
    2001, incorporated by reference to Exhibit 10.47 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.            
|        | 10.41 |             |  | Amendment No. 1 to Master Lease Agreement
    No. 20011, dated October 5, 2001, incorporated by
    reference to Exhibit 10.48 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    October 6, 2001.                                          
|        | 10.42 |             |  | Amended and Restated Loan and Security Agreement
    dated October 29, 2001, between the Company and Silicon valley
    Bank, incorporated by reference to Exhibit 10.37 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.
|        | 10.43 |             |  | Amendment to Loan Documents dated
    October 29, 2001, incorporated by reference to
    Exhibit 10.38 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended October 6,
    2001.                                                                  
|        | 10.44 |             |  | Amendment to Loan Documents, dated
    November 8, 2001, between the Company and Silicon Valley
    Bank, incorporated by reference to Exhibit 10.49 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.                    
|        | 10.45 |             |  | Subordination Agreement, dated November 7,
    2001, between the Company and Silicon Valley Bank, incorporated
    by reference to Exhibit 10.50 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended January 5, 2002.                        
|        | 10.46 |             |  | Amended and Restated Continuing Guarantee, dated
    November 8, 2001, between the Company and Silicon Valley
    Bank, incorporated by reference to Exhibit 10.51 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.      
|        | 10.47 |             |  | Pilot Center Master Services Agreement, dated
    April 1, 2001, between Center 7, Inc. and the Company,
    incorporated by reference to Exhibit 10.52 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 7, 2001.                    
|        | 10.48 |             |  | Warrant to Purchase 190,678 shares of Common
    Stock, issued to Silicon Valley Bank, dated January 11,
    2002, incorporated by reference to Exhibit 10.52 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.           
|        | 10.49 |             |  | Master Services Development Agreement, dated
    June 1, 2001, between the Company and Center 7, Inc.,
    incorporated by reference to Exhibit 10.53 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.                   
|        | 10.50 |             |  | Severance Agreement dated July 26, 2000,
    between Gary Scott and Company incorporated by reference to
    Exhibit 10.19 of the Companys Annual Report on
    Form 10-K for the fiscal year ended quarterly period ended
    April 7, 2001.                                 
|        | 10.51 |             |  | Loan Agreement, entered into as of June 27,
    2002, by and between MTI Technology Corporation and The Canopy
    Group, Inc., incorporated by reference to Exhibit 10.54 of
    the Companys Current Report on Form 8-K filed on
    July 1, 2002.                          
|        | 10.52 |             |  | Security Agreement, entered into as of
    June 27, 2002, by and between MTI Technology Corporation
    and The Canopy Group, Inc., incorporated by reference to
    Exhibit 10.55 of the Companys Current Report on
    Form 8-K filed on July 1, 2002.                      
|        | 10.53 |             |  | Promissory Note, entered into as of June 27,
    2002, by and between MTI Technology Corporation and The Canopy
    Group, Inc., incorporated by reference to Exhibit 10.56 of
    the Companys Current Report on Form 8-K filed on
    July 1, 2002.                         
|        | 10.54 |             |  | Termination Agreement, entered into as of
    June 25, 2002, by and between MTI Technology Corporation
    and Silicon Valley Bank, incorporated by reference to
    Exhibit 10.57 of the Companys Current Report on
    Form 8-K filed on July 1, 2002.                      
|        | 10.55 |             |  | Stock Purchase Agreement, entered into as of
    June 26, 2002, by and between MTI Technology Corporation
    and Caldera International, Inc., incorporated by reference to
    Exhibit 10.58 of the Companys Current Report on
    Form 8-K filed on July 1, 2002.           
|        | 10.56 |             |  | Microsoft OEM License Agreement for embedded
    server products dated August 1, 2001, between Microsoft
    Licensing, Inc. and the Company.                                                                                                                                  

32



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##### Table of Contents



|        |       |             |  |                                                                                                                                              
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.57 |             |  | Development, License and distribution Agreement
    dated September 10, 2001, between FalconStor, Inc. and the
    Company.                  
|        | 10.58 |             |  | Amendment No. 1 to Development, License and
    distribution Agreement dated October 1, 2001, between
    FalconStor, Inc. and the Company.  
|        | 10.59 |             |  | Amendment No. 2 to Development, License and
    distribution Agreement dated February 25, 2002, between
    FalconStor, Inc. and the Company.
|        | 10.60 |             |  | Finders Fee Agreement dated
    February 20, 2002, between WebUseNet Corporation and the
    Company.                                       
|        | 21    |             |  | Subsidiaries of the Company.                                                                                                                 
|        | 23    |             |  | Consent of KPMG LLP.                                                                                                                         
|        | 24    |             |  | Power of Attorney (see page 34)                                                                                                              



---



|  |                                                
|- | -----------------------------------------------
|* | Management or compensatory plan or arrangement.

(b) Reports on Form 8-K

None.

33



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 5th day of July
2002.



| |                           
| | --------------------------
| | MTI TECHNOLOGY CORPORATION



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

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

POWER OF ATTORNEY

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

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

|                                                     |  |                                                                                            |  |              |  | 
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ------------ |  | 
|                                                     |  |                                                                                            |  |             
|Signature                                            |  | Title                                                                                      |  | Date        
|                                                     |  |                                                                                            |  |             
|/s/ THOMAS P. RAIMONDI, JR.(Thomas P. Raimondi, Jr.) |  | Vice Chairman, President and Chief Executive
    Officer
    (Principal Executive Officer) |  | July 5, 2002
|                                                    
|/s/ MARK A. FRANZEN(Mark A. Franzen)                 |  | Chief Financial Officer and Secretary (Principal
    Financial & Accounting Officer)       |  | July 5, 2002
|                                                    
|/s/ RAYMOND J. NOORDA(Raymond J. Noorda)             |  | Chairman of the Board                                                                      |  | July 5, 2002
|                                                    
|/s/ VAL KREIDEL(Val Kreidel)                         |  | Director                                                                                   |  | July 5, 2002
|                                                    
|/s/ AL MELROSE(Al Melrose)                           |  | Director                                                                                   |  | July 5, 2002
|                                                    
|/s/ JOHN REPP(John Repp)                             |  | Director                                                                                   |  | July 5, 2002
|                                                    
|/s/ RALPH J. YARRO, III(Ralph J. Yarro, III)         |  | Director                                                                                   |  | July 5, 2002

34



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##### Table of Contents



|                                           |  |          |  |              |  | 
|------------------------------------------ |  | -------- |  | ------------ |  | 
|                                           |  |          |  |             
|Signature                                  |  | Title    |  | Date        
|                                           |  |          |  |             
|/s/ FRANZ L. CRISTIANI(Franz L. Cristiani) |  | Director |  | July 5, 2002
|                                          
|/s/ KENT D. SMITH(Kent D. Smith)           |  | Director |  | July 5, 2002

35



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##### Table of Contents






INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                  |  |      |    | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                  |  | Page
|                                                                                                                                  |  |     
|Independent Auditors Report                                                                                                      |  |      | 37 | 
|Consolidated Balance Sheets as of April 6,
    2002 and April 7, 2001                                                             |  |      | 38 | 
|Consolidated Statements of Operations for the
    fiscal years ended April 6, 2002, April 7, 2001 and
    April 1, 2000           |  |      | 39 | 
|Consolidated Statements of Stockholders
    Equity for the fiscal years ended April 6, 2002,
    April 7, 2001 and April 1, 2000 |  |      | 40 | 
|Consolidated Statements of Cash Flows for the
    fiscal years ended April 6, 2002, April 7, 2001 and
    April 1, 2000           |  |      | 41 | 
|Notes to Consolidated Financial Statements                                                                                        |  |      | 42 | 
|Financial Statement Schedule                                                                                                      |  |      |    | 
|Schedule II  Valuation and
    Qualifying Accounts                                                                               |  |      | 63 | 

36



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

MTI Technology Corporation:


We have audited the consolidated financial
statements of MTI Technology Corporation and subsidiaries as
listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited
the financial statement schedule listed in the accompanying
index. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of MTI Technology Corporation
and subsidiaries as of April 6, 2002 and April 7,
2001, and the results of their operations and their cash flows
for each of the years in the three-year period ended
April 6, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.



| |         
| | --------
| | KPMG LLP

Costa Mesa, California

June 27, 2002


37



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |         |        | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | -------- | ------ | - | ------- | ------- | ------ | 
|                                                                                              |                                                                                                                                                                             | April 6,                   |        | April 7,
|                                                                                              |                                                                                                                                                                             | 2002                       |        | 2001    
|                                                                                              |                                                                                                                                                                             |                            |        |         
|                                                                                              |                                                                                                                                                                             |                           
|                                                                                              |                                                                                                                                                                             | (In thousands)            
|ASSETS                                                                                       
|Current assets:                                                                               |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              | Cash and cash equivalents                                                                                                                                                   |                            | $      | 8,420    |        |   | $       | 16,320  |       
|                                                                                              | Accounts receivable, less allowance for doubtful
    accounts and sales returns of $3,406 in 2002 and $10,460 in 2001                                                       |                            |        | 18,153   |        |   |         | 21,514  |       
|                                                                                              | Inventories                                                                                                                                                                 |                            |        | 9,793    |        |   |         | 29,112  |       
|                                                                                              | Deferred income tax benefit                                                                                                                                                 |                            |        |         |        |   |         | 1,020   |       
|                                                                                              | Prepaid expenses and other receivables                                                                                                                                      |                            |        | 7,016    |        |   |         | 5,615   |       
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              |                                                                                                                                                                             | Total current assets       |        |          | 43,382 |   |         |         | 73,581 | 
|Property, plant and equipment, net                                                            |                                                                                                                                                                             |                            | 12,535 |          |        |   | 17,182  |        
|Deferred income tax benefit                                                                   |                                                                                                                                                                             |                            |       |          |        |   | 23,280  |        
|Investment in affiliate                                                                       |                                                                                                                                                                             |                            |       |          |        |   | 9,504   |        
|Intangible assets and goodwill, less accumulated
    amortization of $13,191 in 2002 and 2001 |                                                                                                                                                                             |                            | 5,184  |          |        |   | 5,184   |        
|Other                                                                                         |                                                                                                                                                                             |                            | 597    |          |        |   | 229     |        
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              |                                                                                                                                                                             | $                          | 61,698 |          |        | $ | 128,960 |        
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                     
|Current liabilities:                                                                          |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              | Note payable                                                                                                                                                                |                            | $      | 1,900    |        |   | $       |        |       
|                                                                                              | Current portion of capital lease obligations                                                                                                                                |                            |        | 135      |        |   |         | 127     |       
|                                                                                              | Accounts payable                                                                                                                                                            |                            |        | 9,413    |        |   |         | 11,042  |       
|                                                                                              | Accrued liabilities                                                                                                                                                         |                            |        | 9,308    |        |   |         | 14,548  |       
|                                                                                              | Accrued restructuring charges                                                                                                                                               |                            |        | 4,473    |        |   |         | 136     |       
|                                                                                              | Deferred income                                                                                                                                                             |                            |        | 14,884   |        |   |         | 20,214  |       
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              |                                                                                                                                                                             | Total current liabilities  |        |          | 40,113 |   |         |         | 46,067 | 
|Capital lease obligations, less current portion                                               |                                                                                                                                                                             |                            | 461    |          |        |   | 621     |        
|Other                                                                                         |                                                                                                                                                                             |                            | 1,011  |          |        |   | 3,522   |        
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              |                                                                                                                                                                             | Total liabilities          |        |          | 41,585 |   |         |         | 50,210 | 
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|Commitments and contingencies                                                                 |                                                                                                                                                                             |                            |        |          |        |   |         |        
|Subsequent event (note 13)                                                                    |                                                                                                                                                                             |                            |        |          |        |   |         |        
|Stockholders equity:                                                                         |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              | Preferred stock, $.001 par value; authorized
    5,000 shares; issued and outstanding, none                                                                                 |                            |        |         |        |   |         |        |       
|                                                                                              | Common stock, $.001 par value; authorized 80,000
    shares; issued (including treasury shares) and outstanding
    32,862 and 32,732 shares in 2002 and 2001, respectively |                            |        | 33       |        |   |         | 33      |       
|                                                                                              | Additional paid-in capital                                                                                                                                                  |                            |        | 134,887  |        |   |         | 135,132 |       
|                                                                                              | Accumulated deficit                                                                                                                                                         |                            |        | (110,702 | )      |   |         | (51,050 | )     
|                                                                                              | Less cost of treasury stock (187 and 375 shares
    in 2002 and 2001, respectively)                                                                                         |                            |        | (426     | )      |   |         | (1,348  | )     
|                                                                                              | Accumulated other comprehensive loss                                                                                                                                        |                            |        | (3,679   | )      |   |         | (4,017  | )     
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              |                                                                                                                                                                             | Total stockholders equity |        |          | 20,113 |   |         |         | 78,750 | 
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        
|                                                                                              |                                                                                                                                                                             | $                          | 61,698 |          |        | $ | 128,960 |        
|                                                                                              |                                                                                                                                                                             |                            |        |          |        |   |         |        

See accompanying notes to consolidated financial
statements.

38



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MTI TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

Fiscal years ended April 6, 2002, April 7,
2001 and April 1, 2000


|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |         |         | 
|----------------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                            |                                                                      | 2002                                                                                                         |         | 2001    |         | 2000
|                                                            |                                                                      |                                                                                                              |         |         |         |     
|                                                            |                                                                      |                                                                                                             
|                                                            |                                                                      | (In thousands, except per share data)                                                                       
|Net product revenue                                         |                                                                      | $                                                                                                            | 69,519  |         |         | $    | 111,820 |         |         | $ | 177,770 |        
|Service revenue                                             |                                                                      |                                                                                                              | 48,399  |         |         |      | 49,870  |         |         |   | 49,327  |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            |                                                                      | Total revenue, including $836, $429 and $4,920
    from related parties in 2002, 2001 and 2000, respectively |         |         | 117,918 |      |         |         | 161,690 |   |         |         | 227,097 | 
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|Product cost of revenue                                     |                                                                      |                                                                                                              | 56,466  |         |         |      | 72,529  |         |         |   | 106,568 |        
|Service cost of revenue                                     |                                                                      |                                                                                                              | 29,751  |         |         |      | 35,242  |         |         |   | 30,456  |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            |                                                                      | Total cost of revenue                                                                                        |         |         | 86,217  |      |         |         | 107,771 |   |         |         | 137,024 | 
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            |                                                                      | Gross profit                                                                                                 |         |         | 31,701  |      |         |         | 53,919  |   |         |         | 90,073  | 
|Operating expenses:                                         |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Selling, general and administrative                                  |                                                                                                              |         | 43,211  |         |      |         | 66,249  |         |   |         | 64,506  |        
|                                                            | Research and development                                             |                                                                                                              |         | 12,742  |         |      |         | 19,095  |         |   |         | 16,017  |        
|                                                            | Restructuring charges                                                |                                                                                                              |         | 4,911   |         |      |         | 393     |         |   |         |        |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            |                                                                      | Total operating expenses                                                                                     |         |         | 60,864  |      |         |         | 85,737  |   |         |         | 80,523  | 
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            |                                                                      | Operating income (loss)                                                                                      |         |         | (29,163 | )    |         |         | (31,818 | ) |         |         | 9,550   | 
|Other income (expense):                                     |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Equity in net loss and write-down of net
    investment of affiliate |                                                                                                              |         | (9,504  | )       |      |         | (4,800  | )       |   |         | (2,824  | )      
|                                                            | Interest expense                                                     |                                                                                                              |         | (236    | )       |      |         | (432    | )       |   |         | (598    | )      
|                                                            | Interest income                                                      |                                                                                                              |         | 514     |         |      |         | 319     |         |   |         | 110     |        
|                                                            | Loss on foreign currency transactions                                |                                                                                                              |         | (542    | )       |      |         | (552    | )       |   |         | (323    | )      
|                                                            | Other income, net                                                    |                                                                                                              |         | 3,904   |         |      |         | 4,371   |         |   |         | 4,310   |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|Income (loss) before income taxes                           |                                                                      |                                                                                                              | (35,027 | )       |         |      | (32,912 | )       |         |   | 10,225  |        
|                                                            | Income tax expense (benefit)                                         |                                                                                                              |         | 24,598  |         |      |         | 3,529   |         |   |         | (15,095 | )      
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Net income (loss)                                                    |                                                                                                              | $       | (59,625 | )       |      | $       | (36,441 | )       |   | $       | 25,320  |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|Net income (loss) per share:                                |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Basic                                                                |                                                                                                              | $       | (1.83   | )       |      | $       | (1.13   | )       |   | $       | 0.84    |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Diluted                                                              |                                                                                                              | $       | (1.83   | )       |      | $       | (1.13   | )       |   | $       | 0.76    |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|Weighted average shares used in per share
    computations: |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Basic                                                                |                                                                                                              |         | 32,548  |         |      |         | 32,233  |         |   |         | 30,268  |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        
|                                                            | Diluted                                                              |                                                                                                              |         | 32,548  |         |      |         | 32,233  |         |   |         | 33,232  |        
|                                                            |                                                                      |                                                                                                              |         |         |         |      |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

39



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Fiscal years ended April 6, 2002, April 7,
2001 and April 1, 2000


|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | -------------- | ------ | ---------- |  | -------- | -- | ------------- |  | -------- | ------- | ------------- |  | ------ | -------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                    |  |                |        |            |  |          |    | Accumulated   |  | Total    |         | Total        
|                                                                                    |  | Common Stock   |        | Additional |  | Retained |    | Other         |  | Stock-   |         | Comprehensive
|                                                                                    |  |                |        | Paid-In    |  | Earnings |    | Comprehensive |  | Holders |         | Income       
|                                                                                    |  | Shares         |        | Amount     |  | Capital  |    | (Deficit)     |  | Loss     |         | Equity        |  | (Loss)
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |       
|                                                                                    |  |               
|                                                                                    |  | (In thousands)
|Balance at April 3, 1999                                                            |  |                | 28,637 |            |  | $        | 29 |               |  | $        | 96,431  |               |  | $      | (39,929  | ) |  | $ | (2,390 | ) |  | $ | 54,141  |   |  |   |         |  
|Net income                                                                          |  |                |       |            |  |          |   |               |  |          |        |               |  |        | 25,320   |   |  |   |       |   |  |   | 25,320  |   |  | $ | 25,320  |  
|Foreign currency translation adjustments                                            |  |                |       |            |  |          |   |               |  |          |        |               |  |        |         |   |  |   | (800   | ) |  |   | (800    | ) |  |   | (800    | )
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive income for the year ended
    April 1, 2000                           |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  | $ | 24,520  |  
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Sale of stock by affiliate                                                          |  |                |       |            |  |          |   |               |  |          | 6,194   |               |  |        |         |   |  |   |       |   |  |   | 6,194   |   |  |   |         |  
|Issuance of warrant                                                                 |  |                |       |            |  |          |   |               |  |          | 1,894   |               |  |        |         |   |  |   |       |   |  |   | 1,894   |   |  |   |         |  
|Exercise of stock options and warrants (including
    income tax benefit of $9,941) |  |                | 3,140  |            |  |          | 3  |               |  |          | 26,084  |               |  |        |         |   |  |   |       |   |  |   | 26,087  |   |  |   |         |  
|Treasury shares issued under Employee Stock
    Purchase Plan                       |  |                | 96     |            |  |          |   |               |  |          | 659     |               |  |        |         |   |  |   |       |   |  |   | 659     |   |  |   |         |  
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at April 1, 2000                                                            |  |                | 31,873 |            |  | $        | 32 |               |  | $        | 131,262 |               |  | $      | (14,609  | ) |  | $ | (3,190 | ) |  | $ | 113,495 |   |  |   |         |  
|Net loss                                                                            |  |                |       |            |  |          |   |               |  |          |        |               |  |        | (36,441  | ) |  |   |       |   |  |   | (36,441 | ) |  | $ | (36,441 | )
|Foreign currency translation adjustments                                            |  |                |       |            |  |          |   |               |  |          |        |               |  |        |         |   |  |   | (827   | ) |  |   | (827    | ) |  |   | (827    | )
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended
    April 7, 2001                             |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  | $ | (37,268 | )
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Exercise of stock options                                                           |  |                | 379    |            |  |          | 1  |               |  |          | 2,006   |               |  |        |         |   |  |   |       |   |  |   | 2,007   |   |  |   |         |  
|Treasury shares issued under Employee Stock
    Purchase Plan                       |  |                | 105    |            |  |          |   |               |  |          | 516     |               |  |        |         |   |  |   |       |   |  |   | 516     |   |  |   |         |  
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at April 7, 2001                                                            |  |                | 32,357 |            |  | $        | 33 |               |  | $        | 133,784 |               |  | $      | (51,050  | ) |  | $ | (4,017 | ) |  | $ | 78,750  |   |  |   |         |  
|Net loss                                                                            |  |                |       |            |  |          |   |               |  |          |        |               |  |        | (59,625  | ) |  |   |       |   |  |   | (59,625 | ) |  | $ | (59,625 | )
|Foreign currency translation adjustments                                            |  |                |       |            |  |          |   |               |  |          |        |               |  |        |         |   |  |   | 338    |   |  |   | 338     |   |  |   | 338     |  
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended
    April 6, 2002                             |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  | $ | (59,287 | )
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Exercise of stock options                                                           |  |                | 131    |            |  |          |   |               |  |          | 202     |               |  |        |         |   |  |   |       |   |  |   | 202     |   |  |   |         |  
|Treasury shares issued under Employee Stock
    Purchase Plan                       |  |                | 81     |            |  |          |   |               |  |          | 135     |               |  |        |         |   |  |   |       |   |  |   | 135     |   |  |   |         |  
|Treasury shares issued for employee compensation                                    |  |                | 106    |            |  |          |   |               |  |          | 201     |               |  |        | (27      | ) |  |   |        |   |  |   | 174     |   |  |   |         |  
|Issuance of warrant                                                                 |  |                |       |            |  |          |   |               |  |          | 139     |               |  |        |         |   |  |   |       |   |  |   | 139     |   |  |   |         |  
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at April 6, 2002                                                            |  |                | 32,675 |            |  | $        | 33 |               |  | $        | 134,461 |               |  | $      | (110,702 | ) |  | $ | (3,679 | ) |  | $ | 20,113  |   |  |   |         |  
|                                                                                    |  |                |        |            |  |          |    |               |  |          |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

40



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Fiscal years ended April 6, 2002, April 7,
2001 and April 1, 2000


|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |         |         |  
|------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------ | ------- | ------ | ---- | ------ | ------- | ------ | - | ----- | ------- | ------- | -
|                                                                         |                                                                                                            | 2002                                                                   |        | 2001    |        | 2000
|                                                                         |                                                                                                            |                                                                        |        |         |        |     
|                                                                         |                                                                                                            |                                                                       
|                                                                         |                                                                                                            | (In thousands)                                                        
|Cash flows from operating activities:                                    |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Net income (loss)                                                                                          |                                                                        | $      | (59,625 | )      |      | $      | (36,441 | )      |   | $     | 25,320  |        
|                                                                         | Adjustments to reconcile net income
    (loss) to net cash provided (used in) by operating
    activities: |                                                                        |        |         |        |      |        |         |        |   |       |         |        
|                                                                         |                                                                                                            | Depreciation and amortization                                          |        |         | 6,798  |      |        |         | 10,470 |   |       |         | 6,932   |  
|                                                                         |                                                                                                            | Provision for sales returns and losses on
    accounts receivable, net |        |         | 1,884  |      |        |         | 4,330  |   |       |         | 479     |  
|                                                                         |                                                                                                            | Provision for inventory obsolescence                                   |        |         | 8,850  |      |        |         | 2,825  |   |       |         | 2,281   |  
|                                                                         |                                                                                                            | Loss on disposal of fixed assets                                       |        |         | 1,101  |      |        |         | 3,016  |   |       |         | 165     |  
|                                                                         |                                                                                                            | Deferred income tax expense (benefit)                                  |        |         | 24,300 |      |        |         | 3,435  |   |       |         | (17,169 | )
|                                                                         |                                                                                                            | Deferred income                                                        |        |         | (7,841 | )    |        |         | 166    |   |       |         | 4,433   |  
|                                                                         |                                                                                                            | Net loss in equity of affiliate                                        |        |         | 9,504  |      |        |         | 4,800  |   |       |         | 2,824   |  
|                                                                         |                                                                                                            | Restructuring charges                                                  |        |         | 4,473  |      |        |         | 136    |   |       |         |        |  
|                                                                         |                                                                                                            | Non-cash compensation from issuance of
    option/warrant              |        |         | 154    |      |        |         |       |   |       |         | 379     |  
|                                                                         |                                                                                                            | Income tax benefit from exercise of stock options                      |        |         |       |      |        |         |       |   |       |         | 9,941   |  
|Changes in assets and liabilities, net of effect
    of acquisitions:    |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Accounts receivable                                                                                        |                                                                        |        | 1,743   |        |      |        | 48,014  |        |   |       | (22,138 | )      
|                                                                         | Inventories                                                                                                |                                                                        |        | 10,541  |        |      |        | (6,550  | )      |   |       | (10,923 | )      
|                                                                         | Prepaid expenses, other receivables and other
    assets                                                   |                                                                        |        | (1,658  | )      |      |        | 1,223   |        |   |       | 1,399   |        
|                                                                         | Accounts payable                                                                                           |                                                                        |        | (1,517  | )      |      |        | (11,057 | )      |   |       | 3,283   |        
|                                                                         | Accrued and other liabilities                                                                              |                                                                        |        | (5,089  | )      |      |        | (6,157  | )      |   |       | (5,823  | )      
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Net cash provided by (used in) operating
    activities                                                    |                                                                        |        | (6,382  | )      |      |        | 18,210  |        |   |       | 1,383   |        
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|Cash flows from investing activities:                                    |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Capital expenditures for property, plant and
    equipment                                                 |                                                                        |        | (3,311  | )      |      |        | (11,761 | )      |   |       | (6,253  | )      
|                                                                         | Equity investment in affiliate                                                                             |                                                                        |        |        |        |      |        |        |        |   |       | (4,554  | )      
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Net cash used in investing activities                                                                      |                                                                        |        | (3,311  | )      |      |        | (11,761 | )      |   |       | (10,807 | )      
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|Cash flows from financing activities:                                    |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Borrowings under notes payable                                                                             |                                                                        |        | 1,900   |        |      |        |        |        |   |       | 80,871  |        
|                                                                         | Proceeds from issuance of common stock, treasury
    shares and exercise of options and warrants           |                                                                        |        | 496     |        |      |        | 2,523   |        |   |       | 16,805  |        
|                                                                         | Payment of capital lease                                                                                   |                                                                        |        | (152    | )      |      |        | (98     | )      |   |       |        |        
|                                                                         | Repayments of notes payable                                                                                |                                                                        |        |        |        |      |        | (1,500  | )      |   |       | (86,695 | )      
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Net cash provided by financing activities                                                                  |                                                                        |        | 2,244   |        |      |        | 925     |        |   |       | 10,981  |        
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|Effect of exchange rate changes on cash                                  |                                                                                                            |                                                                        | (451   | )       |        |      | 155    |         |        |   | 21    |        
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|Net increase (decrease) in cash and cash
    equivalents                 |                                                                                                            |                                                                        | (7,900 | )       |        |      | 7,529  |         |        |   | 1,578 |        
|Cash at beginning of year                                                |                                                                                                            |                                                                        | 16,320 |         |        |      | 8,791  |         |        |   | 7,213 |        
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|Cash at end of year                                                      |                                                                                                            | $                                                                      | 8,420  |         |        | $    | 16,320 |         |        | $ | 8,791 |        
|                                                                         |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|Supplemental disclosures of cash flow information:                       |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Cash paid during the period for:                                                                           |                                                                        |        |         |        |      |        |         |        |   |       |         |        
|                                                                         |                                                                                                            | Interest                                                               |        | $       | 98     |      |        | $       | 432    |   |       | $       | 599     |  
|                                                                         |                                                                                                            | Income taxes                                                           |        |         |       |      |        |         | 157    |   |       |         | 466     |  
|Supplemental schedule of noncash investing and
    financing activities: |                                                                                                            |                                                                        |        |         |        |      |        |         |        |   |       |        
|                                                                         | Note issued in connection with equity investment
    in affiliate                                          |                                                                        |        |        |        |      |        |        |        |   |       | 1,500   |        
|                                                                         | Valuation of warrant issued                                                                                |                                                                        |        |        |        |      |        |        |        |   |       | 1,894   |        
|                                                                         | Sale of stock by affiliate                                                                                 |                                                                        |        |        |        |      |        |        |        |   |       | 6,194   |        
|                                                                         | Acquisition of leased equipment                                                                            |                                                                        |        |        |        |      |        | 846     |        |   |       |        |        

See accompanying notes to consolidated financial
statements.

41



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except share and per share
data)




|    |                                               
|--- | ----------------------------------------------
|(1) | Summary of Significant Accounting
    Policies



| |                                                                              
| | -----------------------------------------------------------------------------
| | Basis of Financial Statement Presentation
    and Principles of Consolidation

The accompanying consolidated financial
statements include the accounts of MTI Technology Corporation
and subsidiaries (the Company or MTI).
All significant intercompany accounts and transactions have been
eliminated in consolidation.

These consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.
The Company has experienced recurring decreases in revenue and
margins, has incurred significant operating losses, has used
cash in operating activities and has an accumulated deficit. The
Company anticipates that its existing resources, including the
$7,000 line of credit with the Canopy Group, Inc. (see
note 13), will be sufficient to meet its needs for working
capital expenditures through at least fiscal year 2003.
Ultimately, the Companys ability to continue as a going
concern is dependent upon its ability to successfully grow
revenue, attain operational efficiencies and sustain a
profitable level of operations.



| |            
| | -----------
| | Fiscal Year

The Companys year-end is the first Saturday
following March 31. Fiscal years 2002, 2001 and 2000 ended
on April 6, April 7 and April 1, respectively, and
consisted of 52 weeks except for fiscal year 2001 which
consisted of 53 weeks.



| |                    
| | -------------------
| | Revenue Recognition

Sales of the Companys computer equipment
are recorded upon shipment, 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 amount is determinable. Revenue from equipment maintenance
contracts is recorded as deferred income when billed and is
recognized as earned over the period in which the services are
provided, primarily straight-line over the term of the contract.
The Company accrues for 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 warranty costs and sales volumes. In
December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. This
Bulletin has subsequent updates: SAB 101A and
SAB 101B. The objective of this SAB is to provide further
guidance on revenue-recognition issues in the absence of
authoritative literature addressing a specific arrangement or a
specific industry. MTI adopted SAB 101 in the fourth
quarter of fiscal year 2001, which caused no material effect
upon MTIs results of operations or financial position.

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 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 at fair value and there are no significant
Company obligations related to the sale and the resulting
receivable is deemed collectible, net of an allowance for
returns, cancellations and maintenance, including vendor and
post-contract support obligations. Revenue from maintenance
agreements is recognized ratably over the term of the related
agreement. Revenue from consulting and other software-related
services is recognized as the services are rendered.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. There were $818 and $10,179 in
cash equivalents at April 6, 2002 and April 7, 2001,
respectively.

42



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |            
| | -----------
| | Inventories

Inventories are valued at the lower of first-in,
first-out cost or market. Managements estimate of market
includes a provision for obsolete, slow-moving, and unsaleable
inventory based upon inventory on hand, historical product
sales, and forecasts.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment are recorded at
cost. Depreciation is calculated using the straight-line method
over the estimated useful lives of two to seven years. Leasehold
improvements are amortized using the straight-line method over
the lesser of the useful life of the improvement or the term of
the related lease. Maintenance and repairs are expensed as
incurred. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. If the fair value is
less that the carrying value, a loss is recognized for the
difference.



| |                             
| | ----------------------------
| | Accounting for Stock Options

The Company accounts for employee stock-based
compensation using the intrinsic value method. As such,
compensation expense is computed on the date of grant only if
the current market price of the underlying stock exceeded the
exercise price. The related expense is recorded over the vesting
period. The Company accounts for stock-based awards to
nonemployees using the fair value method. The related expense is
recorded in the same manner as if cash were paid.



| |             
| | ------------
| | Income Taxes

Under the asset and liability method, deferred
tax assets and liabilities are determined based on differences
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to
reverse, net of a valuation allowance for deferred tax assets
which are determined to not be more likely than not realizable.
The effect on deferred taxes of a change in tax rates is
recognized in operations in the period that includes the
enactment date. The Company records a valuation allowance
against its deferred tax assets when management determines it is
more likely than not that the assets will not be utilized.



| |                                   
| | ----------------------------------
| | Intangible Assets and
    Goodwill

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill
and Other Intangible Assets. The Company chose to early
adopt the provisions of Statement No. 142 effective
April 8, 2001. The Company adopted Statement No. 141
immediately upon its release. Statement No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement
No. 141 also specifies criteria intangible assets acquired
in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement
No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead
tested for impairment annually or whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could
trigger an impairment review include significant
underperformance relative to expected historical or projected
future operating results, significant changes in the manner of
use of acquired assets or the strategy for the overall business,
and significant negative industry or economic trends. Upon the
adoption of Statement No. 142, the carrying value of the
Companys goodwill and other intangible assets was
determined to not be impaired.

43



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Goodwill represents the excess of the purchase
price of National Peripherals, Inc. after allocation of purchase
price to identifiable assets. Prior to the adoption of Statement
No. 142, this goodwill was being amortized over
10 years.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The Company follows the principles of
Statement 52, Foreign Currency Translation,
using the local currencies as the functional currencies of its
foreign subsidiaries. Accordingly, all assets and liabilities
outside the United States are translated into dollars at the
rate of exchange in effect at the balance sheet date. Income and
expense items are translated at the weighted-average exchange
rates prevailing during the period. Net foreign-currency
translation adjustments are recorded as other accumulated
comprehensive loss in stockholders equity. Net foreign
currency transaction exchange losses of $542, $552 and $323 were
realized in fiscal years 2002, 2001 and 2000, respectively.



| |                                                               
| | --------------------------------------------------------------
| | Concentration of Credit Risk and Dependence
    Upon Suppliers

Credit is extended to all customers based on
financial condition and, generally, collateral is not required.
Concentrations of credit risk with respect to trade receivables
are limited because of the large number of customers comprising
the Companys customer base and dispersion across many
different industries and geographies.

The Company generally uses parts and components
available from multiple vendors. However, for the Vivant product
line, the Company currently purchases disk drives from Seagate
Technology, Inc. and Xyratex Corporation, chipsets from Arrow
Electronics, a distributor of the QLogic chipsets, and RAID
controllers for the Vivant S series from
Xyratex, an OEM for IBM/ Mylex. To date, the Company has been
able to obtain supplies of these parts and believes that
adequate quantities are available to meet its needs. Disruptions
in supply or material increases in the cost of these components
would have an adverse effect on the Companys operations.



| |                                      
| | -------------------------------------
| | Sale of Common Stock by
    Affiliate

At the time a subsidiary or affiliate, accounted
for under the equity method of accounting, sells existing or
newly-issued common stock to unrelated parties at a price in
excess of its book value, the Companys policy is to record
its share of the change in the subsidiarys or
affiliates equity resulting from the sale as an increase
to additional paid-in-capital net of the tax effect.



| |                            
| | ---------------------------
| | Net Income (Loss) per Share

Basic earnings per share are computed by dividing
income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the
period. Diluted earnings per share are computed by dividing
income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the
period increased to include the number of additional common
shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of
outstanding options and warrants is reflected in diluted
earnings per share by application of the treasury-stock method.
Such shares are not included when there is a loss as the effect
would be anti-dilutive.

44



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

As of April 6, 2002, the fair value of all
financial instruments approximated their carrying value.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to the
fiscal years 2001 and 2000 financial statements to conform to
the fiscal year 2002 presentation.



| |                 
| | ----------------
| | Use of Estimates

The financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, and as such, include amounts based
upon informed estimates and judgements of management. Actual
results could differ from these estimates.



|    |              
|--- | -------------
|(2) | Restructuring

During the fourth quarter of fiscal year 2002,
the Company recorded a restructuring charge of $4,911 which
consisted of $4,266, $277, and $368 charges related to
abandonment of underutilized facilities, headcount reduction of
56 employees or 13% of the Companys workforce, and
disposal or abandonment of fixed assets, respectively. Of the 56
employees terminated, 15, 8, 6, 10, 14, and 3 were from Sales,
Marketing, General and Administrative, Field Services, Research
and Development, and Manufacturing department, respectively. The
expected cash impact of the restructuring charge is $277,
related to severance, of which $70 was paid in fiscal year 2002.
The remaining $207 will be paid in fiscal year 2003. The Company
is attempting to complete transitioning its manufacturing
facility to Dublin, Ireland, by the end of the second quarter of
fiscal year 2003. In order to leverage the declining general
economic condition, in June 2002, the Company approved
additional restructuring actions such as, but not limited to,
additional facility and headcount reductions in the first half
of fiscal year 2003. As a result of this additional
restructuring, the Company expects to record an additional
charge of $1,000 in the first quarter of fiscal 2003.

The amount accrued for the fourth quarter fiscal
year 2002 restructuring activities as of April 6, 2002, was
as follows:

|                     |       |   |       |       | 
|-------------------- | ----- | - | ----- | ----- | 
|Abandoned facilities |       | $ | 4,266 |      
|Workforce reduction  |       |   | 207   |      
|                     |       |   |       |      
|                     | Total |   | $     | 4,473 | 
|                     |       |   |       |      

During the fourth quarter of fiscal year 2001,
the Company recorded a restructuring charge of $393 related to
the termination of certain employees. Of this charge, $257 and
$136 were paid during fiscal year 2001 and fiscal year 2002,
respectively. The Restructuring included an aggregate net
reduction of the workforce by 86 employees or 13%.

(3) Inventories

Inventories consist of the following:

|                |  |          |       |          |  |  |         | 
|--------------- |  | -------- | ----- | -------- |  |  | ------- | 
|                |  | April 6, |       | April 7,
|                |  | 2002     |       | 2001    
|                |  |          |       |         
|Raw materials   |  | $        | 2,119 |          |  |  | $8,665  | 
|Work-in-process |  |          | 37    |          |  |  | 705     | 
|Finished goods  |  |          | 7,637 |          |  |  | 19,742  | 
|                |  |          |       |          |  |  |         | 
|                |  | $        | 9,793 |          |  |  | $29,112 | 
|                |  |          |       |          |  |  |         | 

45



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) Property, Plant and
Equipment

Property, plant and equipment, at cost, are
summarized as follows:

|                                               |  |          |        |          |  |   |        | 
|---------------------------------------------- |  | -------- | ------ | -------- |  | - | ------ | 
|                                               |  | April 6, |        | April 7,
|                                               |  | 2002     |        | 2001    
|                                               |  |          |        |         
|Plant equipment, office furniture and fixtures |  | $        | 19,653 |          |  | $ | 19,507 | 
|Computer equipment                             |  |          | 20,728 |          |  |   | 20,886 | 
|Field service spares                           |  |          | 10,232 |          |  |   | 12,793 | 
|Leasehold improvements                         |  |          | 2,559  |          |  |   | 3,042  | 
|                                               |  |          |        |          |  |   |        | 
|                                               |  |          | 53,172 |          |  |   | 56,228 | 
|Less accumulated depreciation and amortization |  |          | 40,637 |          |  |   | 39,046 | 
|                                               |  |          |        |          |  |   |        | 
|                                               |  | $        | 12,535 |          |  | $ | 17,182 | 
|                                               |  |          |        |          |  |   |        | 

Property under capitalized leases in the amount
of $846 at April 6, 2002 and April 7, 2001, is
included in plant equipment, office furniture and fixtures.
Accumulated amortization of this property under capital leases
amounted to $250 and $98 at April 6, 2002 and April 7,
2001, respectively.

(5) Investment in Affiliate

In August 1999, the Company purchased 5,333,333
shares of Caldera Systems, Inc. (Caldera),
representing approximately 25% of the outstanding capital stock
of Caldera upon completion of the purchase. Caldera develops and
markets software based on the Linux operating system and
provides related services. The Canopy Group, Inc.
(Canopy), a major stockholder of the Company, owned
all the issued and outstanding shares of Caldera before this
transaction. The Chairman of the Board of Directors of the
Company is the largest shareholder and Chairman of the Board of
Directors of Canopy.

Also, in August 1999, after the Companys
initial investment in Caldera, the Companys percentage
ownership was diluted to approximately 20% as a result of Canopy
exercising a convertible note payable from Caldera.
Additionally, on March 21, 2000, Caldera completed its
initial public offering, further diluting the Companys
percentage ownership to approximately 14%. The Company accounts
for its investment in Caldera under the equity method because
the Company has significant influence, but not control, of the
operations of Caldera.

The original investment in Caldera was $7,598 and
included: (a) cash payment of $3,000, (b) note payable
of $3,000 bearing interest at the prime rate plus one percent
per annum and payable in two equal semi-annual payments
beginning February 2000 and (c) investment costs of $1,598,
including the issuance of a warrant to purchase 150,000 shares
of the Companys common stock. On March 21, 2000,
Caldera completed its initial public offering. The Company
recorded its share of the change in the affiliates equity
resulting from the public offering as an increase to additional
paid-in capital of $6,194, net of the tax impact of $3,336. The
excess of the Companys investment in Caldera over the
related underlying equity in net assets of $6,931 was being
amortized on a straight-line basis over seven years. However,
the Company adopted Statement 142 as of April 8, 2001, the
beginning of fiscal year 2002, and therefore, ceased to amortize
the remaining balance of goodwill related to the investment in
Caldera of $4,209, which was written off during the third
quarter of fiscal year 2002 an other than temporary decline in
value and to record its proportional share of Calderas net
loss. Such loss has been included in Equity in net loss of
affiliate in the Companys fiscal year 2002
Consolidated Statement of Operations.

46



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Effective with the fourth quarter of fiscal year
2000, the Company records its share of the results of Caldera on
a two-month lag to coincide with Calderas fiscal reporting
as a publicly-traded company. The unaudited financial
information for Caldera is summarized below:

|                        |  |             |         |             |  |   |        |  
|----------------------- |  | ----------- | ------- | ----------- |  | - | ------ | -
|                        |  | January 31, |         | January 31,
|                        |  | 2002        |         | 2001       
|                        |  |             |         |            
|Current assets          |  | $           | 42,676  |             |  | $ | 87,613 |  
|Non-current assets      |  |             | 23,325  |             |  |   | 9,027  |  
|Current liabilities     |  |             | (34,850 | )           |  |   | (5,563 | )
|Non-current liabilities |  |             | (6,869  | )           |  |   |       |  
|Minority interest       |  |             | (173    | )           |  |   |       |  
|                        |  |             |         |             |  |   |        |  
|Net assets              |  | $           | 24,109  |             |  | $ | 91,077 |  
|                        |  |             |         |             |  |   |        |  

|                            |  |          |   |          |  |   |       | 
|--------------------------- |  | -------- | - | -------- |  | - | ----- | 
|                            |  | April 6, |   | April 7,
|                            |  | 2002     |   | 2001    
|                            |  |          |   |         
|Companys equity investment |  | $        |  |          |  | $ | 9,504 | 
|                            |  |          |   |          |  |   |       | 

|                             |  |                     |          |             |  |   |         |  
|---------------------------- |  | ------------------- | -------- | ----------- |  | - | ------- | -
|                             |  |                    
|                             |  | Twelve Months Ended
|                             |  |                    
|                             |  | January 31,         |          | January 31,
|                             |  | 2002                |          | 2001       
|                             |  |                     |          |            
|Total revenue                |  | $                   | 57,300   |             |  | $ | 4,775   |  
|Operating loss               |  |                     | (133,951 | )           |  |   | (36,582 | )
|Net loss                     |  |                     | (132,520 | )           |  |   | (31,253 | )
|Companys equity in net loss |  |                     | (9,504   | )           |  | $ | (4,800  | )

The Company owned 5,333,333 shares of
Calderas stock. Caldera shareholders approved a
one-for-four reverse stock split on March 14, 2002, which
converted the Companys ownership to 1,333,334 shares. The
Company sold 1,800 shares and 142,500 shares on April 1,
2002 and April 8, 2002, respectively.

On June 26, 2002, the Company entered into
an agreement with Caldera, whereby Caldera agreed to purchase
all of the approximately 1.19 million shares of Caldera
common stock held by the Company at a per share purchase price
of $.93, for a total of approximately $1.1 million. The
transaction is scheduled to close on or before July 8,
2002, subject to the satisfaction of certain closing conditions.
There can be no assurance that such conditions will be satisfied.

47



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) Accrued Liabilities

Accrued liabilities consist of the following:

|                       |  |          |       |          |  |   |        | 
|---------------------- |  | -------- | ----- | -------- |  | - | ------ | 
|                       |  | April 6, |       | April 7,
|                       |  | 2002     |       | 2001    
|                       |  |          |       |         
|Salaries and wages     |  | $        | 3,687 |          |  | $ | 5,903  | 
|Commissions            |  |          | 606   |          |  |   | 1,247  | 
|Taxes                  |  |          | 2,629 |          |  |   | 4,426  | 
|Accrued warranty costs |  |          | 897   |          |  |   | 784    | 
|Other                  |  |          | 1,489 |          |  |   | 2,188  | 
|                       |  |          |       |          |  |   |        | 
|                       |  | $        | 9,308 |          |  | $ | 14,548 | 
|                       |  |          |       |          |  |   |        | 

(7) Debt



| |                                         
| | ----------------------------------------
| | Credit Agreement and Lines of
    Credit

The Company entered into a Loan and Security
Agreement (the Loan Agreement) with Silicon Valley
Bank and General Electric Capital Corporation as of
July 22, 1998, and amended July 22, 1999, whereby the
Company could borrow up to $30,000 under an asset-secured
domestic line of credit, limited by the value of pledged
collateral. On September 22, 2000, the Company renewed its
agreement with Silicon Valley Bank and General Electric Capital
Corporation. The agreement allowed the Company to borrow at a
rate equal to the prime rate plus 1%. Borrowings under the line
of credit were subject to certain financial and operating
covenants, including, without limitation, various financial
covenants requiring the Company to maintain a minimum quick
ratio, debt-net worth ratio, tangible net worth, and a maximum
net loss, and restricted the Company from paying any dividends.
The term of the agreement was for one year. The quick ratio, the
profitability, and the maximum net loss covenants of the Loan
Agreement were amended on May 31, 2001. During the first
quarter of fiscal 2002, the Company was in default under the
Amended Loan Agreement for failing to comply with covenants
relating to the maximum debt to tangible net worth ratio and the
maximum net loss. As of September 22, 2001, General
Electric Capital Corporation terminated the agreement and thus
its commitment to extend credit to the Company.

The Company thereafter entered into an Amended
and Restated Loan and Security Agreement with Silicon Valley
Bank as of October 29, 2001, and further amended
November 8, 2001, whereby the Company could borrow up to
$15,000, limited by among other things as discussed below, the
value of certain pledged collateral, at a rate equal to the
prime rate plus 1.5%, under an asset-secured domestic line of
credit. Borrowings under this line of credit were subject to
certain covenants, including, without limitation, a financial
covenant requiring the Company to maintain a minimum tangible
net worth, banking and investment account relationship,
subordination agreement, patents, trademarks and copyrights,
landlord agreement, warrants, continuing guaranty, and an
Amended and Restated continuing guaranty. Borrowing was limited
by the value of the pledged collateral and certain other
exclusions such as over 90 day balances, governmental
customers, service revenue and other factors which could
substantially reduce the Companys borrowing capacity under
the credit line. These restrictions prevented the Company from
borrowing any amounts under the credit facility through the end
of fiscal year 2002. The term of the agreement was for one year.
The loan agreement also restricted the Company from paying any
dividends.

As part of the Amended and Restated Loan and
Security Agreement, the Company, on January 11, 2002,
issued a warrant to Silicon Valley Bank to purchase 190,678
shares of its Common Stock at an exercise price of $2.36 per
share. The term of the warrant is five years. The Company valued
the warrant using the Black-Scholes option pricing model, which
resulted in a fair value of approximately $139, which will be
amortized on a straight-line basis as interest expense over the
agreement term.

48



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of April 6, 2002, there were no
borrowings outstanding under the Amended Loan Agreement and the
Company was in default for failing to comply with the covenant
relating to the minimum tangible net worth. The Company entered
into an Amended Loan Agreement with Silicon Valley Bank as of
June 21, 2002, whereby the minimum tangible net worth
covenant was amended and restated. The Company terminated its
Loan Agreement with Silicon Valley Bank as of June 25, 2002.

In February 2002, Canopy, the Companys
largest stockholder, lent $1,900 to the Company. The Company
then entered into a Loan Agreement (the Canopy Loan
Agreement) with Canopy on June 27, 2002, allowing the
Company, subject to certain conditions, to borrow up to an
aggregate of $7,000 under a revolving line of credit. The
outstanding $1,900 loan has been converted to borrowings against
this line of credit. The line will mature on June 30, 2003,
bearing an interest rate of nine percent per annum and will be
secured by a security interest in substantially all of the
Companys assets. The Canopy Loan Agreement contains
negative covenants placing certain restrictions on the
Companys ability to repurchase capital stock, pay
dividends or make distributions, purchase or sell assets, incur
liens on its assets, incur additional debt, merge with another
entity, make loans or investments, amend its charter Certificate
of Incorporation or bylaws or issue stock. Although the Company
is currently in compliance with all of the terms of the Canopy
Loan Agreement, and believes that it will remain in compliance,
there can be no assurance that it will be able to borrow under
the Canopy Loan Agreement. Canopy may terminate the Canopy Loan
Agreement and declare all amounts outstanding immediately due
and payable upon an event of default, including upon
30 days notice in the event that Canopy in good faith deems
its interest in the Company to be insecure, the value of the
collateral to have significantly declined, or the prospect of
timely payment or performance to be impaired. Canopy owns
approximately 14,463,000 shares, or 44.7%, of the Companys
issued and outstanding common stock. Raymond Noorda, Chairman of
MTI, is also Chairman of the Canopy Group and the beneficial
owner of the majority interest in the Canopy Group.

(8) Income Taxes

The components of income (loss) before
income taxes are as follows:

|        |  |                    |         |          |  |          |         |   |  |   |        | 
|------- |  | ------------------ | ------- | -------- |  | -------- | ------- | - |  | - | ------ | 
|        |  |                   
|        |  | Fiscal Years Ended
|        |  |                   
|        |  | April 6,           |         | April 7, |  | April 1,
|        |  | 2002               |         | 2001     |  | 2000    
|        |  |                    |         |          |  |         
|U.S.    |  | $                  | (33,986 | )        |  | $        | (31,044 | ) |  | $ | 7,833  | 
|Foreign |  |                    | (1,041  | )        |  |          | (1,868  | ) |  |   | 2,392  | 
|        |  |                    |         |          |  |          |         |   |  |   |        | 
|        |  | $                  | (35,027 | )        |  | $        | (32,912 | ) |  | $ | 10,225 | 
|        |  |                    |         |          |  |          |         |   |  |   |        | 

49



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Income tax expense (benefit) consists of the
following:

|      |         |         |       |          |   |       |         |         |   |   |         |         |  
|----- | ------- | ------- | ----- | -------- | - | ----- | ------- | ------- | - | - | ------- | ------- | -
|      |         | Current |       | Deferred |   | Total
|      |         |         |       |          |   |      
|2002: |         |         |       |          |   |       |         |         |   |   |         |        
|      | Federal |         | $     |         |   |       | $       | 24,300  |   |   | $       | 24,300  |  
|      | State   |         |       | 126      |   |       |         |        |   |   |         | 126     |  
|      | Foreign |         |       | 172      |   |       |         |        |   |   |         | 172     |  
|      |         |         |       |          |   |       |         |         |   |   |         |        
|      |         | $       | 298   |          |   | $     | 24,300  |         |   | $ | 24,598  |        
|      |         |         |       |          |   |       |         |         |   |   |         |        
|2001: |         |         |       |          |   |       |         |         |   |   |         |        
|      | Federal |         | $     |         |   |       | $       | 3,435   |   |   | $       | 3,435   |  
|      | State   |         |       |         |   |       |         |        |   |   |         |        |  
|      | Foreign |         |       | 94       |   |       |         |        |   |   |         | 94      |  
|      |         |         |       |          |   |       |         |         |   |   |         |        
|      |         | $       | 94    |          |   | $     | 3,435   |         |   | $ | 3,529   |        
|      |         |         |       |          |   |       |         |         |   |   |         |        
|2000: |         |         |       |          |   |       |         |         |   |   |         |        
|      | Federal |         | $     | 6,452    |   |       | $       | (20,841 | ) |   | $       | (14,389 | )
|      | State   |         |       | 1,459    |   |       |         | (2,107  | ) |   |         | (648    | )
|      | Foreign |         |       | (58      | ) |       |         |        |   |   |         | (58     | )
|      |         |         |       |          |   |       |         |         |   |   |         |        
|      |         | $       | 7,853 |          |   | $     | (22,948 | )       |   | $ | (15,095 | )      
|      |         |         |       |          |   |       |         |         |   |   |         |        

Current income tax expense includes a charge in
lieu of income taxes for the benefit from employee stock option
exercises of $69, $1,450 and $9,941 for April 6, 2002,
April 7, 2001 and April 1, 2000, respectively.

Reconciliations of the federal statutory tax rate
to the effective tax rate are as follows:

|                                    |  |                    |       |          |  |          |       |    |  |  |        |   
|----------------------------------- |  | ------------------ | ----- | -------- |  | -------- | ----- | -- |  |  | ------ | --
|                                    |  |                   
|                                    |  | Fiscal Years Ended
|                                    |  |                   
|                                    |  | April 6,           |       | April 7, |  | April 1,
|                                    |  | 2002               |       | 2001     |  | 2000    
|                                    |  |                    |       |          |  |         
|Federal statutory rate              |  |                    | (35.0 | )%       |  |          | (35.0 | )% |  |  | 35.0   | % 
|Effect of foreign operations        |  |                    | 1.2   |          |  |          | 2.0   |    |  |  | 6.9    |   
|State taxes, net of federal benefit |  |                    | (5.8  | )        |  |          | (5.8  | )  |  |  | (3.8   | ) 
|Change in valuation allowance       |  |                    | 113.8 |          |  |          | 46.0  |    |  |  | (184.6 | ) 
|Non-deductible expenses             |  |                    | 0.3   |          |  |          | 2.0   |    |  |  | 7.4    |   
|Other                               |  |                    | (5.1  | )        |  |          | 1.5   |    |  |  | (8.5   | ) 
|                                    |  |                    |       |          |  |          |       |    |  |  |        |   
|                                    |  |                    | 69.4  | %        |  |          | 10.7  | %  |  |  | (147.6 | )%
|                                    |  |                    |       |          |  |          |       |    |  |  |        |   

The change in the valuation allowance shown in
the table is net of the stock option deduction of $69 that is
included in the deferred tax asset. This amount will be charged
to Additional Paid in Capital if and when the valuation
allowance is released.

50



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred-tax assets and liabilities result from
differences between the financial-statement carrying amounts and
the tax bases of existing assets and liabilities. The
significant components of the deferred-tax assets and
deferred-tax liabilities are as follows:

|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                                                                                      |  | 2002 |        | 2001 |  | 2000
|                                                                                                      |  |      |        |      |  |     
|Tax operating loss carryforwards                                                                      |  | $    | 40,056 |      |  | $    | 26,887 |  |  | $ | 18,013 |  
|Tax basis of intangible assets greater than book
    basis                                            |  |      | 3,726  |      |  |      | 4,185  |  |  |   | 4,989  |  
|Accrued expenses not deductible for tax purposes                                                      |  |      | 2,714  |      |  |      | 2,531  |  |  |   | 2,249  |  
|Inventory reserves                                                                                    |  |      | 3,544  |      |  |      | 1,661  |  |  |   | 1,144  |  
|Book depreciation greater than tax depreciation                                                       |  |      | 4,195  |      |  |      | 2,781  |  |  |   | 2,805  |  
|Recognition of income reported on different
    methods for tax purposes than for financial reporting |  |      | 430    |      |  |      | 1,451  |  |  |   | (693   | )
|Other                                                                                                 |  |      | 2,043  |      |  |      | 1,648  |  |  |   | (772   | )
|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        |  
|                                                                                                      |  |      | 56,708 |      |  |      | 41,144 |  |  |   | 27,735 |  
|Less valuation allowance                                                                              |  |      | 56,708 |      |  |      | 16,844 |  |  |   |       |  
|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        |  
|                                                                                                      |  | $    |       |      |  | $    | 24,300 |  |  | $ | 27,735 |  
|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        |  

At April 6, 2002, the Company had federal
net operating loss (NOL) carryforwards arising from
the acquisition of SF2, available to offset future taxable
income of $15,662. These carryforwards begin to expire in fiscal
year 2004. The utilization of these carryforwards is limited to
approximately $1,000 annually, as a result of the Internal
Revenue Codes restrictive change of ownership rules.

At April 6, 2002, the Company had federal
NOL carryforwards, exclusive of the $15,662 SF2 NOL discussed
above, of $80,789. These carryforwards expire through fiscal
year 2022.

Because of the continued decline in the market
value of the Companys holding of Caldera common stock and
continued softness in the American and European markets for the
Companys products, management believes that it is more
likely than not that the Company will not realize the benefits
of the net deferred tax asset existing on April 6, 2002. In
the first quarter of fiscal year 2002, the Company recorded
$24,300 of tax expense related to establishing a valuation
allowance for deferred-tax assets. The change in the valuation
allowance from fiscal year 2001 to fiscal year 2002 was $39,864
and the change in the valuation allowance from fiscal year 2000
to fiscal year 2001 was $16,844.

The Internal Revenue Service (IRS) is
conducting an examination of the Companys fiscal years
1992 through 1996 federal-income-tax returns. During the fourth
quarter of fiscal year 1999, the Company received notice from
the IRS of proposed adjustments for fiscal years 1992 through
1995. The Company, after consultation with counsel, continues to
believe in the propriety of its positions as set forth in its
tax returns and has filed a letter of protest with the IRS
appeals office. The Company believes the ultimate resolution of
the examinations will not result in a material effect on the
Companys consolidated financial position, results of
operations, or liquidity.

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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(9) Stockholders Equity



| |                            
| | ---------------------------
| | Net Income (Loss) per Share

The following table sets forth the computation of
basic and diluted earnings (loss) per share (in thousands,
except per share amounts):

|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |        |       | 
|------------------------------------ | -------------------------------------------------------------------------------------------- | ----------------------------- | ----- | ------- | - | ---- | ----- | ------- | - | - | ---- | ------ | ----- | 
|                                     |                                                                                              | 2002                          |       | 2001    |   | 2000
|                                     |                                                                                              |                               |       |         |   |     
|Numerator:                           |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|                                     | Net income (loss), basic and diluted                                                         |                               | $     | (59,625 | ) |      | $     | (36,441 | ) |   | $    | 25,320 |      
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|Denominator:                         |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|                                     | Denominator for net income (loss) per share,
    basic  weighted-average shares outstanding |                               |       | 32,548  |   |      |       | 32,233  |   |   |      | 30,268 |      
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|                                     | Effect of dilutive securities:                                                               |                               |       |         |   |      |       |         |   |   |      |        |      
|                                     |                                                                                              | Dilutive options outstanding  |       |         |  |      |       |         |  |   |      |        | 2,917 | 
|                                     |                                                                                              | Dilutive warrants outstanding |       |         |  |      |       |         |  |   |      |        | 47    | 
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|                                     | Dilutive potential common shares                                                             |                               |       |        |   |      |       |        |   |   |      | 2,964  |      
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|                                     | Denominator for net income per share,
    diluted  adjusted weighted-average shares         |                               |       | 32,548  |   |      |       | 32,233  |   |   |      | 33,232 |      
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|Net income (loss) per share, basic   |                                                                                              | $                             | (1.83 | )       |   | $    | (1.13 | )       |   | $ | 0.84 |       
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       
|Net income (loss) per share, diluted |                                                                                              | $                             | (1.83 | )       |   | $    | (1.13 | )       |   | $ | 0.76 |       
|                                     |                                                                                              |                               |       |         |   |      |       |         |   |   |      |       

Options and warrants to purchase 10,954,976
shares of common stock were outstanding at April 6, 2002,
but were not included in the computation of diluted earnings per
share for the year then ended because the effect would be
antidilutive.

Options and warrants to purchase 9,560,835 shares
of common stock were outstanding at April 7, 2001, but were
not included in the computation of diluted earnings per share
for the year then ended because the effect would be antidilutive.

Options to purchase 2,864,100 shares of common
stock at prices in excess of $22.95 per share were outstanding
at April 1, 2000, but were not included in the net income
per share, diluted computation for the year then ended because
the options exercise price was greater than the average
market price of the common stock during the period and,
therefore, the effect would have been antidilutive.



| |              
| | -------------
| | Stock Options

The Company granted stock options under its 1987
Incentive Stock Option Plan and Non-Qualified Stock Option Plan,
its 1992 Stock Incentive Plan, its 1996 Stock Incentive Plan,
and its 2001 Stock Inventive Plan, generally at prices equal to
the estimated fair-market value of the Companys common
stock at date of grant.

The Companys stockholders approved the 2001
Stock Incentive Plan (the SIP), the 2001
Non-Employee Director Option Program (the Program)
and the 2001 Employee Stock Purchase Plan (the Stock
Purchase Plan) on July 11, 2001. Upon approval of
these plans, all prior plans were terminated. Therefore, The
Company will no longer issue options under its prior plans and
has granted stock options under its SIP. Options currently
outstanding under prior plans shall remain in effect in
accordance with the respective terms of such plans. A maximum of
4,000 shares are authorized for issuance under the SIP and
Program and 1,200 under the Stock Purchase Plan. The maximum
aggregate number of shares allocated for

52



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the SIP increases by 3% annually, subject to
terms and conditions of the SIP. The Program functions as part
of the SIP.

In the third quarter of fiscal year 2002, the
Company granted 106,043 shares of common stock, to an employee
to compensate him for his services for fiscal year 2002. The
shares were issued out of treasury shares at a per-share price
of $1.20. The Company recorded compensation expense of $234 in
connection with the grant.



| |                        
| | -----------------------
| | Stock Purchase Warrants

At April 6, 2002, a warrant to purchase
190,678 shares of the Companys common stock at a price of
$2.36 per share was outstanding. The warrant was issued in
January 2002 to Silicon Valley Bank as part of the Amended and
Restated Loan and Security Agreement dated October 29,
2001, and further amended November 8, 2001. The term of the
warrant is five years. At April 6, 2002, the warrant was
fully exercisable. The fair value of the warrant on the grant
date was $139. This fair value of the warrant is being amortized
as interest expense over the life of the agreement.

At April 6, 2002, a warrant to purchase
150,000 shares of the Companys common stock at a price of
$18.75 per share was outstanding. The warrant was issued in
August 1999 to an individual affiliated with Canopy in
connection with services provided to the Company and expires in
August, 2009. At April 6, 2002, the warrant was fully
exercisable.

At April 6, 2002, a warrant to purchase
55,974 shares of the Companys common stock at a price of
$12.00 per share was outstanding. The warrant was issued in
February 1998 in connection with a French distribution agreement
and expires in February 2008. At April 6, 2002, the warrant
was fully exercisable.

Non-Employee
Directors Option Program

On July 11, 2001, the Companys
shareholders approved the 2001 Non-Employee Directors Option
Program which functions as part of the SIP described above. Upon
approval of the Program, the 1994 Directors Non-Qualified
Stock Option Plan was terminated, although options currently
outstanding under the prior plan shall remain in effect in
accordance with the respective terms of such plan. Under the
Program, each non-employee director first elected to the Board
of Directors following the effective date of the SIP will
automatically be granted an option to acquire 50,000 shares of
Common Stock at an exercise price per share equal to the fair
market value of Common Stock on the date of grant. These options
will vest and become exercisable in three equal installments on
each anniversary of the grant date. Upon the date of each annual
stockholders meeting, each non-employee director who has
been a member of the Board of Directors for at least
11 months prior to the date of the stockholders
meeting will receive an automatic grant of options to acquire
25,000 shares of the Companys Common Stock at an exercise
price equal to the fair market value of the Companys
Common Stock at the date of grant. These options will vest and
become exercisable in three equal installments on each
anniversary of the grant date. As of April 6, 2002, there
were no options outstanding under this program.

Options granted typically vest over a period of
four years from the date of grant. At April 6, 2002 and
April 7, 2001, the number of options exercisable was
5,471,796 and 2,434,000, respectively, and the weighted-average
exercise price of those options was $7.91 and $12.63.

The per-share weighted-average fair value of
stock options granted during fiscal years 2002, 2001 and 2000
was $1.48, $4.23 and $16.85, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 2002  expected dividend
yield of 0%, risk-free interest rate of 4.62%, volatility of its
stock over the expected life of the options of 1.2 and an
expected life of five years; 2001  expected dividend
yield of 0%, risk-free interest rate of 4.60%, volatility of its
stock over the expected life of the options of 1.4 and an
expected life of five years; 2000  expected dividend
yield of 0%,

53



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

risk-free interest rate of 6.32%, volatility of
its stock over the expected life of the options of 1.0 and an
expected life of five years.

The Company uses the intrinsic value method in
accounting for its stock-option plans and, accordingly, no
compensation cost has been recognized for its stock options in
the consolidated financial statements, except as noted above.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under
Statement 123, the Companys net income (loss) would
have been the pro-forma amounts indicated below:

|             |      |            |   |                    |   |  |   |       |  
|------------ | ---- | ---------- | - | ------------------ | - |  | - | ----- | -
|             |      |            |   | Net Income        
|             |      | Net Income |   | (Loss)            
|             |      | (Loss)     |   | Per Share, Diluted
|             |      |            |   |                   
|As reported: |      |            |   |                    |   |  |   |      
|             | 2002 |            | $ | (59,625            | ) |  | $ | (1.83 | )
|             | 2001 |            | $ | (36,441            | ) |  | $ | (1.13 | )
|             | 2000 |            | $ | 25,320             |   |  | $ | 0.76  |  
|Pro forma:   |      |            |   |                    |   |  |   |      
|             | 2002 |            | $ | (76,065            | ) |  | $ | (2.34 | )
|             | 2001 |            | $ | (52,579            | ) |  | $ | (1.63 | )
|             | 2000 |            | $ | 12,992             |   |  | $ | 0.37  |  

A summary of all stock option transactions
follows (in thousands, except per share data):

|                                     |  |        |        |                |  |   |       | 
|------------------------------------ |  | ------ | ------ | -------------- |  | - | ----- | 
|                                     |  |        |        | Weighted      
|                                     |  |        |        | Average       
|                                     |  | Shares |        | Exercise Price
|                                     |  |        |        |               
|Options outstanding at April 3, 1999 |  |        | 5,952  |                |  | $ | 6.51  | 
|Granted                              |  |        | 4,424  |                |  |   | 22.29 | 
|Exercised                            |  |        | (3,138 | )              |  |   | 5.16  | 
|Cancelled                            |  |        | (267   | )              |  |   | 11.95 | 
|                                     |  |        |        |                |  |   |       | 
|Options outstanding at April 1, 2000 |  |        | 6,971  |                |  |   | 16.90 | 
|Granted                              |  |        | 5,657  |                |  |   | 4.22  | 
|Exercised                            |  |        | (379   | )              |  |   | 5.26  | 
|Cancelled                            |  |        | (2,894 | )              |  |   | 18.16 | 
|                                     |  |        |        |                |  |   |       | 
|Options outstanding at April 7, 2001 |  |        | 9,355  |                |  |   | 9.39  | 
|Granted                              |  |        | 4,241  |                |  |   | 1.48  | 
|Exercised                            |  |        | (132   | )              |  |   | 5.16  | 
|Cancelled                            |  |        | (2,906 | )              |  |   | 8.26  | 
|                                     |  |        |        |                |  |   |       | 
|Options outstanding at April 6, 2002 |  |        | 10,558 |                |  | $ | 6.62  | 
|                                     |  |        |        |                |  |   |       | 

54



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of stock options outstanding at
April 6, 2002 follows (in thousands, except per share data):

|                         |  |             |        |             |  |          |     |                |  |          |       |  |  |  |       |  |  |   |       | 
|------------------------ |  | ----------- | ------ | ----------- |  | -------- | --- | -------------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |             |        |             |  |          |     |               
|                         |  |             |        |             |  |          |     | Exercisable(1)
|                         |  |             |        | Weighted    |  |          |     |               
|                         |  |             |        | Average     |  | Weighted |     |                |  | Weighted
|                         |  | Number of   |        | Remaining   |  | Average  |     |                |  | Average 
|                         |  | Options     |        | Contractual |  | Exercise |     | Number of      |  | Exercise
|Range of Exercise Prices |  | Outstanding |        | Life        |  | Price    |     | Options        |  | Price   
|                         |  |             |        |             |  |          |     |                |  |         
|$ 0.9000 - 1.1500        |  |             | 506    |             |  |          | 9.6 |                |  | $        | 0.93  |  |  |  | 347   |  |  | $ | 0.90  | 
|1.3500 - 1.3500          |  |             | 1,842  |             |  |          | 9.3 |                |  |          | 1.35  |  |  |  |      |  |  |   |      | 
|1.7500 - 1.8750          |  |             | 946    |             |  |          | 8.9 |                |  |          | 1.80  |  |  |  | 946   |  |  |   | 1.80  | 
|2.1250 - 2.1250          |  |             | 1,457  |             |  |          | 9.0 |                |  |          | 2.12  |  |  |  | 476   |  |  |   | 2.12  | 
|2.2500 - 3.6875          |  |             | 818    |             |  |          | 7.6 |                |  |          | 3.44  |  |  |  | 487   |  |  |   | 3.31  | 
|4.1250 - 4.1250          |  |             | 1,278  |             |  |          | 8.5 |                |  |          | 4.12  |  |  |  | 676   |  |  |   | 4.12  | 
|4.3125 - 5.9063          |  |             | 1,066  |             |  |          | 7.3 |                |  |          | 5.31  |  |  |  | 759   |  |  |   | 5.30  | 
|6.0000 - 9.3750          |  |             | 1,308  |             |  |          | 7.3 |                |  |          | 8.16  |  |  |  | 847   |  |  |   | 8.25  | 
|11.8750 - 30.0625        |  |             | 1,214  |             |  |          | 7.3 |                |  |          | 26.28 |  |  |  | 864   |  |  |   | 24.95 | 
|36.8750 - 52.3440        |  |             | 123    |             |  |          | 7.9 |                |  |          | 47.32 |  |  |  | 70    |  |  |   | 47.23 | 
|                         |  |             |        |             |  |          |     |                |  |          |       |  |  |  |       |  |  |   |       | 
|                         |  |             | 10,558 |             |  |          |     |                |  | $        | 6.62  |  |  |  | 5,472 |  |  | $ | 7.91  | 
|                         |  |             |        |             |  |          |     |                |  |          |       |  |  |  |       |  |  |   |       | 

Note:



|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | Options exercisable at April 6, 2002,
    April 7, 2001 and April 1, 2000, were 5,472, 2,434 and
    946, respectively.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

On July 11, 2001, the Companys
shareholders approved the Stock Purchase Plan. A maximum of
1,200 shares of common stock is authorized for issuance under
the Stock Purchase Plan. The Company will no longer issue
options under the 1994 Employee Stock Purchase Plan. Under the
Stock Purchase Plan, all employees of the Company, and its
designated parents or subsidiaries, whose customary employment
is more than 5 months in any calendar year and more than 20
hours per week are eligible to participate. Initially, the Stock
Purchase Plan will being implemented through overlapping offer
periods of twenty-four (24) months duration
commencing each January 1 and July 1, except that the
initial offer period commenced on July 11, 2001 and ends on
June 30, 2003. Purchase periods generally commence on the
first day of each offer period and terminate on the next
following June 30 or December 31 respectively;
provided, however, that the first purchase period commenced on
July 11, 2001 and ended on December 31, 2001. The
price per share at which shares of Common Stock are to be
purchased under the Stock Purchase Plan during any purchase
period is eighty-five percent (85%) of the fair market value of
the Common Stock on the first day of the offer period or
eighty-five percent (85%) of the fair market value of the Common
Stock on the last day of the purchase period, whichever is
lower. During fiscal year 2002, 81,941 shares of stock were
issued pursuant to the Stock Purchase Plan.

On March 31, 1994, the Company adopted the
1994 Employee Stock Purchase Plan (the Purchase
Plan) allowing for an aggregate of 500,000 shares of the
Companys common stock. Under the Purchase Plan, the Board
may authorize participation by eligible employees, including
officers, in periodic six month offerings following the
commencement of the Purchase Plan. The price of the
Companys common stock purchased under the Purchase Plan
will be equal to 85% of the lower of the fair market value of
the Companys common stock at the commencement date of each
offering period or the relevant purchase date. During fiscal
year 2002, 2001 and 2000, 0, 104,781 and 95,914 shares of stock,
respectively, were issued pursuant to this plan.

55



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(10) Commitments and
Contingencies



| |       
| | ------
| | Leases

The Company leases facilities and certain
equipment under non-cancelable operating leases. Under the lease
agreements for facilities, the Company is required to pay
insurance, taxes, utilities and building maintenance and is
subject to certain consumer-price-index adjustments.

Future minimum lease payments at April 6,
2002 under all non-cancelable operating leases for subsequent
fiscal years are as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 4,195  | 
|2004       |  |   | 2,568  | 
|2005       |  |   | 2,027  | 
|2006       |  |   | 1,013  | 
|2007       |  |   | 413    | 
|Thereafter |  |   | 13     | 
|           |  |   |        | 
|           |  | $ | 10,229 | 
|           |  |   |        | 

Future minimum capital lease payments at
April 6, 2002 for subsequent fiscal years are as follows:

|                                                        |  |   |     | 
|------------------------------------------------------- |  | - | --- | 
|2003                                                    |  | $ | 193 | 
|2004                                                    |  |   | 210 | 
|2005                                                    |  |   | 210 | 
|2006                                                    |  |   | 80  | 
|2007                                                    |  |   |    | 
|Thereafter                                              |  |   |    | 
|                                                        |  |   |     | 
|Total minimum lease payments                            |  |   | 693 | 
|Less: Amount representing interest                      |  |   | 97  | 
|                                                        |  |   |     | 
|Present value of minimum lease payments                 |  |   | 596 | 
|Less: current portion                                   |  |   | 135 | 
|                                                        |  |   |     | 
|Capital lease obligations excluding current
    portion |  | $ | 461 | 
|                                                        |  |   |     | 

Rent expense totaled $5,000, $5,383 and $5,782,
for fiscal years 2002, 2001 and 2000, respectively.



| |           
| | ----------
| | Litigation

From July through September 2000, several class
action complaints were filed against the Company and several of
its officers, alleging that the Company was aware of adverse
information that it failed to disclose primarily during fiscal
2000 and, hence, that it violated specified provisions of the
Securities Exchange Act of 1934 and the rules promulgated
thereunder. The plaintiffs in those cases filed a consolidated
amended complaint in the federal court for the Central District
of California on or about December 5, 2000, making similar
allegations. This consolidated complaint alleges a class period
from July 22, 1999 to July 27, 2000 and alleges that
the defendants were aware of certain adverse information that
they failed to disclose during that period. The Company filed a
motion to dismiss the complaint which the district court
granted. However, the plaintiffs filed a Second Amended
Complaint, and, on October 9, 2001, the district court
denied its motion to dismiss that complaint. The Second Amended
Complaint alleges a class period from July 22, 1999 to
July 12, 2000. The trial date is August 19, 2003.

56



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The plaintiffs have not specified the amount of
damages they seek. Although the Company believes the alleged
claims in this lawsuit are without merit and is defending the
lawsuit vigorously, due to the inherent uncertainties of the
litigation process and the judicial system, the Company is
unable to predict the outcome of this litigation. This
litigation may result in substantial costs and distract
managements attention and resources. As of April 6,
2002, the Company met the deductible of its insurance policy. In
addition, a judgment against the Company in this case could have
a material adverse effect on its results of operations and
liquidity.

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

(11) Business Segment and International
Information

The Company is engaged in the design,
manufacture, sale, and service of high-performance storage
systems, software, and related products. The Companys
reportable business segments are based upon geographic areas.
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 income
(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.

Revenue and transfers between geographic areas
are generally priced to recover cost, plus an appropriate
mark-up for profit. Operating income (loss) is revenue less cost
of revenues and direct operating expenses.

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

|                         |                         |                               |   |         |         |      |   |         |         |   |   |         |         | 
|------------------------ | ----------------------- | ----------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | 
|                         |                         | 2002                          |   | 2001    |         | 2000
|                         |                         |                               |   |         |         |     
|Revenue:                 |                         |                               |   |         |         |      |   |         |         |   |   |        
|                         | United States           |                               | $ | 81,300  |         |      | $ | 110,025 |         |   | $ | 174,156 |        
|                         | Europe                  |                               |   | 39,662  |         |      |   | 58,052  |         |   |   | 64,303  |        
|                         | Transfers between areas |                               |   | (3,044  | )       |      |   | (6,387  | )       |   |   | (11,362 | )      
|                         |                         |                               |   |         |         |      |   |         |         |   |   |        
|                         |                         | Total revenue                 |   | $       | 117,918 |      |   | $       | 161,690 |   |   | $       | 227,097 | 
|                         |                         |                               |   |         |         |      |   |         |         |   |   |        
|Operating income (loss): |                         |                               |   |         |         |      |   |         |         |   |   |        
|                         | United States           |                               | $ | (28,362 | )       |      | $ | (30,977 | )       |   | $ | 5,762   |        
|                         | Europe                  |                               |   | (801    | )       |      |   | (841    | )       |   |   | 3,788   |        
|                         |                         |                               |   |         |         |      |   |         |         |   |   |        
|                         |                         | Total operating income (loss) |   | $       | (29,163 | )    |   | $       | (31,818 | ) |   | $       | 9,550   | 
|                         |                         |                               |   |         |         |      |   |         |         |   |   |        
|Identifiable assets:     |                         |                               |   |         |         |      |   |         |         |   |   |        
|                         | United States           |                               |   | 42,248  |         |      |   | 105,170 |         |   |   | 146,183 |        
|                         | Europe                  |                               |   | 19,450  |         |      |   | 23,790  |         |   |   | 34,764  |        
|                         |                         |                               |   |         |         |      |   |         |         |   |   |        
|                         |                         | Total assets                  |   | $       | 61,698  |      |   | $       | 128,960 |   |   | $       | 180,947 | 
|                         |                         |                               |   |         |         |      |   |         |         |   |   |        

57



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys revenues by product type and
are summarized below:

|                      |        |      |         |        |  |      |         |        |  |   |         |        | 
|--------------------- | ------ | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                      |        | 2002 |         | 2001   |  | 2000
|                      |        |      |         |        |  |     
|Server:               |        |      |         |        |  |      |         |        |  |   |         |       
|                      | Vivant |      | $       | 36,015 |  |      | $       | 42,696 |  |   | $       | 67,700 | 
|                      | Other  |      |         | 9,296  |  |      |         | 25,408 |  |   |         | 64,093 | 
|Tape libraries        |        |      | 17,904  |        |  |      | 35,537  |        |  |   | 35,719  |       
|Tape related software |        |      | 6,304   |        |  |      | 8,179   |        |  |   | 10,258  |       
|Service               |        |      | 48,399  |        |  |      | 49,870  |        |  |   | 49,327  |       
|                      |        |      |         |        |  |      |         |        |  |   |         |       
|                      |        | $    | 117,918 |        |  | $    | 161,690 |        |  | $ | 227,097 |       
|                      |        |      |         |        |  |      |         |        |  |   |         |       

No single customer accounted for more than 10% of
revenue in fiscal year 2002, 2001, or 2000.

(12) Sale of Patents

Effective February 9, 1996, the Company
entered into an agreement (the EMC Agreement) by
which it sold to EMC substantially all of the Companys
existing patents, patent applications and related rights.
Pursuant to the EMC Agreement, the Company was entitled to
receive $30,000 over the life of this agreement, in six equal
annual installments of $5,000 each. As of January 2001, the
Company had received all installments. The Company also would
receive royalty payments in the aggregate of up to a maximum of
$30,000 over the term of the EMC Agreement. As part of the
maximum $30,000 of royalties, minimum royalties of $10,000 would
be received in five annual installments, beginning within thirty
days of the first anniversary of the effective date of the EMC
Agreement, and within thirty days of each subsequent anniversary
thereof. As of March 2001, the Company 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 $10,000 were to be increased to $15,000.
Payments were to be received under the EMC Agreement in five
equal annual installments. The Company received the first three
annual installments in March 2000, March 2001 and March 2002,
and is expecting to receive the two remaining annual
installments of $3,000 in March 2003 and 2004. Included in net
product revenue and other income for fiscal years 2002, 2001 and
2000 are $3,840, $3,410 and $4,348, and $3,600, $4,800 and
$5,000, respectively, related to this agreement. Included in
deferred income at April 6, 2002 and April 7, 2001,
are $0 and $3,600, respectively, related to this agreement. In
addition, pursuant to the terms of the EMC Agreement, the
Company also received an irrevocable, non-cancelable, perpetual
and royalty-free license to exploit, market, and sell the
technology protected under the applicable patents. Pursuant to
the terms and conditions of the EMC Agreement, this license will
terminate in the event of a change in control of the Company
involving certain acquirers.

(13) Related-Party Transactions

In the normal course of business, the Company
sold goods and services to subsidiaries of Canopy. Goods and
services sold to the subsidiaries of Canopy in fiscal year 2002,
2001 and 2000 were $836, $429 and $4,920, respectively. The
Company made no sales to the subsidiaries of Canopy prior to
fiscal year 2000. At April 6, 2002, there was $11 due from
the subsidiaries of Canopy.

In February 2002, Canopy lent $1,900 to the
Company. The Company entered into a loan agreement with Canopy
on June 26, 2002, allowing the Company to borrow up to
$7,000 under a revolving line of credit. The outstanding $1,900
loan has been converted to borrowings against this line of
credit. The line will mature on June 30, 2003, bearing
interest of nine percent per annum and is secured by a security
interest in substantially all of the assets of the Company. The
Canopy Loan Agreement contains negative covenants placing
certain restrictions on the Companys ability to repurchase
capital stock, pay dividends or make distributions,

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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase or sell assets, incur liens on its
assets, incur additional debt, merge with another entity, make
loans or investments, amend its charter Certificate of
Incorporation or bylaws or issue stock. Although the Company is
currently in compliance with all of the terms of the Canopy Loan
Agreement, and believes it will remain in compliance, there can
be no assurance that it will be able to borrow under the Canopy
Loan Agreement. Canopy may terminate the Canopy Loan Agreement
and declare all amounts outstanding immediately due and payable
upon an event of default, including upon 30 days notice in
the event that Canopy in good faith deems its interest in MTI to
be insecure, the value of the collateral to have significantly
declined, or the prospect of timely payment or performance to be
impaired. Canopy owns approximately 14,463,000 shares, or
44.7%, of the Companys issued and outstanding common
stock. Raymond Noorda, Chairman of MTI, is also Chairman of the
Canopy Group and the beneficial owner of the majority interest
in the Canopy Group.

(14) Employee Benefits

The Company maintains an employee savings plan
which is intended to qualify under section 401(k) of the
Internal Revenue Code. The Companys contributions to the
plan are determined at the discretion of the Board of Directors.
During fiscal years 2002, 2001 and 2000, the Company contributed
$0, $0 and $306, respectively.

(15) Goodwill and Other
Intangibles

In July 2001, the FASB issued Statement
No. 141, Business Combinations, and Statement
No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141
also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for
separately. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually
in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement 144,
Accounting for the Impairment and Disposal of Long-Lived
Assets.

The Company was required to adopt the provisions
of Statement 141 immediately upon release, except with regard to
business combinations initiated prior to July 1, 2001, and
Statement 142 effective April 8, 2001. Companies with
fiscal year ends beginning after March 15, 2001, who had
not yet issued financial statements for their first interim
period may early adopt Statement 142. The Company elected
to adopt Statement 142 as of April 8, 2001, the beginning
of fiscal year 2002. Furthermore, goodwill and intangible assets
determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated
for impairment in accordance with the appropriate
pre-Statement 142 accounting literature.

Statement 141 required upon adoption of
Statement 142, that the Company evaluate its existing
intangible assets and goodwill that were acquired in a prior
purchase business combination and make any necessary
reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon
adoption of Statement 142, the Company was required to reassess
the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the
first interim period after adoption (period ended
October 6, 2001). In addition, to the extent an intangible
asset is identified as having an indefinite useful life, the
Company was required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within
the first interim period. Any impairment loss would be measured
as of the date of

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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.

In connection with the transitional goodwill
impairment evaluation, Statement 142 required the Company
to perform an assessment of whether there was an indication that
goodwill was impaired as of the date of adoption. To accomplish
this, the Company identified its reporting units and determined
the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of
adoption. The Company then had up to six months from the date of
adoption to determine the fair value of each reporting unit and
compare it to the reporting units carrying amount. To the
extent a reporting units carrying amount exceeds its fair
value, an indication exists that the reporting units
goodwill may be impaired and the Company must perform the second
step of the transitional impairment test. In the second step,
the Company must compare the implied fair value of the reporting
units goodwill, determined by allocating the reporting
units fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of the date
of adoption. This second step is required to be completed as
soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss would be recognized
as the cumulative effect of a change in accounting principle in
the Companys statement of operations.

As of April 6, 2002, the Company had
remaining goodwill related to the acquisition of National
Peripherals, Inc. (NPI) of $5,184. The Company has
no amortizable intangible assets. Because of the adoption of
Statement 142, $2,693 of goodwill amortization expense
incurred in fiscal year 2001 will no longer be recognized.

An assessment for goodwill impairment was
performed by an independent third party in the second quarter of
fiscal 2002. Income and market approaches were used for
reporting unit valuations. The methodology used to implement the
income approach was the capitalized income approach that bases
the value of an asset on the future cash flows attributable to
that asset. The methodologies used to implement the market
approach were the market multiples methodology, which results in
an indication of value by comparing the business being appraised
to guideline publicly traded companies, and the similar
transactions methodology, which develops an indication of value
based on prices paid for comparable businesses. Because the
Companys reportable business segments were based upon
geographic areas, it had two reporting units, the United States
and Europe. The lower of the total of the market value estimated
for each reporting unit or the total market value of the
Companys stock at the valuation date was used as the total
value of each of the reporting units in performing the reporting
unit valuations. The result of the test showed that the Company
did not meet Statement 142 requirements for reporting unit
valuations. Therefore, additional valuation procedures, the
underlying asset valuations, were required to determine whether
goodwill was impaired. This step involved the comparison of the
fair value of the business enterprise for the Company to its
carrying value. Based on the valuation procedures employed, as
of April 8, 2001, the fair value of goodwill exceeded the
reported carrying value of the goodwill and, therefore, there
was no indication of impairment. The following table shows, on a

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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pro-forma basis, what earnings and earnings per
share would have been if the new accounting standard had been
applied for the period indicated:

|                                              |  |            |         |          |  |   |        | 
|--------------------------------------------- |  | ---------- | ------- | -------- |  | - | ------ | 
|                                              |  |           
|                                              |  | Year Ended
|                                              |  |           
|                                              |  | April 7,   |         | April 1,
|                                              |  | 2001       |         | 2000    
|                                              |  |            |         |         
|Reported net income (loss)                    |  | $          | (36,441 | )        |  | $ | 25,320 | 
|Add back: goodwill amortization               |  |            | 2,693   |          |  |   | 2,367  | 
|                                              |  |            |         |          |  |   |        | 
|Adjusted net income (loss)                    |  | $          | (33,748 | )        |  | $ | 27,687 | 
|                                              |  |            |         |          |  |   |        | 
|Per share information:                        |  |            |         |          |  |   |        | 
|Reported net income (loss) per share, basic   |  | $          | (1.13   | )        |  | $ | 0.84   | 
|Add back: goodwill amortization per share     |  |            | 0.08    |          |  |   | 0.08   | 
|                                              |  |            |         |          |  |   |        | 
|Adjusted net income (loss) per share, basic   |  | $          | (1.05   | )        |  | $ | 0.92   | 
|                                              |  |            |         |          |  |   |        | 
|Reported net income (loss) per share, diluted |  | $          | (1.13   | )        |  | $ | 0.76   | 
|Add back: goodwill amortization per share     |  |            | 0.08    |          |  |   | 0.07   | 
|                                              |  |            |         |          |  |   |        | 
|Adjusted net income (loss) per share, diluted |  | $          | (1.05   | )        |  | $ | 0.83   | 
|                                              |  |            |         |          |  |   |        | 

(16) Quarterly Financial Data
(Unaudited)

Selected quarterly financial data for continuing
operations for fiscal years 2002 and 2001 are as follows:

|      |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |       |   | 
|----- | -------------- | -------------- | - | ------------ | ------- | ---- | - | --------- | ------ |  | - | ------- | ------- | - | - | ----- | - | 
|      |                |                |   |              |         | Net  |   | Net Loss 
|      |                | Total Revenues |   | Gross Profit |         | Loss |   | Per Share
|      |                |                |   |              |         |      |   |          
|2002: |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |      
|      | Fourth quarter |                | $ | 25,724       |         |      | $ | 7,093     |        |  | $ | (10,781 | )       |   | $ | (0.33 | )
|      | Third quarter  |                |   | 29,827       |         |      |   | 8,895     |        |  |   | (9,617  | )       |   |   | (0.30 | )
|      | Second quarter |                |   | 32,547       |         |      |   | 10,345    |        |  |   | (2,740  | )       |   |   | (0.08 | )
|      | First quarter  |                |   | 29,820       |         |      |   | 5,368     |        |  |   | (36,487 | )       |   |   | (1.13 | )
|      |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |      
|      |                | Total          |   | $            | 117,918 |      |   | $         | 31,701 |  |   | $       | (59,625 | ) |   |       |   | 
|      |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |      
|2001: |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |      
|      | Fourth quarter |                | $ | 34,170       |         |      | $ | 11,498    |        |  | $ | (20,592 | )       |   | $ | (0.64 | )
|      | Third quarter  |                |   | 42,021       |         |      |   | 12,896    |        |  |   | (4,984  | )       |   |   | (0.15 | )
|      | Second quarter |                |   | 47,589       |         |      |   | 17,335    |        |  |   | (2,125  | )       |   |   | (0.07 | )
|      | First quarter  |                |   | 37,910       |         |      |   | 12,190    |        |  |   | (8,740  | )       |   |   | (0.27 | )
|      |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |      
|      |                | Total          |   | $            | 161,690 |      |   | $         | 53,919 |  |   | $       | (36,441 | ) |   |       |   | 
|      |                |                |   |              |         |      |   |           |        |  |   |         |         |   |   |      

The Company has experienced significant quarterly
fluctuations in operating results and anticipates that these
fluctuations may continue into the future. These fluctuations
have been and may continue to be caused by a number of factors,
including: competitive pricing pressures, the timing of customer
orders (a large majority of which have historically been placed
in the last month of each quarter), the timing of the
introduction of new products and new versions of the
Companys products, shifts in product mix and the timing of
sales and marketing and research, and development expenditures.
Future operating results may fluctuate as a result of these and
other factors, including the Companys ability to continue
to develop innovative products, the introduction of new products
by the Companys competitors and decreases in gross profit
margin for mature products.

61



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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company recorded a net tax expense of $24,598
for fiscal year 2002, as compared to a net tax expense of $3,529
in fiscal year 2001. The increase was primarily because of
recording $24,300 of tax expense related to establishing a
valuation allowance for deferred-tax assets in the first quarter
of fiscal year 2002. Because of the continued decline in the
market value of the Companys holding of Caldera stock and
continued softness in the American and European markets for the
Companys products, management believes that it is more
likely than not that the Company will not realize the benefits
of the net deferred tax asset existing on April 6, 2002.

In fiscal years 2002, 2001 and 2000, the Company
recognized $3,840, $3,410, $4,189 from royalty revenue resulting
from the sale of patents to EMC (see note 12). Based upon
the agreement, a minimum of $15,000 and a maximum of $30,000 of
royalties were to be received under the EMC Agreement in five
equal annual installments. The Company received the first three
annual installments in March 2000, March 2001 and March 2002,
and is expecting to receive the two remaining annual
installments in March 2003 and 2004.

In the fourth quarter of fiscal year 2002, the
Company recorded excess and obsolete inventory charges of $2,100
related to certain 6700, 8700 and 8900 series inventory. Also in
the fourth quarter of fiscal year 2002, the Company recorded
restructuring charges of $4,911 (see note 2).

The Company has operated historically without a
significant backlog of orders and, as a result, net product
revenue in any quarter is dependent upon orders booked and
products shipped during that quarter. A significant portion of
the Companys operating expenses are relatively fixed in
nature and planned expenditures are based primarily upon sales
forecasts. If revenue does not meet the Companys
expectations in any given quarter, the adverse effect on the
Companys liquidity and net income may be magnified by the
Companys inability to reduce expenditures quickly enough
to compensate for the revenue shortfall. Further, as is common
in the computer industry, the Company historically has
experienced an increase in the number of orders and shipments in
the latter part of each quarter and the Company expects this
pattern to continue into the future. The Companys failure
to receive anticipated orders or to complete shipments in the
latter part of a quarter could have a materially adverse effect
on the Companys results of operations for that quarter.

Because of all of the foregoing factors, the
Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future
performance. There can be no assurance that the Company will
achieve profitability on a quarter-to-quarter basis or that
future revenues and operating results will not be below the
expectations of public market analysts and investors, which
could result in a materially adverse effect on the
Companys common stock.

62



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Schedule II

MTI TECHNOLOGY CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

For the fiscal years ended April 6, 2002,
April 7, 2001 and April 1, 2000


|                         |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |        | 
|------------------------ | ------------------------------------------------- | -------------- | - | ----------- |  | ---------- | - | ---------- |  |  | - | ------ | - |  | - | ------ | 
|                         |                                                   |                |   | Charged to  |  |            |   |           
|                         |                                                   | Balance at     |   | Revenue,    |  |            |   | Balance at
|                         |                                                   | Beginning      |   | Costs and   |  |            |   | End of    
|Description              |                                                   | of Period      |   | Expenses(1) |  | Deductions |   | Period    
|                         |                                                   |                |   |             |  |            |   |           
|                         |                                                   |               
|                         |                                                   | (In thousands)
|Year ended April 6, 2002 |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |       
|                         | Allowance for doubtful accounts and sales returns |                | $ | 10,460      |  |            | $ | 1,884      |  |  | $ | (8,938 | ) |  | $ | 3,406  | 
|                         |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |       
|Year ended April 7, 2001 |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |       
|                         | Allowance for doubtful accounts and sales returns |                | $ | 7,210       |  |            | $ | 7,580      |  |  | $ | (4,330 | ) |  | $ | 10,460 | 
|                         |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |       
|Year ended April 1, 2000 |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |       
|                         | Allowance for doubtful accounts and sales returns |                | $ | 3,250       |  |            | $ | 4,439      |  |  | $ | (479   | ) |  | $ | 7,210  | 
|                         |                                                   |                |   |             |  |            |   |            |  |  |   |        |   |  |   |       



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The allowance for sales returns is recorded as a
    charge to revenue and the allowance for doubtful accounts is
    charged to selling, general and administrative expenses.

63



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EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |      |             |  |                                                                                                                                                                                                                                                                                                                       
|Number  |      | Description |  |                                                                                                                                                                                                                                                                                                                       
|        |      |             |  |                                                                                                                                                                                                                                                                                                                       
|        | 3.1  |             |  | Restated Certificate of Incorporation of the
    Company, incorporated by reference to Exhibit 3.1 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                                                                         |  |  |  | 
|        | 3.2  |             |  | Certificate of Amendment of Restated Certificate
    of Incorporation of the Company, incorporated by reference to
    Exhibit A of the Companys Information Statement on
    Schedule 14C filed with the Commission on April 3,
    2000.                                                                            |  |  |  | 
|        | 3.3  |             |  | Amended and Restated Bylaws of the Company, dated
    January 18, 2002, incorporated by reference to
    exhibit 3.3 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended January 5,
    2002.                                                                                            |  |  |  | 
|        | 4.1  |             |  | Form of Registration Rights Agreement between the
    Company and certain Purchasers, and schedule of such Purchasers,
    incorporated by reference to Exhibit 4.1 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                        |  |  |  | 
|        | 4.2  |             |  | Registration Rights Agreement among the Company,
    Dialogic System Corporation and NFT Ventures, Inc., dated
    June 15, 1992, as amended as of April 1, 1993 and as
    of February 11, 1994, incorporated by reference to
    Exhibit 4.2 of the Companys Registration Statement on
    Form S-1 (No. 33-75180). |  |  |  | 
|        | 4.3  |             |  | Registration Rights Agreement between the Company
    and NFT Ventures, Inc., dated November 30, 1992,
    incorporated by reference to Exhibit 4.3 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                        |  |  |  | 
|        | 4.4  |             |  | Registration Rights Agreement between the Company
    and Dialogic Systems Corporation, dated November 30, 1992,
    incorporated by reference to Exhibit 4.11 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                             |  |  |  | 
|        | 4.5  |             |  | Amended and Restated Registration Rights
    Agreement between the Company and Silicon Valley Bank, dated
    January 11, 2002, incorporated by reference to
    Exhibit 4.8 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended January 5,
    2002.                                    |  |  |  | 
|        | 4.6  |             |  | Specimen of Amended Stock Certificate,
    incorporated by reference to Exhibit 4.6 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended quarterly period ended April 7, 2001.                                                                                                                |  |  |  | 
|        | 10.1 |             |  | Triple Net Lease between the Company and Catellus
    Development Corporation effective December 20, 1991,
    incorporated by reference to Exhibit 10.2 of the
    Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                   |  |  |  | 
|        | 10.2 |             |  | Owner Participation Agreement between the
    Company, Catellus Development Corporation and Anaheim
    Redevelopment Agency, dated as of January 7, 1992,
    including exhibits, incorporated by reference to
    Exhibit 10.3 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).               |  |  |  | 
|        | 10.3 |             |  | Form of Nonqualified Stock Option Agreement under
    the Stock Incentive Plan, incorporated by reference to
    Exhibit 10.14 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                 |  |  |  | 
|        | 10.4 |             |  | Form of Indemnification Agreement, incorporated
    by reference to Exhibit 10.16 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                                                                              |  |  |  | 
|        | 10.5 |             |  | Micro Technology, Inc. Incentive Stock Option
    Plan  1985, incorporated by reference to
    Exhibit 10.20 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                                  |  |  |  | 
|        | 10.6 |             |  | 1987 Incentive Stock Option and Nonqualified
    Stock Option Plan of the Company (the 1987 Stock Option
    Plan), incorporated by reference to Exhibit 10.21 of
    the Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                           |  |  |  | 
|        | 10.7 |             |  | Form of Incentive Common Stock Option Agreement
    under the 1987 Stock Option Plan, incorporated by reference to
    Exhibit 10.22 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                           |  |  |  | 
|        | 10.8 |             |  | Form of Nonqualified Common Stock Option
    Agreement under the 1987 Stock Option Plan, incorporated by
    reference to Exhibit 10.23 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                        |  |  |  | 



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                                                                   
|Number  |       | Description |  |                                                                                                                                                                                                                                                                                                                   
|        |       |             |  |                                                                                                                                                                                                                                                                                                                   
|        | 10.9  |             |  | Stock Incentive Plan of the Company, incorporated
    by reference to Exhibit 10.24 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                                                                        |  |  |  | 
|        | 10.10 |             |  | 1988 Stock Option Plan, as amended
    August 12, 1991, of SF2 Corporation, incorporated by
    reference to Exhibit 10.25 of the Companys
    Registration Statement on Form S-1 (No. 33-75180).                                                                                                                 |  |  |  | 
|        | 10.11 |             |  | Form of Consultant/ Employee Confidentiality
    Agreement, incorporated by reference to Exhibit 10.28 of
    the Companys Registration Statement on Form S-1
    (No. 33-75180).                                                                                                                                 |  |  |  | 
|        | 10.12 |             |  | Lease between Oak Creek Delaware, Inc., and the
    Company, dated December 18, 1993, incorporated by reference
    to Exhibit 10.29 of the Companys Registration
    Statement on Form S-1 (No. 33-75180).                                                                                                       |  |  |  | 
|        | 10.13 |             |  | Form of Incentive Stock Option Agreement under
    the Stock Incentive Plan, incorporated by reference to
    Exhibit 10.30 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                |  |  |  | 
|        | 10.14 |             |  | MTI Technology Corporation 1994 Employee Stock
    Purchase Plan, as amended, incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 2, 1994.                                                                                              |  |  |  | 
|        | 10.15 |             |  | MTI Technology Corporation Directors
    Non-Qualified Stock Option Plan, incorporated by reference to
    Exhibit 10.32 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                  |  |  |  | 
|        | 10.16 |             |  | Asset Purchase Agreement, dated February 9,
    1995, between EMC Corporation and the Company (confidential
    treatment granted pursuant to Rule 24b-2), incorporated by
    reference to Exhibit 10.36 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    December 30, 1995. |  |  |  | 
|        | 10.17 |             |  | Loan and Security Agreement between the Company
    and Silicon Valley Bank and General Electric Capital
    Corporation, as Co-Lenders, and Schedules thereto, incorporated
    by reference to Exhibit 10.28 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended July 4, 1998. |  |  |  | 
|        | 10.18 |             |  | Amendment to the 1996 Stock Incentive Plan,
    incorporated by reference to Exhibit 10.29 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 2, 1999.                                                                                                                  |  |  |  | 
|        | 10.19 |             |  | Severance Agreement dated as of July 15,
    1998, between Thomas P. Raimondi, Jr. and Company,
    incorporated by reference to Exhibit 10.30 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended quarterly period ended April 3, 1999.                                                 |  |  |  | 
|        | 10.20 |             |  | Severance and Release Agreement dated as of
    July 7, 2000, between Dale Boyd and Company, incorporated
    by reference to Exhibit 10.20 of the Companys Annual
    Report on Form 10-K for the fiscal year ended April 7,
    2001.                                                                           |  |  |  | 
|        | 10.21 |             |  | Severance and Release Agreement dated as of
    April 29, 2001, between Guy M. Cheney and Company,
    incorporated by reference to Exhibit 10.21 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 7, 2001.                                                                     |  |  |  | 
|        | 10.22 |             |  | Severance and Release Agreement dated as of
    September 20, 2000, between Daniel Brown and Company,
    incorporated by reference to Exhibit 10.22 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 7, 2001.                                                                  |  |  |  | 
|        | 10.23 |             |  | Severance Agreement dated as of February 7,
    2001, between Keith Clark and Company, incorporated by reference
    to Exhibit 10.24 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 7, 2001.                                                                                     |  |  |  | 
|        | 10.24 |             |  | Severance Agreement dated as of May 30,
    2001, between Kenneth D. Simpson and Company, incorporated by
    reference to Exhibit 10.26 of the Companys Annual
    Report on Form 10-K for the fiscal year ended April 7,
    2001.                                                                              |  |  |  | 
|        | 10.25 |             |  | Severance Agreement dated as of May 31,
    2001, between Venki Venkatarman and Company, incorporated by
    reference to Exhibit 10.27 of the Companys Annual
    Report on Form 10-K for the fiscal year ended April 7,
    2001.                                                                               |  |  |  | 



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                 |  |  |  | 
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                                
|Number  |       | Description |  |                                                                                                                                                                                                                                                                                
|        |       |             |  |                                                                                                                                                                                                                                                                                
|        | 10.26 |             |  | Severance Agreement dated as of February 7,
    2001, between Keith Clark and Company, incorporated by reference
    to Exhibit 10.24 of the Companys Annual Report on
    Form 10-K for the fiscal year ended quarterly period ended
    April 7, 2001.                       |  |  |  | 
|        | 10.27 |             |  | Severance Agreement dated as of May 30,
    2001, between Kenneth D. Simpson and Company, incorporated
    by reference to Exhibit 10.26 of the Companys Annual
    Report on Form 10-K for the fiscal year ended quarterly
    period ended April 7, 2001.                    |  |  |  | 
|        | 10.28 |             |  | Severance Agreement dated as of May 31,
    2001, between Venki Venkataraman and Company, incorporated by
    reference to Exhibit 10.27 of the Companys Annual
    Report on Form 10-K for the fiscal year ended quarterly
    period ended April 7, 2001.                    |  |  |  | 
|        | 10.29 |             |  | MTI Technology Corporation 2001 Stock Incentive
    Plan, incorporated by reference to Exhibit 10.30 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended quarterly period ended April 7, 2001.                                                        |  |  |  | 
|        | 10.30 |             |  | MTI Technology Corporation 2001 Non-Employee
    Directors Option Program, incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on
    Form 10-K for the fiscal year ended quarterly period ended
    April 7, 2001.                                   |  |  |  | 
|        | 10.31 |             |  | MTI Technology Corporation 2001 Employee Stock
    Purchase Plan, incorporated by reference to Exhibit 10.32
    of the Companys Annual Report on Form 10-K for the
    fiscal year ended quarterly period ended April 7, 2001.                                                |  |  |  | 
|        | 10.32 |             |  | Severance and Release Agreement dated as of
    July 31, 2001, between Richard L. Ruskin and Company,
    incorporated by reference to Exhibit 10.39 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.                     |  |  |  | 
|        | 10.33 |             |  | Consulting Agreement dated as of August 1,
    2001, between Richard L. Ruskin and Company, incorporated
    by reference to Exhibit 10.40 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended October 6, 2001.                               |  |  |  | 
|        | 10.34 |             |  | Severance and Release Agreement dated as of
    August 20, 2001, between Dale Wight and Company,
    incorporated by reference to Exhibit 10.41 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.                          |  |  |  | 
|        | 10.35 |             |  | Consulting Agreement dated as of August 21,
    2001, between Dale Wight and Company, incorporated by reference
    to Exhibit 10.40 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended October 6,
    2001.                                     |  |  |  | 
|        | 10.36 |             |  | Indemnification Agreement dated as of
    October 15, 2001, between Kent Smith and the Company,
    incorporated by reference to Exhibit 10.43 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.                           |  |  |  | 
|        | 10.37 |             |  | Warrant to Purchase 10,500 shares of Common
    Stock, issued to John E. Osborne, dated May 27, 2001
    incorporated by reference to Exhibit 10.44 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.                      |  |  |  | 
|        | 10.38 |             |  | Warrant to Purchase 4,500 shares of Common Stock,
    issued to Kenneth J. Virnig, dated May 27, 2001,
    incorporated by reference to Exhibit 10.45 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.                    |  |  |  | 
|        | 10.39 |             |  | Statement of Work under PilotCenter Master
    Services Agreement, incorporated by reference to
    Exhibit 10.46 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended October 6,
    2001.                                                        |  |  |  | 
|        | 10.40 |             |  | Master Lease Agreement No. 20011 between
    WebUseNet Corporation and the Company, dated September 28,
    2001, incorporated by reference to Exhibit 10.47 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001.             |  |  |  | 
|        | 10.41 |             |  | Amendment No. 1 to Master Lease Agreement
    No. 20011, dated October 5, 2001, incorporated by
    reference to Exhibit 10.48 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    October 6, 2001.                                           |  |  |  | 
|        | 10.42 |             |  | Amended and Restated Loan and Security Agreement
    dated October 29, 2001, between the Company and Silicon
    valley Bank, incorporated by reference to Exhibit 10.37 of
    the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 6, 2001. |  |  |  | 



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                           |  |  |  | 
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                          
|Number  |       | Description |  |                                                                                                                                                                                                                                                                          
|        |       |             |  |                                                                                                                                                                                                                                                                          
|        | 10.43 |             |  | Amendment to Loan Documents dated
    October 29, 2001, incorporated by reference to
    Exhibit 10.38 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended October 6,
    2001.                                                             |  |  |  | 
|        | 10.44 |             |  | Amendment to Loan Documents, dated
    November 8, 2001, between the Company and Silicon Valley
    Bank, incorporated by reference to Exhibit 10.49 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.               |  |  |  | 
|        | 10.45 |             |  | Subordination Agreement, dated November 7,
    2001, between the Company and Silicon Valley Bank, incorporated
    by reference to Exhibit 10.50 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended January 5, 2002.                   |  |  |  | 
|        | 10.46 |             |  | Amended and Restated Continuing Guarantee, dated
    November 8, 2001, between the Company and Silicon Valley
    Bank, incorporated by reference to Exhibit 10.51 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002. |  |  |  | 
|        | 10.47 |             |  | Pilot Center Master Services Agreement, dated
    April 1, 2001, between Center 7, Inc. and the Company,
    incorporated by reference to Exhibit 10.52 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 7, 2001.               |  |  |  | 
|        | 10.48 |             |  | Warrant to Purchase 190,678 shares of Common
    Stock, issued to Silicon Valley Bank, dated January 11,
    2002, incorporated by reference to Exhibit 10.52 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.      |  |  |  | 
|        | 10.49 |             |  | Master Services Development Agreement, dated
    June 1, 2001, between the Company and Center 7, Inc.,
    incorporated by reference to Exhibit 10.53 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 5, 2002.              |  |  |  | 
|        | 10.50 |             |  | Severance Agreement dated July 26, 2000,
    between Gary Scott and Company incorporated by reference to
    Exhibit 10.19 of the Companys Annual Report on
    Form 10-K for the fiscal year ended quarterly period ended
    April 7, 2001.                            |  |  |  | 
|        | 10.51 |             |  | Loan Agreement, entered into as of June 27,
    2002, by and between MTI Technology Corporation and The Canopy
    Group, Inc., incorporated by reference to Exhibit 10.54 of
    the Companys Current Report on Form 8-K filed on
    July 1, 2002.                     |  |  |  | 
|        | 10.52 |             |  | Security Agreement, entered into as of
    June 27, 2002, by and between MTI Technology Corporation
    and The Canopy Group, Inc., incorporated by reference to
    Exhibit 10.55 of the Companys Current Report on
    Form 8-K filed on July 1, 2002.                 |  |  |  | 
|        | 10.53 |             |  | Promissory Note, entered into as of June 27,
    2002, by and between MTI Technology Corporation and The Canopy
    Group, Inc., incorporated by reference to Exhibit 10.56 of
    the Companys Current Report on Form 8-K filed on
    July 1, 2002.                    |  |  |  | 
|        | 10.54 |             |  | Termination Agreement, entered into as of
    June 25, 2002, by and between MTI Technology Corporation
    and Silicon Valley Bank, incorporated by reference to
    Exhibit 10.57 of the Companys Current Report on
    Form 8-K filed on July 1, 2002.                 |  |  |  | 
|        | 10.55 |             |  | Stock Purchase Agreement, entered into as of
    June 26, 2002, by and between MTI Technology Corporation
    and Caldera International, Inc., incorporated by reference to
    Exhibit 10.58 of the Companys Current Report on
    Form 8-K filed on July 1, 2002.      |  |  |  | 
|        | 10.56 |             |  | Microsoft OEM License Agreement for embedded
    server products dated August 1, 2001, between Microsoft
    Licensing, Inc. and the Company.                                                                                                                             |  |  |  | 
|        | 10.57 |             |  | Development, License and distribution Agreement
    dated September 10, 2001, between FalconStor, Inc. and the
    Company.                                                                                                                                               |  |  |  | 
|        | 10.58 |             |  | Amendment No. 1 to Development, License and
    distribution Agreement dated October 1, 2001, between
    FalconStor, Inc. and the Company.                                                                                                                               |  |  |  | 
|        | 10.59 |             |  | Amendment No. 2 to Development, License and
    distribution Agreement dated February 25, 2002, between
    FalconStor, Inc. and the Company.                                                                                                                             |  |  |  | 
|        | 10.60 |             |  | Finders Fee Agreement dated
    February 20, 2002, between WebUseNet Corporation and the
    Company.                                                                                                                                                                    |  |  |  | 
|        | 21    |             |  | Subsidiaries of the Company.                                                                                                                                                                                                                                              |  |  |  | 



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##### Table of Contents



|        |    |             |  |                                 |  |  |  | 
|------- | -- | ----------- |  | ------------------------------- |  |  |  | 
|Exhibit |    |             |  |                                
|Number  |    | Description |  |                                
|        |    |             |  |                                
|        | 23 |             |  | Consent of KPMG LLP.            |  |  |  | 
|        | 24 |             |  | Power of Attorney (see page 34) |  |  |  | 



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|  |                                                
|- | -----------------------------------------------
|* | Management or compensatory plan or arrangement.

(b) Reports on Form 8-K

None.