##### Table of Contents









UNITED STATES 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 5,
    2003                                                     
|          
|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                                                           |  | 95-3601802                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

14661 Franklin Avenue

Tustin, California 92780


(Address of principal executive offices, Zip
Code)


Registrants telephone number, including
area code:

(714) 481-7800


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

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
Registrant was $5,661,460 on October 5, 2002, based on the
closing sale price of such stock on The Nasdaq SmallCap Market.

The number of shares outstanding of
Registrants Common Stock, $0.001 par value, was 32,974,882
on June 24, 2003.

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

DOCUMENTS INCORPORATED BY REFERENCE:

Information required under Items 10, 11, 12,
and 13 of Part III hereof are incorporated by reference to
portions of the registrants definitive Proxy Statement to
be filed in connection with the solicitation of proxies for its
Annual Meeting of Stockholders to be held August 21, 2003.



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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 Accountants 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 and Related Stockholders Matters
|               | Item 13. Certain Relationships and Related Transactions                                                 
|               | Item 14. Controls and Procedures                                                                        
|PART IV       
|               | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT 4.2   
|EXHIBIT 10.2  
|EXHIBIT 10.3  
|EXHIBIT 10.4  
|EXHIBIT 10.9  
|EXHIBIT 10.10 
|EXHIBIT 10.61 
|EXHIBIT 10.62 
|EXHIBIT 10.63 
|EXHIBIT 10.64 
|EXHIBIT 10.65 
|EXHIBIT 10.66 
|EXHIBIT 10.67 
|EXHIBIT 10.68 
|EXHIBIT 10.69 
|EXHIBIT 10.70 
|EXHIBIT 10.71 
|EXHIBIT 10.72 
|EXHIBIT 10.73 
|EXHIBIT 10.74 
|EXHIBIT 21    
|EXHIBIT 23    
|EXHIBIT 99.1  
|EXHIBIT 99.2  



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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
14661 Franklin Avenue, Tustin, California 92780. Our telephone
number at that location is (714) 481-7800. References in
this Form 10-K to we, our,
us, the Company and MTI
refer to MTI Technology Corporation and its consolidated
subsidiaries.

All references to years refer to our fiscal years
ended April 3, 1999, April 1, 2000, April 7,
2001, April 6, 2002 and April 5, 2003, 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

During fiscal year 2003, we were a provider of
enterprise storage solutions focusing on the mid-range market.
We refocused our strategy from being a developer of MTI-branded
RAID controller technology to being a storage solutions provider
for the mid-range enterprise market. We partnered with
independent storage technology companies to develop, integrate
and maintain high-performance, high-availability storage
solutions for the mid-range and Global 2000 companies worldwide.
We also serviced select third party hardware and software, and
our Professional Services organization provided planning,
consulting and implementation support for storage products from
other leading vendors. We believe that there is significant
value in creating, integrating, implementing and providing
umbrella services around these various technologies as there is
in developing the raw technology. On March 31, 2003, we
entered into a reseller agreement with EMC Corporation
(EMC), a world leader in information storage
systems, software, networks and services, and have become a
reseller and service provider of EMC Automated Networked
StorageTM systems and software. Although we intend to
focus primarily on EMC products, we will continue to support and
service our current customer base on both our MTI-branded RAID
controller technology and our partnered independent storage
technology. We believe that we can differentiate ourselves
through our ability to offer umbrella services on a wide range
of storage products covering online storage, replicated site
environments and data protection from leading technology
companies. We sell our solutions and services to Global 2000
companies for their data center computing environments.

Under the terms of the EMC reseller agreement, we
will combine our core services capabilities including storage
networking assessment, installation, resource management and
enhanced data protection with the complete line of EMC Automated
Networked Storage systems and software, with a focus on the
CLARiiON® family of systems. We are developing and
implementing solutions that incorporate a broad array of third
party products which, we believe, are the finest commercial
technologies available to meet customer requirements in the
areas of Storage Area Networks, Network Attached Storage,
high-availability systems for enhanced business continuance,
data protection systems incorporating enhanced backup and
recovery, HSM, archiving and tape automation while minimizing
our past dependencies on MTI-branded RAID controller technology.
We also enhance the value of our storage solutions through our
24x7x365 support and service infrastructure, which includes an
international network of over 130 on-site field engineers, a
solution and integration test laboratory, and our global call
response centers.

The total storage solutions that we deliver to
the market are generally compatible with Sun Solaris, HP-UX,
Windows NT, Novell Netware, IBM AIX, and Linux operating
systems. Having the ability to work on these operating platforms
enables us to meet varied customer demands. Our customers
represent a cross-section of industries and governmental
agencies and range from small businesses to Fortune 500
companies. No single customer accounted for more than ten
percent of total revenue during fiscal years 2003, 2002 and 2001.

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Our Strategy

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

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

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

Significant Business Developments

During fiscal year 2003, we did the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we consolidated our service, manufacturing and
    business systems on a worldwide basis. This allows us to deploy
    our employees skills where geographically required and
    ensures that we are better positioned to respond to the demands
    of our customers;                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | we entered into a worldwide reseller agreement
    with EMC under which we plan to sell the full line of EMC
    disk-based storage products and, as a service-enabled partner,
    intend to offer full professional services and field service for
    all CLARiiON hardware and software products. Combining EMC
    storage systems with complementary technologies such as back-up
    and software solutions from our other leading vendors such as
    Brocade, Legato, Quantum, StorageTek, and Veritas, we have begun
    to build a storage solutions strategy and portfolio to cover the
    entire spectrum of todays enterprise storage needs; and
|
| |  | in order to execute our strategy and fulfill the
    high expectations we hold for our new vendor relationships, we
    increased our focus and resources on continued expansion of
    enterprise storage solutions through integration of technologies
    and development of enhanced services, particularly consulting
    and remote services.                                                                                                                                                                                                                                                                                                             



| |                        
| | -----------------------
| | Financial Restructuring

During the fourth quarter of fiscal year 2002, we
recorded a restructuring charge of $4.9 million which
consisted of $4.3 million in charges related to the
abandonment of either underutilized or historically unprofitable
facilities, $0.3 million in charges related to headcount
reduction of 56 employees, and $0.3 million in charges
related to the disposal of certain fixed assets. The cash
outflow of the restructuring charge was $0.3 million,
related to severance paid to employees, of which
$0.1 million was paid in fiscal year 2002. The remaining
$0.2 million was paid in the first quarter of fiscal year
2003.

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

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

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

We face significant risks and uncertainties in
connection with these restructuring activities and we have
incurred substantial charges in connection with the
restructuring. Despite the restructuring activities that have
taken place to date, we continue 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 Factors That May Affect Future
Results for additional risks related to the restructuring.



| |                           
| | --------------------------
| | SCO Group Stock Repurchase

On June 26, 2002, we entered into an
agreement with SCO Group (formerly Caldera International Inc.)
whereby SCO Group (SCO) agreed to purchase all of
the approximately 1.19 million shares of SCO common stock
held by us at a per share purchase price of $0.90, for a total
of approximately $1.1 million. The stock repurchase
transaction was completed during the second quarter of fiscal
year 2003. We recognized a gain of $1.2 million from the
sale of SCO shares which is recorded in other income, net in the
2003 consolidated statement of operations.

EMC Reseller Agreement

Effective March 31, 2003, we entered into a
worldwide agreement with EMC under which we plan to sell the
full line of EMC disk-based storage products and, as a
service-enabled partner, intend to offer full professional
services and field service for all CLARiiON hardware and
software products. Combining EMC storage systems with
complementary technologies such as back-up and software
solutions from our other leading vendors including Brocade,
Legato, Quantum, StorageTek, and Veritas, we have begun to build
a storage solutions strategy and portfolio to cover the entire
spectrum of todays enterprise storage needs.

As EMC is the leading disk subsystem vendor, we
believe our new EMC relationship will improve our
competitiveness in the mid-range storage market. We believe the
relationship will be successful because of the significant
synergies between our two companies. Both companies are pure
play storage providers, accustomed to selling and servicing
similar customer bases, supporting mission-critical
environments, providing fully integrated value-added solutions
and offering 24x7x365 support on those installations. We believe
that we are well positioned to complement EMCs traditional
high-end standards of service to the mid-range.

Simultaneously, both companies will be able to
take advantage of their individual and complementary skills and
offerings. For us, EMC will provide the core engineering,
certification and software engineering needed to stay
competitive in the storage market, thus freeing us to focus our
technical resources on solutions integration. The EMC
relationship will give us access to additional technologies and
supported environments where we have not had the solutions
required by our customer base. The new technologies include
content addressable storage for HIPAA and SEC requirements
related to record retention, ATA drives for low cost mass
storage, and internally integrated replication software for
business continuity and disaster recovery. We expect to leverage
the EMC resources, where possible, including marketing, global
financial services and field service for the CLARiiON,
Symmetrix, Centerra and Celerra line of storage solutions. We
believe that EMC will be able to take advantage of our expertise
and support infrastructure over the full range of storage needs,
including third party integration of leading data protection and
data life cycle management technologies from Legato, Quantum,
StorageTek and Veritas.

The EMC Reseller Agreement will expire on
March 31, 2006. Thereafter, and subject to mutual
agreement, the EMC Reseller Agreement shall be automatically
renewed for successive one-year renewal periods until terminated
by either party with a 90-day notice.

EMC Asset Purchase Agreement

Effective February 9, 1996, we entered into
an asset purchase agreement with EMC, in which we sold to EMC
substantially all of our existing patents, patent applications
and related rights. We were entitled to receive
$30.0 million over the life of the EMC asset purchase
agreement. The final payment of $5.0 million

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was received in January 2001. We also were
entitled to receive royalty payments in the aggregate of up to a
maximum of $30.0 million over the term of the EMC asset
purchase agreement.


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

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

Our Market

Based on industry research, we believe that the
worldwide mid-range open systems-based market for storage
solutions including products and services will be approximately
$12.7 billion in calendar year 2003, growing to
$22.1 billion in calendar year 2007. We believe this
represents a significant opportunity for us. Furthermore, EMC
currently fulfills approximately 39% of the storage
infrastructure for this market. We believe that we can increase
our revenue by leveraging EMCs leadership position in the
market.

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

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

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Our Storage Solution

We deliver storage solutions to solve many common
and demanding customer problems. These solutions are built on
what we believe to be the best-of-breed platform complemented by
other strategic partners such as EMC, Brocade, Legato, Quantum,
StorageTek, and Veritas. We believe that we integrate these
solutions into a complete, easy-to-operate and reliable storage
environment to meet the customers specific business
objectives. Our technical specialists assess the customers
environment and custom integrate each solution to address the
customers specific needs, both in terms of technical
configuration and vendor product selection. Leveraging our
interoperability resources and vendor relationships, we select,
along with our customers input, a platform that will
interoperate and meet the solution objectives. We then integrate
and deliver these solutions with a full range of value-added
service offerings from installation and implementation to
ongoing maintenance, support, management, and knowledge
transfer. While our customers usually engage us to solve
problems and deliver complete applications, our solutions
perspective also gives us the expertise with customers to meet
their requests for individual hardware, software, and service
offerings.

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Storage infrastructure solutions that center on
    state-of-the-art, high-performance, high-availability networked
    storage systems from EMC for Direct Attached Storage, Network
    Attached Storage and Storage Area Networks. These solutions are
    designed to deliver fast and reliable on-line storage that is
    easily and rapidly deployed, easily managed to handle all
    critical data. Storage infrastructure options include: extended
    fault-tolerance, business continuance technology, and Content
    Addressable Storage technology;
|
| |  | Backup Solutions that incorporate leading edge
    solutions from platform vendors such as Veritas and Legato in
    combination with state-of-the-art tape libraries from Quantum
    and StorageTek; and                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Replication services on a local level and/or on a
    wide area basis to create operational copies of current data and
    on a wide area basis for enhanced data protection and business
    continuity utilizing software and hardware services from EMC,
    Veritas and Legato.                                                                                                                                                                                                                                                                                

Global Customer Solutions

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

As part of our strategy to build a worldwide
organization devoted to addressing customers storage
related needs, we have engineered a major realignment within the
service elements of the business. The key objectives of this
initiative are:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to focus resources closer to the customer,
    thereby delivering better services at the point of need;                                                         
|
| |  | to consolidate deployed resources within the
    services arena in order to deliver improved efficiency within
    this manpower intensive area of the business.

Therefore, during the first quarter of fiscal
year 2004, we created a new function called Global Customer
Solutions (GCS), consisting of 139 people, to better
align and utilize our resources as we embrace our new business
model as a reseller of the full line of EMC disk-based storage
products. GCS will become the umbrella function for all of our
customer support functions. As part of the initiative, we are
migrating various elements of our operation to the new group
which include the manufacturing/integration capacity elements
based in Tustin, California, required as part of our new
solution set, and the product sustaining function previously
located at Westmont, Illinois. We consolidated our product
sustaining function to Tustin, California.

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As of June 6, 2003, we have two separate
primary product support centers, one located at our corporate
headquarters in Tustin, California, and a second located in
Godalming, England, consisting of 139 people. As a function of
our consolidation efforts and to avoid duplication at the two
facilities, the Godalming, England facility will handle
primarily our European customer base and sustaining for our
S and D series RAID storage, while the Tustin,
California facility will continue to sustain our traditional
RAID storage, and primarily handle our U.S. customer base. As
necessary, professional technicians from either facility will be
dispatched worldwide to address and solve our customer
requirements.

Our integration center and worldwide purchasing
facility located in Dublin, Ireland will continue as before but
operate within this new grouping. This move is designed to
streamline all solution services within GCS.

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 24 hours-a-day, seven-days-week, 365
days-a-year. For proprietary hardware products, we provide our
customers with a warranty against defects for one year
domestically and for two years internationally. As of
April 5, 2003, approximately 84% of total proprietary
hardware products sold have been entered into post-warranty
maintenance contracts with us. Service revenue represented
approximately 51%, 41% and 31% of our total revenue in fiscal
years 2003, 2002 and 2001, respectively.

Currently, we are selling most EMC hardware
products with up to 2-year 24x7x365 warranties and EMC software
products with 90-day warranties. As a result, the amount of
service contracts associated with those hardware product sales
is expected to decrease in value. Thus, depending upon the
conversion of our current customer base to EMC products from MTI
proprietary products, service revenues may decrease. As sales of
EMC products increase, we expect that sales of back-up products,
which are not a part of the EMC reseller agreement, will
increase. The back-up products carry shorter warranty periods,
thus providing us an opportunity for increased maintenance
contracts.

Sales and Marketing

Since 1996, we have focused on the storage needs
of the open-systems based and mid-range enterprise computing
market. Over 4,000 well known companies, such as Bell South,
France Telecomm, Charter Communications, and DoubleClick, relied
on us to design, implement, and service portions of the storage
environments that support their critical business applications.
During much of our history, we developed core technologies as an
innovator of RAID, fault-tolerant storage and storage area
networking systems. Whether using our own products or those from
leading vendors, our greatest value to customers has always been
on-site integration and service and support of these
technologies. To support this effort, we have created a
multinational sales, service and support infrastructure
including:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | a multinational Global Customer Solutions
    organization;                                                              
|
| |  | a solution integration development team to
    rapidly respond to changing technologies and/or unique customer
    needs;
|
| |  | service and support certifications from all key
    technology partners; and                                             
|
| |  | call response centers with multinational dispatch
    for delivering 24x7x365 service and support.                       

Effective March 31, 2003, we entered into a
reseller agreement with EMC and began to rollout a new
comprehensive family of storage solutions based on EMCs
Automated Networked Storage technology. Combining EMCs
systems with technologies from other leading vendors such as
Quantum, StorageTek, Legato and Veritas, we have built a storage
solutions portfolio to cover a wide spectrum of todays
enterprise storage needs.

We will continue to provide direct end user sales
and services support to our customer base. As of June 6,
2003, we have a multinational sales organization consisting of
71 people, located in 21 sales offices in 14 states and 3
countries. The sales organization includes a technical field
support staff of approximately 14 system

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professionals, who help identify business
problems, design and implement solutions. We are aligning our
sales efforts to revisit all of our existing clients and past
customers to discuss our value proposition and inform them of
the complete solutions suite available from us with the new EMC
relationship.


Order Backlog

Historically, we shipped products within
30 days after receipt of a purchase order and had
relatively little backlog at any given time and, therefore, did
not consider backlog to be a significant or important measure of
sales for any future period. As of March 31, 2003, we have
become a reseller of EMC Automated Networked Storage Systems and
software and our backlog levels will depend on the availability
of EMC products. EMC generally ships products within ten days
upon receipt of a purchase order. A significant portion of our
sales generally occurs in the last month and weeks of a given
quarter. EMC ends its quarter a week ahead of us. Consequently,
EMCs ability to assemble, test and ship orders received in
the last weeks and days of each quarter may be limited.
Therefore, based on our current revenue level, we expect that
order backlog will be an important indicator of our future
success. As of April 5, 2003, our order backlog was
$1.8 million.

Manufacturing and Integration
Services

Our manufacturing and integration services
operations that are located in Dublin, Ireland, are
transitioning to a central procurement and order fulfillment
center. Manufacturing and integration operations consist
primarily of final systems integration and reliability testing.
Order fulfillment for North America is managed through Tustin,
California and products are drop-shipped either directly from
suppliers such as EMC, Brocade, Legato, Quantum, StorageTek, and
Veritas, or from the Dublin, Ireland manufacturing location.
Order fulfillment for Europe is managed directly through Dublin,
Ireland.

Competition

The market for data storage solutions is
extremely competitive, characterized by rapidly changing
technology. We have a number of competitors in various markets,
including Hitachi Data Systems, Hewlett-Packard Company, Sun
Microsystems, Inc., IBM, and Network Appliance, Inc., each of
which has substantially greater name recognition, marketing
capabilities, and financial and personnel resources than we
have. We expect to experience increased competition from
established and emerging computer storage hardware and
management software companies, particularly Hewlett-Packard, Sun
Microsystems and IBM. As we shift our focus to reselling EMC
centric solutions, we believe that we will have a competitive
advantage of selling products of the highest levels of
functionality, performance and availability in the information
storage market.

Since our goal is to enable customers to purchase
a single, integrated storage 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 Factors That May Affect
Future Results  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 have relied on a combination of patent,
copyright, trademark and trade-secret laws, employee and third
party non-disclosure agreements and technical measures to
protect our proprietary rights in our products. Since we shifted
our strategy to become an EMC reseller, our reliance on property
rights is less relevant.

Pursuant to the EMC asset purchase agreement, we
sold to EMC substantially all of our then-existing patents,
patent applications, and related rights. We have an irrevocable,
non-cancelable, perpetual and royalty-free license to exploit,
market and sell the technology protected under the patents sold
to EMC. The license we were granted pursuant to the terms and
conditions of that agreement will terminate in the event of a
change of control of the Company involving certain identified
acquirers. On April 1, 2003, we entered into an

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amended asset purchase agreement with EMC, under
which EMC paid us $5.9 million, which satisfied all
obligations of EMC under the February 9, 1996 Asset
Purchase Agreement (See EMC RESELLER AGREEMENT).
Also, we granted EMC immunity from suit for patent infringement
with respect to our patents.


Employees

As of June 6, 2003 we had 281 full-time
employees worldwide, including 71 in sales and marketing, 139 in
global customer solutions, 24 in manufacturing and quality
assurance, and 47 in general administration and finance. None of
our employees are represented by a labor union, and we consider
our relations with our employees to be good.

Availability of SEC Filings

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






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

In January 2003, we relocated our corporate
headquarters which include marketing, sales and support, general
administration, and finance functions from Anaheim, California
to Tustin, California, a leased facility consisting of
approximately 41,130 square feet. These premises are occupied
under a lease agreement that expires on September 30, 2005.
In July 2002, we completed consolidating our manufacturing
facility into our 28,500 square feet facility in Dublin,
Ireland, for which the lease expires in 2023. We also lease
16,000 square feet, 19,500 square feet, 11,800 square feet and
1,500 square feet facilities in Godalming, England, Chatou,
France, Wiesbaden, Germany and Munich, Germany, respectively,
which are used for sales and services.

We abandoned 21,700 square feet, 11,160 square
feet, 2,635 square feet, 3,200 square feet, 2,050 square feet
and 3,400 square feet of our facilities located in Sunnyvale,
California, Westmont, Illinois, Raleigh, North Carolina, Dublin,
Ireland, Godalming, England, and Chatou, France, respectively,
in the fourth quarter of fiscal year 2002. However, we are still
obligated under the Sunnyvale, California, Westmont, Illinois,
Raleigh, North Carolina, Dublin, Ireland, Godalming, England,
and Chatou, France lease agreements that expire on July 31,
2006, June 30, 2005, April 30, 2005, October 14,
2023, November 5, 2012 and April 30, 2007,
respectively. Since calendar year 2003, we have been able to
sublet portions of our Sunnyvale, California and Raleigh, North
Carolina offices. We will continue to seek sub-tenants in order
to further reduce our cost from the closure of our facilities.
However, due to the current economic conditions, there can be no
assurance that we will be able to sub-lease the facilities in a
timely manner.

We also lease approximately 12 sales and support
offices located throughout the U.S. and Europe.




Item 3.     Legal
Proceedings

On December 3, 2002, we signed an agreement
for the settlement and release of all claims that had been filed
against us and several current or former officers in In re
MTI Technology Corp. Securities Litigation. Our insurers
will cover all but $0.1 million of the total settlement
amount. This case had begun with the filing of several
complaints from July through September 2000; the claims later
were consolidated in the federal court for the Central District
of California on or about December 5, 2000. The plaintiffs
had sought unspecified damages for our alleged violation of the
Securities Exchange Act of 1934 by failing to disclose certain
adverse information primarily during fiscal year 2000. The
settlement is subject to a settlement hearing by the court,
which is scheduled to be held on July 28, 2003.

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




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

No matters were submitted to a vote of MTIs
stockholders during the fourth quarter of fiscal year 2003.




PART II




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

Principal Market and Prices

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

The following table sets forth the range of high
and low sales prices per share of our common stock for each
quarterly period as reported on The Nasdaq National Market and
the Nasdaq SmallCap Market for the periods indicated. The price
of our common stock at the close of business on June 24,
2003 was $1.0500. See Factors That May Affect Future
Results  We may fail to comply with the Marketplace
Rules from Nasdaq.

|                 |  |              |        |     |  |  |        | 
|---------------- |  | ------------ | ------ | --- |  |  | ------ | 
|                 |  |             
|                 |  | Sales Prices
|                 |  |             
|                 |  | High         |        | Low
|                 |  |              |        |    
|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 | 
|Fiscal Year 2003 |  |              |        |     |  |  |        | 
|First Quarter    |  |              | 0.9900 |     |  |  | 0.4200 | 
|Second Quarter   |  |              | 0.5700 |     |  |  | 0.2500 | 
|Third Quarter    |  |              | 0.7900 |     |  |  | 0.2800 | 
|Fourth Quarter   |  |              | 1.3400 |     |  |  | 0.4000 | 

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Number of Common Stockholders

The approximate number of record holders of our
common stock as of June 24, 2003 was 384.

Dividends

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

Warrants

No warrants were exercised during fiscal year
2003.

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Item 6.     Selected
Financial Data

|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |         |        | 
|-------------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------ | -------- | ------- | -------- | ------ | -------- | ------- | -------- | ------- | ------- | ------- | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                                                     |                                     |                         
|                                                                     |                                     | Fiscal Year Ended       
|                                                                     |                                     |                         
|                                                                     |                                     | April 5,                 |        | April 6, |         | April 7, |        | April 1, |         | April 3,
|                                                                     |                                     | 2003                     |        | 2002     |         | 2001     |        | 2000     |         | 1999    
|                                                                     |                                     |                          |        |          |         |          |        |          |         |         
|Selected Statement of Operations
    Data:                           |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|Net product revenue                                                  |                                     | $                        | 40,101 |          |         | $        | 69,519 |          |         | $        | 111,820 |         |         | $ | 177,770 |         |        | $ | 157,456 |        
|Service revenue                                                      |                                     |                          | 42,285 |          |         |          | 48,399 |          |         |          | 49,870  |         |         |   | 49,327  |         |        |   | 44,193  |        
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Total revenue                       |                          |        | 82,386   |         |          |        | 117,918  |         |          |         | 161,690 |         |   |         | 227,097 |        |   |         | 201,649 |       
|Product gross profit                                                 |                                     |                          | 7,153  |          |         |          | 13,053 |          |         |          | 39,291  |         |         |   | 71,202  |         |        |   | 50,689  |        
|Service gross profit                                                 |                                     |                          | 14,645 |          |         |          | 18,648 |          |         |          | 14,628  |         |         |   | 18,871  |         |        |   | 16,276  |        
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Gross profit                        |                          |        | 21,798   |         |          |        | 31,701   |         |          |         | 53,919  |         |   |         | 90,073  |        |   |         | 66,965  |       
|Operating expense:                                                   |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Selling, general and administrative |                          |        | 27,754   |         |          |        | 43,211   |         |          |         | 66,249  |         |   |         | 64,506  |        |   |         | 45,657  |       
|                                                                     | Research and development            |                          |        | 5,238    |         |          |        | 12,742   |         |          |         | 19,095  |         |   |         | 16,017  |        |   |         | 12,765  |       
|                                                                     | Restructuring charges               |                          |        | 1,467    |         |          |        | 4,911    |         |          |         | 393     |         |   |         |        |        |   |         |        |       
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     |                                     | Total operating expenses |        |          | 34,459  |          |        |          | 60,864  |          |         |         | 85,737  |   |         |         | 80,523 |   |         |         | 58,422 | 
|                                                                     |                                     | Operating income (loss)  |        |          | (12,661 | )        |        |          | (29,163 | )        |         |         | (31,818 | ) |         |         | 9,550  |   |         |         | 8,543  | 
|Other income, net                                                    |                                     |                          | 1,008  |          |         |          | 4,182  |          |         |          | 4,258   |         |         |   | 3,822   |         |        |   | 3,739   |        
|Equity in net loss and write-down of net
    investment of affiliate |                                     |                          |       |          |         |          | (9,504 | )        |         |          | (4,800  | )       |         |   | (2,824  | )       |        |   |        |        
|Gain (loss) on foreign currency transactions                         |                                     |                          | 639    |          |         |          | (542   | )        |         |          | (552    | )       |         |   | (323    | )       |        |   | (669    | )      
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Income (loss) before income taxes   |                          |        | (11,014  | )       |          |        | (35,027  | )       |          |         | (32,912 | )       |   |         | 10,225  |        |   |         | 11,613  |       
|Income tax expense (benefit)                                         |                                     |                          | 205    |          |         |          | 24,598 |          |         |          | 3,529   |         |         |   | (15,095 | )       |        |   | 1,521   |        
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Net income (loss)                   |                          |        | (11,219  | )       |          | $      | (59,625  | )       |          | $       | (36,441 | )       |   | $       | 25,320  |        |   | $       | 10,092  |       
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|Earnings (loss) per share:                                           |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Basic                               |                          | $      | (0.34    | )       |          | $      | (1.83    | )       |          | $       | (1.13   | )       |   | $       | 0.84    |        |   | $       | 0.35    |       
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Diluted                             |                          | $      | (0.34    | )       |          | $      | (1.83    | )       |          | $       | (1.13   | )       |   | $       | 0.76    |        |   | $       | 0.34    |       
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|Weighted average shares used in per share
    computations:          |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Basic                               |                          |        | 32,852   |         |          |        | 32,548   |         |          |         | 32,233  |         |   |         | 30,268  |        |   |         | 28,451  |       
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|                                                                     | Diluted                             |                          |        | 32,852   |         |          |        | 32,548   |         |          |         | 32,233  |         |   |         | 33,232  |        |   |         | 29,710  |       
|                                                                     |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|Selected Balance Sheet Data:                                         |                                     |                          |        |          |         |          |        |          |         |          |         |         |         |   |         |         |        |   |         |        
|Cash and cash equivalents                                            |                                     | $                        | 9,833  |          |         | $        | 8,420  |          |         | $        | 16,320  |         |         | $ | 8,791   |         |        | $ | 7,213   |        
|Working capital                                                      |                                     |                          | 2,071  |          |         |          | 8,263  |          |         |          | 27,514  |         |         |   | 51,434  |         |        |   | 29,997  |        
|Total assets                                                         |                                     |                          | 44,556 |          |         |          | 61,698 |          |         |          | 128,960 |         |         |   | 180,947 |         |        |   | 113,778 |        
|Short-term debt                                                      |                                     |                          | 1,901  |          |         |          | 2,035  |          |         |          | 127     |         |         |   | 1,500   |         |        |   | 5,824   |        
|Long-term debt, less current maturities                              |                                     |                          | 286    |          |         |          | 461    |          |         |          | 621     |         |         |   |        |         |        |   |        |        
|Total stockholders equity                                           |                                     |                          | 8,974  |          |         |          | 20,113 |          |         |          | 78,750  |         |         |   | 113,495 |         |        |   | 54,141  |        

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

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

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

Financial 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 the abandonment of either
underutilized or historically unprofitable facilities, a
headcount reduction of 56 employees, and the disposal of certain
fixed assets, respectively. The cash outflow of the
restructuring charge was $0.3 million, related to
severance, of which $0.1 million was paid in fiscal year
2002. The remaining $0.2 million was paid in the first
quarter of fiscal year 2003.

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

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

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

We face significant risks and uncertainties in
connection with these restructuring activities and we have
incurred substantial charges in connection with the
restructuring. Despite the restructuring activities that have
taken place to date, we continue 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 Factors That May Affect Future
Results for additional risks related to the restructuring.

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Critical Accounting Policies

This section of this report entitled
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 and disclosures of assets and
liabilities and revenues and expenses as of the date of our
financial statements.

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 most important to the portrayal of the Companys
financial condition and results of operations, and require
managements most difficult, subjective or complex
judgements, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and
could potentially produce materially different results under
different assumptions and conditions. For a detailed discussion
of the application of the following critical accounting policies
and other accounting policies, see notes to the consolidated
financial statements.

Revenue Recognition.We record sales of our equipment after
the inventories have cleared customs, if necessary, and upon
pick-up by a common carrier for FOB origin shipments. For FOB
destination shipments, sales are recorded upon delivery to the
customer. Sales are recorded net of an allowance for estimated
returns, as long as no significant post-delivery obligations
exist and collection of the resulting receivable is probable and
the sales price is fixed or determinable. Generally, product
sales are not contingent upon customer testing, approval and/or
acceptance. However, if sales require customer acceptance or
include post-delivery obligations, revenue is recognized upon
customer acceptance or fulfillment of any post delivery
obligations. We record revenue from equipment maintenance
contracts as deferred income when billed and we recognize this
revenue 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 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 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. We
recognize revenue from maintenance agreements ratably over the
term of the related agreement. Revenue from consulting and other
software-related services is recognized as the services are
rendered.

We consider sales contracts that include a
combination of systems, software or services to be multiple
element arrangements. An item is considered a separate element
if it involves a separate earnings process. If an arrangement
includes undelivered elements that are not essential to the
functionality of the delivered elements, the Company defers the
fair value of the undelivered elements with the residual revenue
allocated to the delivered elements. Discounts are allocated
only to the delivered elements. Fair value is determined based
upon the price charged when the element is sold separately.
Undelivered elements typically include installation, training,
warranty, maintenance and professional services.

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 products sold or services
rendered. 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.

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

Valuation of Goodwill.We assess the impairment of goodwill
in accordance with Statement 142 on an annual basis or
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include
significant under-performance relative to expected historical or
projected future operating results, significant changes in the
manner of our use of acquired assets or the strategy for our
overall business, and significant negative industry or economic
trends. Upon the adoption of Statement 142 and the
completion of the transitional impairment test in fiscal year
2002, we concluded that there was no impairment of goodwill. The
Company completed its annual assessment for goodwill impairment
in the fourth quarter of fiscal year 2003 and no impairment was
found to exist. 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.

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 future sales forecasts.
Historically, we used rolling forecasts based upon anticipated
product orders to determine our component and product inventory
requirements. As a reseller, we intend to procure inventory
primarily upon receipt of purchase orders from customers. 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,

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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 5,          |      | April 6, |    | April 7,
|                                                                     |                | 2003              |      | 2002     |    | 2001    
|                                                                     |                |                   |      |          |    |         
|Net product revenue                                                  |                |                   | 48.7 | %        |    |          | 59.0  | %     |    |  | 69.2 | %    
|Service revenue                                                      |                |                   | 51.3 |          |    |          | 41.0  |       |    |  | 30.8 |      
|                                                                     |                |                   |      |          |    |          |       |       |    |  |      |      
|                                                                     | Total revenue  |                   |      | 100.0    |    |          |       | 100.0 |    |  |      | 100.0 |   
|Product gross profit                                                 |                |                   | 17.8 |          |    |          | 18.8  |       |    |  | 35.1 |      
|Service gross profit                                                 |                |                   | 34.6 |          |    |          | 38.5  |       |    |  | 29.3 |      
|                                                                     |                |                   |      |          |    |          |       |       |    |  |      |      
|                                                                     | Gross profit   |                   |      | 26.5     |    |          |       | 26.9  |    |  |      | 33.3  |   
|Selling, general and administrative                                  |                |                   | 33.7 |          |    |          | 36.6  |       |    |  | 41.0 |      
|Research and development                                             |                |                   | 6.4  |          |    |          | 10.8  |       |    |  | 11.8 |      
|Restructuring charges                                                |                |                   | 1.8  |          |    |          | 4.2   |       |    |  | 0.2  |      
|                                                                     |                |                   |      |          |    |          |       |       |    |  |      |      
|                                                                     | Operating loss |                   |      | (15.4    | )  |          |       | (24.7 | )  |  |      | (19.7 | ) 
|Other income, net                                                    |                |                   | 1.2  |          |    |          | 3.6   |       |    |  | 2.6  |      
|Equity in net loss and write-down of net
    investment of affiliate |                |                   |     |          |    |          | (8.1  | )     |    |  | (3.0 | )    
|Gain (loss) on foreign currency transactions                         |                |                   | 0.8  |          |    |          | (0.5  | )     |    |  | (0.3 | )    
|Income tax expense                                                   |                |                   | (0.2 | )        |    |          | (20.9 | )     |    |  | (2.2 | )    
|                                                                     |                |                   |      |          |    |          |       |       |    |  |      |      
|                                                                     | Net loss       |                   |      | (13.6    | )% |          |       | (50.6 | )% |  |      | (22.6 | )%
|                                                                     |                |                   |      |          |    |          |       |       |    |  |      |      

Net Product Revenue.Net product revenue for fiscal year 2003 decreased
$29.4 million, or 42% from fiscal year 2002. This decrease
was primarily because of a $27.7 million and a
$1.7 million, or 58% and 8%, decrease in domestic product
and international product revenue, respectively. In terms of
product mix on a worldwide basis, this decrease was the result
of decreased revenue of $22.8 million, $3.6 million
and $3.0 million from server products, tape libraries and
tape related software products, respectively. Server products
revenue in fiscal year 2003 from the Vivant product family was
$14.7 million, down 59% from $36.0 million in fiscal
2002. The decrease was primarily due to the decrease in sales
volume rather than average sales price. In general, we have
found that our customer base has become much more cautious in
its buying patterns and purchasing is being confined to an
as-needed basis, with increasing levels of customer
justification and management approval required during the sales
process. This more difficult sales environment is partially a
result, but not solely a result, of the ongoing global economic
downturn, coupled with the U.S. war against Iraq. As a result,
our customers have delayed or reduced their expenditures,
including those for information technology, thus decreasing the
current demand for our information-storage systems and software.
We also believe that our customers have been cautious to
purchase our proprietary products due to our prior financial
weaknesses and lack of sources of working capital. We believe
that the Comerica line of credit of $7.0 million coupled
with the EMC reseller agreement will enhance our future ability
to increase product revenues. Additionally, aggressive
competition in the form of pricing discounts offered by EMC,
Hitachi Data Systems, Hewlett-Packard Company, Sun Microsystems,
Inc., IBM, and Network Appliance, Inc., each of which has
substantially greater name recognition, marketing capabilities
and financial and personnel resources than we have, have
contributed to the decrease in our sales. As a result and in an
effort to increase revenue, we have done the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have transitioned away from manufacturing to
    emphasize and further develop our capabilities as a storage
    solutions provider. In an effort to de-emphasize our proprietary
    products in favor of MTI-integrated solutions using third party
    name-brand products, including third party storage subsystems,
    we entered into a reseller agreement with EMC on March 31,
    2003, in which we have the right to resell the complete line of
    EMC Automated Networked Storage systems and software. We realize
    that in order to continue to provide the broadest array of
    storage solutions we require access to a full complement of
    technology from the leaders in the industry. We believe that EMC
    provides the most

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | comprehensive compilation of storage solutions in
    the market today. Through this relationship, we have gained
    access to a broad array of disk-based solutions, from the high
    end Symmetrix® through the CLARiiON® networked storage
    systems and platform-based software, CelerraTM
    Network Servers, CenteraTM CAS (content addressed
    storage) systems and the ConnectrixTM family of
    directors and switches. With our current product partnership
    relationships, we can offer our customers effective solutions
    addressing the majority of their business and regulatory
    requirements.                 
|
| |  | Historically, we sold our solutions and services
    to the Global 2000 companies for their data center computing
    environments. We will be expanding our customer base to include
    the mid-range enterprise market.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We have enhanced our customer satisfaction and
    account retention team of technology specialists to ensure that
    we keep in constant communication with our customers, regardless
    of their size.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In an attempt to offset some of the pricing
    discounts being offered by our competitors, in October 2002 we
    partnered with Canopy Capital to provide creative and flexible
    financing options to our customers to increase revenues. As the
    program is relatively new, we have not had any success in
    generating sales through this channel and intend to expand the
    program further. To date the financing program is only being
    offered to our U.S. customer base but we hope to offer it
    to our European customer base as well. As of April 5, 2003,
    there was no sales activity involving Canopy Capital.
|
| |  | As a part of the EMC reseller agreement, we have
    the ability to introduce our customers and potential customers
    to EMCs Global Financial Services which will enhance and
    supplement the Canopy Capital flexible financing options. Sales
    through this group had not commenced as of the end of the fiscal
    year 2003 and, therefore, the magnitude of such services remains
    relatively uncertain.                                                                                                                                                                                                                      

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. Our business is greatly affected by general economic
and business conditions. Continued softness in the information
technology market in both the U.S. and in Europe and
consumers uncertainty about the global economic condition
resulted in further reduced demand for our products and
services. As a result of the weakened global economy, consumers
were postponing or reducing expenditures, causing our revenue,
our operating results and our financial condition to decline.
The downturn also had 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 were shifting to integrated third party
products.

Service Revenue.Service revenue was $42.3 million for fiscal year 2003, a
decrease of $6.1 million, or 13%, from fiscal year 2002.
This decrease was attributable to decreased maintenance revenue
of $4.1 million, decreased consulting revenue of
$1.2 million and other decreased service revenue of
$0.8 million. The decrease in maintenance revenue is
primarily due to the expiration of maintenance contracts without
offsetting renewed and new maintenance contracts. We attribute
the lower number of renewals to the loss of customers to our
competitors, customers that have updated their technology which
is now covered by warranty, and customers that have ceased
operations. The decrease in consulting and other revenue is
primarily attributable to decreased product revenue. We recently
changed our Service and Business Systems operations throughout
the world to operate under one leadership in an attempt to
minimize duplication of costs, increase efficiencies and exploit
successful operations. Even though service revenue has been
declining, it remains our foundation and provides significant
contribution to our gross profit. Subsequent to the end of
fiscal year 2003, we became a reseller and service provider of
EMC Automated Networked Storage Systems and software. Commencing
with the resell of the EMC array of products, most EMC hardware
products will have up to 2-year 24x7x365 warranty. As a result,
the amount of post-warranty service contracts associated with
those hardware product sales is expected to decrease in value.
Thus, depending upon the conversion of our current customer base
to

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EMC products from MTI proprietary products,
service revenues may decrease. However, as sales of EMC products
increase, we expect that sales of back-up products, which are
not a part of the EMC resellers agreement, will increase
and those products carry shorter warranty periods thus
containing the opportunity for increased maintenance contracts.
Despite focusing on EMC products, we will continue to support
and service our current customer base on both our MTI-branded
RAID controller technology and our partnered independent storage
technology. We believe that we can differentiate ourselves
through our ability to offer umbrella services on a wide range
of storage products covering online storage, replicated site
environments and data protections from the leading technology
companies. In addition, we became a member of the EMC Authorized
Services Network and will provide end-to-end service for
EMCs CLARiiON family of systems. We also enhanced the
value of our storage solutions through our 24x7x365 support and
service infrastructure, which includes an international network
of over 130 on-site field engineers and a solution and
integration test laboratory, and our global call response
centers.


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 was attributable to the loss of
customers to competitors during the fiscal year. Due to concerns
about our financial position, existing customers were more
reluctant to renew their maintenance contracts.

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

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.

Service Gross
Profit.Service gross profit for
fiscal year 2003 decreased $4.0 million, or 22%, from
fiscal year 2002. The gross profit percentage for service
revenue was 35% in fiscal year 2003, as compared to 39% for
fiscal year 2002. In addition to the relatively fixed cost
structure, we attribute the decreases in service gross profit to
a 23.2% decrease in domestic customer service revenue,
particularly maintenance revenue, partially offset by a 5.3%
increase in international customer service revenue. In an effort
to improve our service gross profit, the following actions were
taken:



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of March 31, 2003, we have become part of
    EMCs Authorized Service Network. As a result, we will be
    part of a worldwide-network of professional service organization
    enabling us to offer enhanced service and consulting
    capabilities to our customers;                                               
|
| |  | Effective March 1, 2003, we outsourced our
    non-prime time hours domestic CRC Operations to Center 7,
    Inc. for a fixed monthly charge of $0.003 million. We are
    considering outsourcing additional CRC Operations in an attempt
    to further reduce fixed charges for labor and benefits. To
    benefit from

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fixed price repairs, we also outsourced our parts
    repair center. Our logistics function is now focused on the
    supply of spare parts to field personnel. These actions resulted
    in eliminating 8 full time employees from the domestic customer
    service department. The cash outflow of $0.02 million
    related to severance was paid during the fourth quarter of
    fiscal 2003.

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 travel-related expenses.

Selling, General and Administrative
Expenses.In fiscal year 2003,
selling, general and administrative expenses decreased
$15.5 million, or 36%, over fiscal year 2002. The decrease
was primarily due to a 32% or $7.5 million decrease in
salary and benefit expenses which resulted from reduced
headcounts of 22%; a 54% or $3.0 million decrease in
outside purchases such as consulting and professional services,
tax services, bank fees and bad debt expense; a 64% or
$1.7 million decrease in marketing and promotional
expenses; an 18% or $1.3 million decrease in fixed charges
such as rent and utilities expenses; a 52% or $1.4 million
decrease in supplies and telecommunication expenses; and a 26%
or $0.6 million decrease in travel and lodging expenses.
During fiscal year 2003, we recovered $0.6 million from
accounts that were previously determined to be uncollectible, as
compared to bad debt expense of $1.9 million in the
preceding fiscal year. The decreased expenditures were the
result of a directed program to bring expenditures in line with
the reduced product and service revenues and resultant margins
noted above.

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

Research and Development
Expenses.Research and development
expenses in fiscal year 2003 decreased $7.5 million, or
59%, from fiscal year 2002. These decreases were primarily
attributable to decreases in salary and benefit expenses of
$4.1 million resulting from a 47% headcount reduction over
fiscal year 2002, decreases in project costs of
$0.9 million, decreases in rent, utilities, repair and
maintenance expenses, depreciation, insurance and property tax
expenses of $2.0 million, decreases in travel and lodging,
consulting and loss on disposal of fixed assets of
$0.4 million, and decreases in communication expenses of
$0.1 million.

As part of our restructuring activities, we
anticipated changing our emphasis from the sale of MTI-branded
products to the sale of co-branded solutions serving the storage
and enhanced data protection market. Our focus towards EMC
networked storage systems will result in limited partnering of
products beyond the EMC line of products and those products
related to backup functions. The primary goal of the
restructuring was to refocus on the design and implementation of
storage solutions at a significantly lower cost. In support of
this, our Engineering department has been redeployed within our
professional services organization. During fiscal 2004 these
costs will be incorporated into our professional services
expenditures thus eliminating a separate Research and
Development expenditure. As such, we believe that our Research
and Development expense will substantially decrease in fiscal
year 2004.

Research and development expenses in fiscal year
2002 decreased $6.4 million, or 33%, from fiscal year 2001.
The 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.

Restructuring.We
recorded a $1.0 million restructuring charge in the first
quarter of fiscal year 2003, which consisted of charges of
approximately $0.5 million related to a headcount reduction
of 39 employees, or 15% of our workforce, and
$0.5 million related to the disposal or abandonment of
fixed assets. Of the

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39 employees terminated, 14, 3, 6, 1, 14,
and 1 were from the Sales, Marketing, General and
Administrative, Customer Service, Research and Development, and
Manufacturing departments, respectively. The cash outflow of the
restructuring charge is $0.5 million related to severance,
which was paid during fiscal year 2003.


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

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

We also completed consolidating our manufacturing
facility to Dublin, Ireland, in July 2002, and reduced the
amount of space leased for our corporate headquarters by moving
from Anaheim, California to Tustin, California in January 2003.

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

|                                                     |                             |                                         |     |     |      |  
|---------------------------------------------------- | --------------------------- | --------------------------------------- | --- | --- | ---- | -
|Abandoned facilities:                                |                             |                                         |     |    
|                                                     | Balance as of April 6, 2002 |                                         | $   | 4.3 |     
|                                                     |                             | Add: Current year restructuring charges |     |     | 0.4  |  
|                                                     |                             | Less: Current year utilization          |     |     | (1.8 | )
|                                                     |                             |                                         |     |    
|                                                     | Balance as of April 5, 2003 |                                         |     | 2.9 |     
|                                                     |                             |                                         |     |    
|Workforce reduction:                                 |                             |                                         |     |    
|                                                     | Balance as of April 6, 2002 |                                         |     | 0.2 |     
|                                                     |                             | Add: Current year severance charges     |     |     | 0.5  |  
|                                                     |                             | Less: Current year severance payments   |     |     | (0.7 | )
|                                                     |                             |                                         |     |    
|                                                     | Balance as of April 5, 2003 |                                         |     |    |     
|                                                     |                             |                                         |     |    
|Total accrued restructuring, as of April 5,
    2003 |                             | $                                       | 2.9 |    
|                                                     |                             |                                         |     |    

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

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 final annual payment in advance of $5.0 million from
the sale of certain patents in fiscal 2001 and recorded the
payments as other income proportionately during the fourth
quarter of fiscal year 2001 and the first nine months of fiscal
year 2002, coupled with a decrease in interest expense. We
recorded other income related to the sale of patents of
$3.6 million in fiscal year 2002, as compared to
$4.8 million in fiscal year 2001. These decreases were
partially offset by a favorable sales tax refund of
$0.7 million in fiscal year 2002.

Equity in Net Loss and Write-down of Net
Investment of Affiliate.Equity in net
loss of affiliate represents our proportionate share of
SCOs net losses and amortization of the goodwill related
to the investment made in SCO in August 1999. The original
investment in SCO was $7.6 million and included:
(a) cash payment of $3.0 million, (b) note
payable of $3.0 million bearing interest at the prime rate
plus one percent per annum and payable in two equal semi-annual
payments beginning February 2000 and (c) investment costs
of $1.6 million, including the issuance of a warrant to
purchase 150,000 shares of our

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common stock. The excess of our investment in SCO
over the related underlying equity in net assets of
$6.9 million was being amortized on a straight-line basis
over seven years. However, we adopted Statement 142 as of
April 8, 2001, the beginning of fiscal year 2002, and
therefore, ceased to amortize the remaining balance of goodwill
related to the investment in SCO of $4.2 million, which was
written off during the third quarter of fiscal year 2002 due to
an other than temporary decline in value and recognizing our
proportional share of SCOs net loss. Such loss has been
included in Equity in net loss and write-down of net
investment of affiliate in our fiscal year 2002
Consolidated Statement of Operations.


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

Income Taxes.We
recorded a net tax expense of $0.2 million for fiscal year
2003, as compared to a net tax expense of $24.6 million for
fiscal year 2002.

In fiscal year 2002, we recorded a net tax
expense of $24.6 million of which $24.3 million was
related to the valuation allowance for deferred-tax assets
recorded in the first quarter of fiscal year 2002. Because of
the continued decline in the market value of our investment in
SCO and continued softness in the domestic and European markets
for our products, management believed that it was more likely
than not that we would not realize the benefits of the net
deferred tax assets existing on April 6, 2002.

Liquidity and Capital Resources

We had cash and cash equivalents of
$9.8 million as of April 5, 2003 and $8.4 million
as of April 6, 2002. Net operating activities provided cash
of $0.4 million in fiscal year 2003, an increase in cash
generated from operating activities of $6.8 million as
compared to fiscal year 2002. This was primarily due to reduced
net losses from $59.6 million in fiscal year 2002 to
$11.2 million in fiscal year 2003. The net loss was
partially offset by non-cash expenses of $5.0 million and
cash provided by changes in operating assets and liabilities of
$6.6 million. Net investing activities provided cash of
$0.7 million primarily as a result of the sale of our
investment in SCO. As of June 30, 2003, we had cash and
cash equivalents of approximately $6.1 million.

Net cash used by financing activities was
$0.2 million due to total borrowings on notes payable of
$4.5 million and total payments of notes payable of
$4.7 million, capital lease payments of $0.1 million,
offset by cash provided by the issuance of treasury shares of
$0.1 million.

Due to recurring decreases in revenues, we are
operating at lower accounts receivable and inventory levels,
resulting in reduced available working capital. As of
April 5, 2003, working capital was $2.1 million, as
compared to $3.3 million at the end of the prior fiscal
year.

We believe our new relationship with EMC will be
successful and, as a result, the relationship will position us
to grow our product revenues in the mid-range storage market. In
this new relationship, sales order backlog could become
significant. As of April 5, 2003, our order backlog was
$1.8 million. EMC ends its fiscal quarters a week ahead of
us and a significant portion of our sales generally occur in the
last month and weeks of a given quarter. Consequently, if EMC is
unable to assemble, test and ship orders on a timely basis or if
all orders received within one quarter are shipped leaving no
backlog for future quarters, our quarter-to-quarter performance
could be negatively affected.

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

As part of the maximum $30.0 million in
royalties, minimum royalties of $10.0 million were to be
received in five annual installments, beginning within
30 days of the first anniversary of the effective date of
the EMC asset purchase agreement, and within 30 days of
each subsequent anniversary thereof. As of March

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2001, we had received all such installments.
Also, as a result of a computer and technology agreement between
EMC and IBM announced in March 1999, the minimum royalties of
$10.0 million were to be increased to $15.0 million.
Payments were to be received under the EMC asset purchase
agreement in five equal annual installments. We received the
first three annual installments in March 2000, March 2001 and
March 2002. On April 1, 2003, prior to fiscal 2003
year-end, we entered into an amended asset purchase agreement
with EMC pursuant to which EMC agreed to pay to us
$5.9 million which fully satisfied obligations of EMC under
the original agreement. The payment was received on
April 2, 2003. Future periods will not benefit from any
additional payments, which have amounted to approximately
$3.0 million of cash receipts in prior years, under the
asset purchase agreement. Also, we granted EMC immunity from
suit for patent infringement with respect to our patents.


The Companys principal source of liquidity
is cash and cash equivalents, cash flows from operations and the
Comerica line of credit under the Comerica loan agreement, which
was to mature on October 31, 2003, but on June 30,
2003, the Company received a renewal on the line of credit for
$7.0 million until May 31, 2004. The line of credit is
secured by a letter of credit that is guaranteed by Canopy. The
Canopy guarantee was to mature on November 30, 2003, but on
June 30, 2003, we received an extension on the letter of
credit for $7.0 million until June 30, 2004. We
believe that revenues and margins are at sustainable levels and
working capital, coupled with the borrowing ability under the
Comerica line of credit, is adequate to fund operations for at
least the next twelve months. However, in general, resellers of
third party manufactured products sell such products at margins
significantly lower than would be experienced if they were the
original manufacturers of the products. As product margins
decrease, there is a need to sell substantially more products to
achieve the same product margin dollars. Additionally, under the
EMC agreement, products other than software are generally sold
with a two-year warranty and, therefore we expect that our
service revenue base will decrease as a result. If we are not
able to renew the existing service contracts, we expect that our
cash receipts will decrease. If product revenues and margins
continue to decrease or we are not able to replace expiring
service maintenance contracts with other forms of service
revenues and/or are not able to reduce our operating expenses,
we may have to 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 Factors That May Affect Future
Results  We may 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 5,
2003:

|                                        |  |                        |       |      |  |      |      |      |  |      |      |      |  |            |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|--------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---------- | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                        |  |                       
|                                        |  | Payments Due by Period
|                                        |  |                       
|                                        |  | Total                  |       | 2004 |  | 2005 |      | 2006 |  | 2007 |      | 2008 |  | Thereafter
|                                        |  |                        |       |      |  |      |      |      |  |      |      |      |  |           
|                                        |  |                       
|                                        |  | (In millions)         
|Note Payable                            |  | $                      | 1.74  |      |  |      |     |      |  | $    | 1.74 |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|Capital and Operating Lease Obligations |  |                        | 9.71  |      |  |      | 3.65 |      |  |      | 3.06 |      |  |            | 1.70 |  |  |   | 0.80 |  |  |   | 0.36 |  |  |   | 0.14 | 
|                                        |  |                        |       |      |  |      |      |      |  |      |      |      |  |            |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|                                        |  | $                      | 11.45 |      |  | $    | 3.65 |      |  | $    | 4.80 |      |  | $          | 1.70 |  |  | $ | 0.80 |  |  | $ | 0.36 |  |  | $ | 0.14 | 
|                                        |  |                        |       |      |  |      |      |      |  |      |      |      |  |            |      |  |  |   |      |  |  |   |      |  |  |   |      | 



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

On December 5, 2002, we paid off the
outstanding $1.7 million loan with the Canopy Group, Inc.
(Canopy), our major shareholder, and terminated our
loan agreement. The Canopy Loan Agreement was entered into on
June 27, 2002, allowing us to borrow up to an aggregate of
$7.0 million at an interest rate of nine percent per annum
under a revolving line of credit. The line was secured by a
security interest in substantially all of MTIs
unencumbered assets. Ralph J. Yarro, III, one of our
Directors, is also a Director, President and Chief Executive
Officer of Canopy. Darcy G. Mott, one of our Directors, is also
a Vice

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President, Treasurer and Chief Financial Officer
of Canopy. Canopy beneficially owns approximately 44% of our
outstanding common stock.


In November 2002, we entered into an agreement
with Comerica Bank for a line of credit of $7.0 million at
an interest rate equal to the prime rate. The line of credit is
secured by a letter of credit that is guaranteed by Canopy.
Canopys guarantee was to mature on November 30, 2003,
but on June 30, 2003, we received an extension on the
letter of credit for $7.0 million until June 30, 2004.
The Comerica Bank loan agreement was to mature on
October 31, 2003, but on June 30, 2003, we received a
renewal on the line of credit for $7.0 million until
May 31, 2004.

The Comerica Bank loan agreement contains
negative covenants placing restrictions on our ability to engage
in any business other than the businesses currently engaged in,
suffer or permit a change in control, and merge with or acquire
another entity. Although we are currently in compliance with all
of the terms of the Comerica Bank loan agreement, and believe
that we will remain in compliance, there can be no assurance
that we will be able to borrow under the Comerica Bank loan
agreement. Upon an event of default, Comerica Bank may terminate
the Comerica Bank loan agreement and declare all amounts
outstanding immediately due and payable. As of April 5,
2003, there was $1.7 million outstanding under the Comerica
Bank loan agreement. If our product and service revenue and
related margins decline further, there could be an adverse
effect on cash flow and working capital. Should that occur,
there can be no assurance that existing or additional financing
sources would be available.

New Accounting Standards Not Yet
Adopted

The Financial Accounting Standards Board
(FASB) recently issued Statement 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. The Company does not expect the adoption of
this pronouncement to have a material impact on the results of
its operations, financial position, or liquidity.

In April 2003, the FASB issued
Statement 149, an amendment of FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities, which requires prospective application for contracts
entered into or modified after June 30, 2003, except for
contracts which exist in fiscal quarters that began prior to
June 15, 2003, and for hedging relationships designated
after June 30, 2003. For existing contracts for fiscal
quarters that began prior to June 15, 2003, the provisions
of this Statement that relate to Statement 133
Implementation Issues should continue to be applied in
accordance with their respective effective dates.
Statement 149 requires that contracts with comparable
characteristics be accounted for similarly. The Company does not
expect the adoption of this pronouncement to have a material
impact on the results of its operations, financial position or
liquidity.

In May 2003, the FASB issued Statement 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
Statement 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of
both liabilities and equity. Statement 150 requires that an
issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer.
Statement 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective for the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial
instruments of a nonpublic entity for which this statement is
effective for fiscal periods beginning December 15, 2003.
The Company does not expect the adoption of this pronouncement
to have a material impact on the results of its operations,
financial position, or liquidity.

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The Emerging Issues Task force EITF
recently reached a consensus on its tentative conclusions for
EITF 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 provides accounting guidance
for customer solutions where delivery or performance of
products, services and/or performance may occur at different
points in time or over different periods of time. Companies are
required to adopt this consensus for fiscal periods beginning
after June 15, 2003. The Company does not believe that the
adoption of EITF 00-21 will have a material impact on the
results of its operations, financial position, or liquidity.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (Interpretation 46), an
interpretation of ARB No. 51. Interpretation 46
addresses consolidation by business enterprises of variable
interest entities. Interpretation 46 applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The
Company does not believe it has any variable interest entities
to which Interpretation 46 would apply.

Inflation and Foreign Currency
Exchange

We recorded a $0.6 million in foreign
exchange gain during fiscal year 2003, which resulted from the
weakening U.S. dollar against the Euro. 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. As of April 5, 2003,
we have an outstanding forward contract to purchase
EURO 0.7 million. There can be no assurance, however,
that such actions successfully will reduce our exposure to
financial-market risks.

Factors That May Affect Future
Results

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 Factors That May Affect Future
Results, Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Business contain a discussion of some of the factors
that could contribute to those differences. Factors that could
contribute to these differences include those discussed below
and elsewhere in this Form 10-K.

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 U.S. 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.

We cannot predict the result of our recent
transition from a manufacturer to a solutions
provider.

During fiscal year 2003, we took steps to
transition away from manufacturing and engineering of our
proprietary products to reselling best-of-class third party
storage solutions. On March 31, 2003, we entered into a
reseller agreement with EMC, in which we sell the complete line
of EMC Automated Networked Storage systems and software. In
addition, we become a member of the EMC Authorized Services
Network and will provide end-to-end service for EMCs
CLARiiON family of systems. The EMC reseller agreement will
enable us to provide what we believe to be the best in class
storage solutions from their partnerships with leading disk and
software manufacturers. We may be unable to leverage our new EMC
partnership effectively and achieve the expected growth in our
revenue. We may be unsuccessful in differentiating ourselves
from our

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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 services. Additionally, we currently sell EMC
hardware products with up to 2-year 24x7x365 warranties and EMC
software products with 90-day warranties. As a result, the
amount of service contracts associated with those hardware
product sales is expected to decrease in value. Thus, depending
upon the conversion of our current customer base to EMC products
from MTI proprietary products, service revenues may decrease.


Our gross margins are most likely to
decrease as we transition from selling MTI proprietary products
to becoming a reseller of EMC and other third party
manufacturers requiring an increase in revenues. We may not be
able to attain such volumes to ensure profitable
operations.

In general, resellers of third party
manufacturers products sell such products at margins
significantly lower than would be experienced if they were the
original manufacturers of the products. As product revenue
margins decrease, there is a need to sell substantially more
products to achieve the same product margin dollars. In such
cases, to continue to achieve and sustain profitable operations,
the decrease in product margin dollars must be offset by
increased product sales volume, increased service revenues which
are typically generated on a higher margin basis, lower
operating expenses, or a combination of all of the above.

We are dependent upon EMC as the main
supplier for our disk-based storage products, and disruptions in
supply or significant increases in costs could harm our business
materially.

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

The storage market is characterized by
rapid technological change, and our success will depend on
EMCs ability to develop new products.

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

Our future operating results may depend on
the success of our restructuring program.

We have 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, Orlando,
Florida, Westmont, Illinois and Raleigh, North Carolina. We
reduced the number of our full-time employees by approximately
49% within the last two fiscal years (from 549 on April 7,
2001 to 281 as of June 6, 2003). Our restructuring may fail
to reduce expenses significantly enough to compensate for
decreases in margin and revenue. Please see Significant
Business Developments  Financial Restructuring.

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

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

We believe that our working capital, cash flow
from operating activities and amounts available under the
Comerica Loan Agreement will be sufficient to meet our operating
and capital expenditure requirements for at least the next
12 months assuming we will be able to achieve sufficient
revenues and margins. However, Comerica may terminate the
Comerica Loan Agreement and declare all amounts outstanding
immediately due and payable upon an event of default. If the
Comerica Loan Agreement were terminated and all outstanding
amounts declared immediately due and payable, we would require
additional financing. Also, the Comerica Bank loan agreement was
to mature on October 31, 2003, but on June 30, 2003,
we received a renewal on the line of credit for
$7.0 million until May 31, 2004. The line of credit is
secured by a letter of credit that is guaranteed by Canopy. The
Canopy guarantee was to mature on November 30, 2003, but on
June 30, 2003, we received an extension on the letter of
credit for $7.0 million until June 30, 2004. 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 2004 and general economic
conditions. As of the fourth quarter of fiscal year 2003, we
started to realize the cost savings from the restructuring
activities that have taken place to date resulting in fourth
quarter operating income of $0.3 million. However, there
can be no assurance that we will continue to realize those cost
savings. Also, in the longer term, if we do not continue to
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.

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 or enhance our product offerings;
|
| |  | respond to competitive pressures; or      
|
| |  | continue operations.                      

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



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

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In fiscal 2003, we received a
$5.9 million royalty payment from EMC as a result of the
EMC sale of patents and that was the final payment to be
received under the EMC Asset Purchase Agreement. If we are not
able to substitute the cash receipts from that royalty payment
by increases in product and service revenues and related
margins, our operations and liquidity could be adversely
affected.

Pursuant to the February 9, 1996 EMC asset
purchase agreement, we sold to EMC substantially all of our
then-existing patents, patent applications, and related rights.
As part of the maximum $30.0 million in royalties, minimum
royalties of $10.0 million were to be received in five
annual installments, beginning within 30 days of the first
anniversary of the effective date of the EMC asset purchase
agreement, and within 30 days of each subsequent
anniversary thereof. As of March 2001, we had received all
installments. Also, as a result of a computer and technology
agreement between EMC and IBM announced in March 1999, the
minimum royalties of $10.0 million were to be increased to
$15.0 million. Payments were to be received under the EMC
asset purchase agreement in five equal annual installments. We
received the first three annual installments in March 2000,
March 2001 and March 2002. On April 1, 2003, we
entered into an amended asset purchase agreement with EMC, under
which EMC paid us $5.9 million, which satisfied all
obligations of EMC under the original agreement. Also, we
granted EMC immunity from suit for patent infringement with
respect to our patents.



We do not expect to receive any further royalty
payments from the EMC asset purchase agreement nor, currently,
from other patent and licensing agreements. Therefore, we do not
expect that we will be receiving royalty payments in fiscal 2004
and the lost revenue of $2.7 million and lost cash flow of
$5.9 million could materially, adversely affect our
operations and liquidity unless we can find substitute revenue
and cash sources such as sufficient increased product and
service revenues and margins.

A significant portion of our revenues
occurs in the last month, weeks and days of a given quarter.
Consequently, our results of operations for that quarter may be
difficult to predict.

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. Due to the new
relationship with EMC and based on our current revenue level, we
may operate with a more significant backlog than in prior
periods and expect that order backlog will be an important
indicator of our future success.

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

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 pressures and reduced
sales, margins, profits and market share, each of which could
materially harm our business. Furthermore, new products and
technologies developed by third parties, may depress the sales
of existing products and technologies. Our customers
requirements and the technology available to satisfy those
requirements are continually changing. Therefore, we must be
able to respond to these changes in order to remain competitive.
Since we have placed total emphasis on integrating third party
products, our ability to respond to new technologies will be
substantially dependent upon our contractual relationships with
such manufacturers. In addition, we must be able to quickly and
effectively train our employees with respect to any new products
or technologies developed by our third party suppliers and
resold by us. Since the third party

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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: Hewlett-Packard, Sun Microsystems, IBM, and
Network Appliance, each of which has substantially greater name
recognition, marketing capabilities, 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 be 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:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | the introduction of new products by our
    competitors and competitive pricing pressures;    
|
| |  | the size, timing and terms of customer orders;                                                
|
| |  | the timing of the introduction of new products
    and new versions of best-of-breed products;
|
| |  | shifts in our product or services mix;                                                        
|
| |  | changes in our operating expenditures;                                                        
|
| |  | 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
products or effectively manage the transitions to new products
or new technologies could harm our business materially.

Our solutions 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 solutions are
complex and are a combination of products from the third party
manufacturers whose products we represent and sell, and from
time to time there may be errors in these products. These errors
could:



| |   |                            
| | - | ---------------------------
| |  | adversely affect our sales;

27



---



##### Table of Contents





| |   |                                                             
| | - | ------------------------------------------------------------
| |  | cause us to incur significant warranty and repair
    costs;
|
| |  | cause significant customer relations problems;              
|
| |  | harm our competitive position;                              
|
| |  | hurt our reputation; and                                    
|
| |  | cause purchase delays.                                      

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

All domestic employment at MTI, including
employment of our domestic key personnel, is at
will.

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

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. International sales
and service revenue represented 47% of our total sales and
service revenue for fiscal year 2003. 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. From time to
time, we enter into foreign currency exchange contracts on a
limited basis in an attempt to minimize foreign currency
exposure. Such contracts can be costly or limited in their
effectiveness. If we are faced with significant changes in the
regulatory and business climate in our international markets,
our business and results of operations could suffer.

War and terrorist activities could
adversely affect our business.

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

28



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##### Table of Contents



or if such activities or responses will have any
long-term material adverse effect on our business, results of
operations or financial condition.


We may have difficulty managing any future
growth effectively.

We believe our new EMC relationship positions us
to grow in the mid-range storage market because EMC is the
leading disk subsystem vendor and both companies are pure play
storage providers, accustomed to selling and servicing similar
customer bases, supporting mission-critical environments,
providing fully integrated value-added solutions and offering
24x7x365 support on those installations. Our facilities,
personnel and operating and financial systems may not be
sufficient to effectively manage our future growth and, as a
result, we may lose our ability to respond to new opportunities
promptly. Additionally, our expected revenue growth may not
materialize and increases in our operating expenses in response
to the expected revenue growth may harm our operating results
and financial condition.

As a reseller of third party products, we
are susceptible to factors that may affect their future results
of operations.

As we transition away from manufacturing and
engineering, a majority of our future sales will be sales of
third party products. As such, we are open to the risk factors
affecting our vendors results of operations including, but
not limited to their:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | business could continue to be adversely affected
    by the general economic conditions and/or the decreasing demand
    in the information technology market;        
|
| |  | failure to keep pace with the rapid industry and
    technological changes;                                                                                           
|
| |  | failure to be competitive in terms of product
    pricing;                                                                                                            
|
| |  | research and development efforts may not be
    successful;                                                                                                           
|
| |  | inability to compete effectively or meet future
    capital requirements;                                                                                             
|
| |  | suppliers may not be able to meet their
    requirements;                                                                                                             
|
| |  | difficulty to manage their operation or any
    future growth;                                                                                                        
|
| |  | inability to retain or attract key personnel;                                                                                                                         
|
| |  | financial difficulty;                                                                                                                                                 
|
| |  | business could be adversely affected as a result
    of the risks associated with acquisitions, investments,
    alliances, litigation and changes in regulations; and
|
| |  | business may suffer if they cannot protect their
    intellectual property;                                                                                           

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

29



---



##### Table of Contents



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 and/or our partners are unable to
comply with evolving industry standards and government
regulations, we may be unable either to sell our solutions or to
be competitive in the marketplace.

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

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

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

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

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

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



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

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

30



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##### Table of Contents



We may fail to comply with Nasdaq
Marketplace Rules.

Our securities have been trading on the Nasdaq
SmallCap Market since August 16, 2002. In order to maintain
our listing with Nasdaq SmallCap Market, we have to meet its
continued listing requirements, one of which is to avoid our
stock bid price falling below $1.00 per share for 30 consecutive
trading days. Recently, our stock has been trading in a range
close to $1.00 per share. Therefore, we may once again fail to
comply with the minimum bid price requirement, or other
continued listing requirements of the Nasdaq SmallCap Market. If
that happens and we do not regain compliance by the end of the
applicable grace period to regain compliance, our stock will be
delisted and we would likely seek listing of our common stock on
the over-the-counter market, which is viewed by many investors
as a less liquid marketplace. As a result, the price per share
of our common stock would likely decrease materially and, the
trading market for our common stock, our ability to issue
additional securities and our ability to secure additional
financing would likely be materially and adversely affected.

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
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
and may continue to utilize hedging programs, currency forward
contracts, currency options and/or other derivative financial
instruments commonly used to reduce financial market risks. As
of April 5, 2003, we have an outstanding forward contract
to purchase EURO 0.7 million. There can be no
assurance that such actions will successfully reduce our
exposure to financial market risks.

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






|        |                                                
|------- | -----------------------------------------------
|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 15(a)(1) and
15(a)(2) of Part IV of this report.

31



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.




PART III




Item 10.Directors
and Executive Officers of the Registrant

The information required hereunder is
incorporated by reference from the information contained in the
sections entitled Directors, Executive
Officers and Section 16(a) Beneficial Ownership
Reporting Compliance in MTIs definitive Proxy
Statement for its 2003 Annual Meeting of the Stockholders to be
held on August 21, 2003 to be filed with the Securities and
Exchange Commission.




Item 11.Executive
Compensation

The information required hereunder is
incorporated by reference from the information contained in the
sections entitled Compensation of Directors and Executive
Officers and Other Information, in MTIs definitive
Proxy Statement for its 2003 Annual Meeting of the Stockholders
to be held on August 21, 2003 to be filed with the
Securities and Exchange Commission.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholders
    Matters

The information required hereunder is
incorporated by reference from the information contained in the
section entitled Voting Securities and Principal Holders
Thereof in MTIs definitive Proxy Statement for its
2003 Annual Meeting of the Stockholders to be held on
August 21, 2003 to be filed with the Securities and
Exchange Commission.

32



---



##### Table of Contents



Securities Authorized for Issuance

The following table sets forth certain
information as of April 5, 2003 with respect to equity
compensation plans under which our equity securities are
authorized for issuance:

|                                                                |                                                                                 |                      |            |                   |     |                         |  |       |  |  |           |           |    
|--------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------- | ---------- | ----------------- | --- | ----------------------- |  | ----- |  |  | --------- | --------- | ---
|                                                                |                                                                                 |                      |            |                   |     | Number of Securities   
|                                                                |                                                                                 | Number of Securities |            | Weighted-average  |     | Remaining Available    
|                                                                |                                                                                 | to be Issued upon    |            | Exercise Price    |     | for Future Issuance    
|                                                                |                                                                                 | the Exercise of      |            | of Outstanding    |     | Under Equity           
|                                                                |                                                                                 | Outstanding Options, |            | Options, Warrants |     | Compensation Plans     
|                                                                |                                                                                 | Warrants and Rights  |            | and Rights        |     | (Excluding Securities  
|Plan Category                                                   |                                                                                 | (#)                  |            | ($)               |     | Reflected in Column(a))
|                                                                |                                                                                 |                      |            |                   |     |                        
|                                                                |                                                                                 | (a)                  |            | (b)               |     | (c)                    
|Equity Compensation Plans Approved by Security
    Holders:     |                                                                                 |                      |            |                   |     |                         |  |       |  |  |           |          
|                                                                | 1987 Stock Option Plan                                                          |                      |            | 13,000            |     |                         |  | 2.25  |  |  |           |          |    
|                                                                | 1992 Stock Option Plan                                                          |                      |            | 346,762           |     |                         |  | 7.35  |  |  |           |          |    
|                                                                | 1996 Stock Option Plan                                                          |                      |            | 5,221,659         |     |                         |  | 8.36  |  |  |           |          |    
|                                                                | 1994 Directors Non-Qualified Stock Option
    Plan                             |                      |            | 80,000            |     |                         |  | 13.13 |  |  |           |          |    
|                                                                | 2001 Stock Incentive Plan and 2001 Non- Employee
    Director Option Program(1) |                      |            | 4,571,983         | (2) |                         |  | 0.77  |  |  |           | 3,858,677 | (3)
|                                                                | 2001 Employee Stock Purchase Plan                                               |                      |            |                  |     |                         |  |      |  |  |           | 1,190,434 |    
|Warrants:                                                       |                                                                                 |                      |            |                   |     |                         |  |       |  |  |           |          
|                                                                | Silicon Valley Bank                                                             |                      |            | 190,678           |     |                         |  | 2.36  |  |  |           |          |    
|                                                                | Gerard Bantchik                                                                 |                      |            | 32,398            |     |                         |  | 12.00 |  |  |           |          |    
|                                                                | Emmanuel Moreau                                                                 |                      |            | 15,913            |     |                         |  | 12.00 |  |  |           |          |    
|                                                                | Alain Mariotta                                                                  |                      |            | 6,411             |     |                         |  | 12.00 |  |  |           |          |    
|                                                                | Florence Ferraz                                                                 |                      |            | 2,518             |     |                         |  | 12.00 |  |  |           |          |    
|                                                                | Ralph Yarro                                                                     |                      |            | 150,000           |     |                         |  | 18.75 |  |  |           |          |    
|                                                                |                                                                                 |                      |            |                   |     |                         |  |       |  |  |           |          
|                                                                |                                                                                 |                      | 10,631,322 |                   |     |                         |  |       |  |  | 5,049,111 |          
|                                                                |                                                                                 |                      |            |                   |     |                         |  |       |  |  |           |          
|                                                               
|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) | 4,321,983 shares and 250,000 shares
    related to the 2001 Stock Incentive Plan (the SIP)
    and the 2001 Non-Employee Director Option Program (the
    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. Includes an increase of
    2,500,000 shares issuable over the term of the SIP,
    approved by the Board of Directors on June 24, 2003.
    3,658,677 shares and 200,000 shares related to the SIP and
    the Program, respectively.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required hereunder is
incorporated by reference from the information contained in the
section entitled Certain Transactions and Related
Transactions in MTIs definitive Proxy Statement for
its 2003 Annual Meeting of the Stockholders to be held on
August 21, 2003 to be filed with the Securities and
Exchange Commission.

33



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##### Table of Contents








|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

The Company maintains disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in the Companys reports under the
Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this
report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures
pursuant to Rule 13a-14(c) under the Securities Exchange
Act of 1934, as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer have concluded that as of the date of the evaluation,
the Companys disclosure controls and procedures were
adequate to timely alert them of material information relating
to the Company required to be included in the Companys
periodic SEC filings.

Changes In Internal Controls

There were no significant changes in the
Companys internal controls, or to the Companys
knowledge, in other factors that could significantly affect the
Companys disclosure controls and procedures subsequent to
the date of our most recent evaluation.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | 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 36 and 35.



| |                                          
| | -----------------------------------------
| | (a)(1) Consolidated Financial Statements:



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Independent Auditors Report                                                                      
|
| | Consolidated Balance Sheets as of April 5,
    2003 and April 6, 2002                             
|
| | Consolidated Statements of Operations for the
    fiscal years ended 2003, 2002 and 2001          
|
| | Consolidated Statements of Stockholders
    Equity for the fiscal years ended 2003, 2002 and 2001
|
| | Consolidated Statements of Cash Flows for the
    fiscal years ended 2003, 2002 and 2001          
|
| | Notes to Consolidated Financial Statements                                                        



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | (2) The following financial statement
    schedule for fiscal years 2003, 2002 and 2001 is submitted
    herewith:



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedule II  Valuation and
    Qualifying Accounts (See page 57)                                                                                                      
|
| | All other schedules are omitted because they are
    not applicable or the required information is shown in the
    Consolidated Financial Statements or notes thereto.

34



---



##### Table of Contents





| |             
| | ------------
| | (3) Exhibits



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



| |                        
| | -----------------------
| | (b) Reports on Form 8-K



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We did not file any current report on
    Form 8-K during the quarter ended April 5, 2003.

35



---



##### 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 11th day of
July 2003.



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



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

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

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below, constitutes and appoints Thomas
P. Raimondi, Jr. and 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.) |  | Chairman, President and Chief Executive Officer
    (Principal Executive Officer)    |  | July 11, 2003
|                                                    
|/s/ MARK A. FRANZEN(Mark A. Franzen)                 |  | Chief Financial Officer and Secretary (Principal
    Financial & Accounting Officer) |  | July 11, 2003
|                                                    
|/s/ DARCY G. MOTT(Darcy G. Mott)                     |  | Director                                                                             |  | July 11, 2003
|                                                    
|/s/ VAL KREIDEL(Val Kreidel)                         |  | Director                                                                             |  | July 11, 2003
|                                                    
|/s/ JOHN REPP(John Repp)                             |  | Director                                                                             |  | July 11, 2003
|                                                    
|/s/ RALPH J. YARRO, III(Ralph J. Yarro, III)         |  | Director                                                                             |  | July 11, 2003
|                                                    
|/s/ FRANZ L. CRISTIANI(Franz L. Cristiani)           |  | Director                                                                             |  | July 11, 2003

36



---



##### Table of Contents



|                                 |  |          |  |               |  | 
|-------------------------------- |  | -------- |  | ------------- |  | 
|                                 |  |          |  |              
|Signature                        |  | Title    |  | Date         
|                                 |  |          |  |              
|                                
|/s/ KENT D. SMITH(Kent D. Smith) |  | Director |  | July 11, 2003
|                                
|/s/ AL MELROSE(Al Melrose)       |  | Director |  | July 11, 2003

37



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##### Table of Contents






CERTIFICATIONS

I, Thomas P. Raimondi, Jr., Chairman,
President and Chief Executive Officer of MTI Technology
Corporation (the Company), certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of the Company;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Rules 13a-14 and 15d-14 of
    the Exchange Act) for the registrant and we have:                                                                                                



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: July 11, 2003



| |                                                    
| | ---------------------------------------------------
| | /s/ THOMAS P. RAIMONDI, JR.                        
| |                                                    
| | Thomas P. Raimondi, Jr.                            
| | Chairman, President and Chief Executive
    Officer

38



---



##### Table of Contents



CERTIFICATIONS

I, Mark A. Franzen, Chief Financial Officer and
Secretary of MTI Technology Corporation (the
Company), certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of the Company;                                                                                                                                                                                                                                                                             
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Rules 13a-14 and 15d-14 of
    the Exchange Act) for the registrant and we have:                                                                                                



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

Date: July 11, 2003



| |                                          
| | -----------------------------------------
| | /s/ MARK A. FRANZEN                      
| |                                          
| | Mark A. Franzen                          
| | Chief Financial Officer and
    Secretary

39



---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                  |  |      |    | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                  |  | Page
|                                                                                                                                  |  |     
|Independent Auditors Report                                                                                                      |  |      | 41 | 
|Consolidated Balance Sheets as of April 5,
    2003 and April 6, 2002                                                             |  |      | 42 | 
|Consolidated Statements of Operations for the
    fiscal years ended April 5, 2003, April 6, 2002 and
    April 7, 2001           |  |      | 43 | 
|Consolidated Statements of Stockholders
    Equity for the fiscal years ended April 5, 2003,
    April 6, 2002 and April 7, 2001 |  |      | 44 | 
|Consolidated Statements of Cash Flows for the
    fiscal years ended April 5, 2003, April 6, 2002 and
    April 7, 2001           |  |      | 45 | 
|Notes to Consolidated Financial Statements                                                                                        |  |      | 46 | 
|Financial Statement Schedule                                                                                                      |  |      |    | 
|Schedule II  Valuation and
    Qualifying Accounts                                                                               |  |      | 67 | 

40



---



##### 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 5, 2003 and April 6,
2002, and the results of their operations and their cash flows
for each of the years in the three-year period ended
April 5, 2003, 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.

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



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

Costa Mesa, California

May 23, 2003, except as to the second


paragraph of note 7, which is as


of June 30, 2003


41



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |          |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | -------- | ------ | - | ------ | -------- | ------ | 
|                                         |                                                                                                                                                                             | April 5,                   |        | April 6,
|                                         |                                                                                                                                                                             | 2003                       |        | 2002    
|                                         |                                                                                                                                                                             |                            |        |         
|                                         |                                                                                                                                                                             |                           
|                                         |                                                                                                                                                                             | (In thousands except per  
|                                         |                                                                                                                                                                             | share amounts)            
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         | Cash and cash equivalents                                                                                                                                                   |                            | $      | 9,833    |        |   | $      | 8,420    |       
|                                         | Accounts receivable, less allowance for doubtful
    accounts and sales returns of $2,266 in 2003 and $3,406 in 2002                                                        |                            |        | 13,913   |        |   |        | 18,153   |       
|                                         | Inventories                                                                                                                                                                 |                            |        | 8,297    |        |   |        | 14,787   |       
|                                         | Prepaid expenses and other receivables                                                                                                                                      |                            |        | 4,330    |        |   |        | 7,016    |       
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         |                                                                                                                                                                             | Total current assets       |        |          | 36,373 |   |        |          | 48,376 | 
|                                         | Property, plant and equipment, net                                                                                                                                          |                            |        | 2,833    |        |   |        | 7,541    |       
|                                         | Goodwill, net                                                                                                                                                               |                            |        | 5,184    |        |   |        | 5,184    |       
|                                         | Other                                                                                                                                                                       |                            |        | 166      |        |   |        | 597      |       
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         |                                                                                                                                                                             | $                          | 44,556 |          |        | $ | 61,698 |         
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         | Note payable                                                                                                                                                                |                            | $      | 1,740    |        |   | $      | 1,900    |       
|                                         | Current portion of capital lease obligations                                                                                                                                |                            |        | 161      |        |   |        | 135      |       
|                                         | Accounts payable                                                                                                                                                            |                            |        | 8,006    |        |   |        | 9,413    |       
|                                         | Accrued liabilities                                                                                                                                                         |                            |        | 8,014    |        |   |        | 9,308    |       
|                                         | Accrued restructuring charges                                                                                                                                               |                            |        | 2,931    |        |   |        | 4,473    |       
|                                         | Deferred income                                                                                                                                                             |                            |        | 13,450   |        |   |        | 14,884   |       
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         |                                                                                                                                                                             | Total current liabilities  |        |          | 34,302 |   |        |          | 40,113 | 
|                                         | Capital lease obligations, less current portion                                                                                                                             |                            |        | 286      |        |   |        | 461      |       
|                                         | Other                                                                                                                                                                       |                            |        | 994      |        |   |        | 1,011    |       
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         |                                                                                                                                                                             | Total liabilities          |        |          | 35,582 |   |        |          | 41,585 | 
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|Commitments and contingencies            |                                                                                                                                                                             |                            |        |          |        |   |        |         
|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
    32,969 and 32,862 shares in 2003 and 2002, respectively |                            |        | 33       |        |   |        | 33       |       
|                                         | Additional paid-in capital                                                                                                                                                  |                            |        | 134,931  |        |   |        | 134,887  |       
|                                         | Accumulated deficit                                                                                                                                                         |                            |        | (122,282 | )      |   |        | (110,702 | )     
|                                         | Less cost of treasury stock (0 and 187 shares in
    2003 and 2002, respectively)                                                                                           |                            |        |         |        |   |        | (426     | )     
|                                         | Accumulated other comprehensive loss                                                                                                                                        |                            |        | (3,708   | )      |   |        | (3,679   | )     
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         |                                                                                                                                                                             | Total stockholders equity |        |          | 8,974  |   |        |          | 20,113 | 
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         
|                                         |                                                                                                                                                                             | $                          | 44,556 |          |        | $ | 61,698 |         
|                                         |                                                                                                                                                                             |                            |        |          |        |   |        |         

See accompanying notes to consolidated financial
statements.

42



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

Fiscal Years Ended April 5, 2003, April 6,
2002 and April 7, 2001


|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |         |  
|-------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                     |                                                                                                            | 2003                                  |         | 2002    |   | 2001
|                                                                     |                                                                                                            |                                       |         |         |   |     
|                                                                     |                                                                                                            |                                      
|                                                                     |                                                                                                            | (In thousands, except per share data)
|Net product revenue                                                  |                                                                                                            | $                                     | 40,101  |         |   | $    | 69,519  |         |   | $ | 111,820 |        
|Service revenue                                                      |                                                                                                            |                                       | 42,285  |         |   |      | 48,399  |         |   |   | 49,870  |        
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|                                                                     | Total revenue, including $104, $836 and $429 from
    related parties in 2003, 2002 and 2001, respectively |                                       |         | 82,386  |   |      |         | 117,918 |   |   |         | 161,690 |  
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Product cost of revenue                                              |                                                                                                            |                                       | 32,948  |         |   |      | 56,466  |         |   |   | 72,529  |        
|Service cost of revenue                                              |                                                                                                            |                                       | 27,640  |         |   |      | 29,751  |         |   |   | 35,242  |        
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|                                                                     | Total cost of revenue                                                                                      |                                       |         | 60,588  |   |      |         | 86,217  |   |   |         | 107,771 |  
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|                                                                     | Gross profit                                                                                               |                                       |         | 21,798  |   |      |         | 31,701  |   |   |         | 53,919  |  
|Operating expenses:                                                  |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Selling, general and administrative                                  |                                                                                                            |                                       | 27,754  |         |   |      | 43,211  |         |   |   | 66,249  |        
|Research and development                                             |                                                                                                            |                                       | 5,238   |         |   |      | 12,742  |         |   |   | 19,095  |        
|Restructuring charges                                                |                                                                                                            |                                       | 1,467   |         |   |      | 4,911   |         |   |   | 393     |        
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|                                                                     | Total operating expenses                                                                                   |                                       |         | 34,459  |   |      |         | 60,864  |   |   |         | 85,737  |  
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|                                                                     | Operating loss                                                                                             |                                       |         | (12,661 | ) |      |         | (29,163 | ) |   |         | (31,818 | )
|Other income (expense):                                              |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Equity in net loss and write-down of net
    investment of affiliate |                                                                                                            |                                       |        |         |   |      | (9,504  | )       |   |   | (4,800  | )      
|Interest expense                                                     |                                                                                                            |                                       | (299    | )       |   |      | (236    | )       |   |   | (432    | )      
|Interest income                                                      |                                                                                                            |                                       | 76      |         |   |      | 514     |         |   |   | 319     |        
|Gain (loss) on foreign currency transactions                         |                                                                                                            |                                       | 639     |         |   |      | (542    | )       |   |   | (552    | )      
|Other income, net                                                    |                                                                                                            |                                       | 1,231   |         |   |      | 3,904   |         |   |   | 4,371   |        
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Loss before income taxes                                             |                                                                                                            |                                       | (11,014 | )       |   |      | (35,027 | )       |   |   | (32,912 | )      
|Income tax expense                                                   |                                                                                                            |                                       | 205     |         |   |      | 24,598  |         |   |   | 3,529   |        
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Net loss                                                             |                                                                                                            | $                                     | (11,219 | )       |   | $    | (59,625 | )       |   | $ | (36,441 | )      
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Net loss per share:                                                  |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Basic and diluted                                                    |                                                                                                            | $                                     | (0.34   | )       |   | $    | (1.83   | )       |   | $ | (1.13   | )      
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Weighted average shares used in per share
    computations:          |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        
|Basic and diluted                                                    |                                                                                                            |                                       | 32,852  |         |   |      | 32,548  |         |   |   | 32,233  |        
|                                                                     |                                                                                                            |                                       |         |         |   |      |         |         |   |   |         |        

See accompanying notes to consolidated financial
statements.

43



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Fiscal Years Ended April 5, 2003, April 6,
2002 and April 7, 2001


|                                                              |  |                |        |            |  |             |    |               |  |               |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------- |  | -------------- | ------ | ---------- |  | ----------- | -- | ------------- |  | ------------- | ------- | ------------- |  | ------ | -------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                              |  |                |        |            |  |             |    | Accumulated   |  |               |         | Total        
|                                                              |  | Common Stock   |        | Additional |  |             |    | Other         |  | Total         |         | Comprehensive
|                                                              |  |                |        | Paid-in    |  | Accumulated |    | Comprehensive |  | Stockholders |         | Income       
|                                                              |  | Shares         |        | Amount     |  | Capital     |    | Deficit       |  | Loss          |         | Equity        |  | (Loss)
|                                                              |  |                |        |            |  |             |    |               |  |               |         |               |  |       
|                                                              |  |               
|                                                              |  | (In thousands)
|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  |   |  |   |         |  
|Net loss                                                      |  |                |       |            |  |             |   |               |  |               |        |               |  |        | (11,219  | ) |  |   |       |   |  |   | (11,219 | ) |  | $ | (11,219 | )
|Foreign currency translation adjustments                      |  |                |       |            |  |             |   |               |  |               |        |               |  |        |         |   |  |   | (29    | ) |  |   | (29     | ) |  |   | (29     | )
|                                                              |  |                |        |            |  |             |    |               |  |               |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Comprehensive loss for the year ended
    April 5, 2003.      |  |                |        |            |  |             |    |               |  |               |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  | $ | (11,248 | )
|                                                              |  |                |        |            |  |             |    |               |  |               |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Shares issued under Employee Stock Purchase Plan              |  |                | 142    |            |  |             |   |               |  |               | 429     |               |  |        | (361     | ) |  |   |       |   |  |   | 68      |   |  |   |         |  
|Shares issued for employee compensation                       |  |                | 152    |            |  |             |   |               |  |               | 41      |               |  |        |         |   |  |   |       |   |  |   | 41      |   |  |   |         |  
|                                                              |  |                |        |            |  |             |    |               |  |               |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at April 5, 2003                                      |  |                | 32,969 |            |  | $           | 33 |               |  | $             | 134,931 |               |  | $      | (122,282 | ) |  | $ | (3,708 | ) |  | $ | 8,974   |   |  |   |         |  
|                                                              |  |                |        |            |  |             |    |               |  |               |         |               |  |        |          |   |  |   |        |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

44



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##### Table of Contents



MTI TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Fiscal Years Ended April 5, 2003, April 6,
2002 and April 7, 2001


|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |         |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------- | -
|                                                                                              |                                                                                                  | 2003           |         | 2002   |   | 2001
|                                                                                              |                                                                                                  |                |         |        |   |     
|                                                                                              |                                                                                                  |               
|                                                                                              |                                                                                                  | (In thousands)
|Cash flows from operating activities:                                                         |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Net loss                                                                                      |                                                                                                  | $              | (11,219 | )      |   | $    | (59,625 | )      |   | $ | (36,441 | )      
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|                                                                                              | Depreciation and amortization                                                                    |                |         | 3,460  |   |      |         | 6,798  |   |   |         | 10,470  |  
|                                                                                              | Provision for (recovery of) sales returns and
    losses on accounts receivable, net             |                |         | (602   | ) |      |         | 1,884  |   |   |         | 4,330   |  
|                                                                                              | Provision for inventory obsolescence                                                             |                |         | 1,950  |   |      |         | 8,850  |   |   |         | 2,825   |  
|                                                                                              | Loss on disposal of fixed assets                                                                 |                |         | 1,186  |   |      |         | 1,101  |   |   |         | 3,016   |  
|                                                                                              | Deferred income tax expense                                                                      |                |         |       |   |      |         | 24,300 |   |   |         | 3,435   |  
|                                                                                              | Deferred income                                                                                  |                |         | (1,452 | ) |      |         | (7,841 | ) |   |         | 166     |  
|                                                                                              | Net loss in equity of affiliate                                                                  |                |         |       |   |      |         | 9,504  |   |   |         | 4,800   |  
|                                                                                              | Restructuring charges                                                                            |                |         | 1,467  |   |      |         | 4,473  |   |   |         | 136     |  
|                                                                                              | Non-cash compensation from issuance of
    option/warrant                                        |                |         | 41     |   |      |         | 154    |   |   |         |        |  
|                                                                                              | Gain on sale of investment                                                                       |                |         | (1,070 | ) |      |         |       |   |   |         |        |  
|Changes in assets and liabilities, net of effect
    of acquisitions:                         |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|                                                                                              | Accounts receivable                                                                              |                |         | 4,680  |   |      |         | 1,743  |   |   |         | 48,014  |  
|                                                                                              | Inventories                                                                                      |                |         | 4,799  |   |      |         | 10,541 |   |   |         | (6,550  | )
|                                                                                              | Prepaid expenses, other receivables and other
    assets                                         |                |         | 2,678  |   |      |         | (1,658 | ) |   |         | 1,223   |  
|                                                                                              | Accounts payable                                                                                 |                |         | (1,496 | ) |      |         | (1,517 | ) |   |         | (11,057 | )
|                                                                                              | Accrued and other liabilities                                                                    |                |         | (4,017 | ) |      |         | (5,089 | ) |   |         | (6,157  | )
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Net cash provided by (used in) operating
    activities                                       |                                                                                                  |                | 405     |        |   |      | (6,382  | )      |   |   | 18,210  |        
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Cash flows from investing activities:                                                         |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|                                                                                              | Capital expenditures for property, plant and
    equipment                                       |                |         | (378   | ) |      |         | (3,311 | ) |   |         | (11,761 | )
|                                                                                              | Proceeds from the sale of investment                                                             |                |         | 1,070  |   |      |         |       |   |   |         |        |  
|                                                                                              | Proceeds from the sale of property, plant and
    equipment                                      |                |         | 7      |   |      |         |       |   |   |         |        |  
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Net cash provided by (used in) investing
    activities                                       |                                                                                                  |                | 699     |        |   |      | (3,311  | )      |   |   | (11,761 | )      
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Cash flows from financing activities:                                                         |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|                                                                                              | Borrowings under note payable                                                                    |                |         |       |   |      |         | 1,900  |   |   |         |        |  
|                                                                                              | Borrowings under line of credit                                                                  |                |         | 4,490  |   |      |         |       |   |   |         |        |  
|                                                                                              | Proceeds from issuance of common stock, treasury
    shares and exercise of options and warrants |                |         | 68     |   |      |         | 496    |   |   |         | 2,523   |  
|                                                                                              | Payment of capital lease obligations                                                             |                |         | (149   | ) |      |         | (152   | ) |   |         | (98     | )
|                                                                                              | Repayments of notes payable                                                                      |                |         | (1,900 | ) |      |         |       |   |   |         | (1,500  | )
|                                                                                              | Repayments of line of credit                                                                     |                |         | (2,750 | ) |      |         |       |   |   |         |        |  
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Net cash provided by (used in) financing
    activities                                       |                                                                                                  |                | (241    | )      |   |      | 2,244   |        |   |   | 925     |        
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Effect of exchange rate changes on cash                                                       |                                                                                                  |                | 550     |        |   |      | (451    | )      |   |   | 155     |        
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Net increase (decrease) in cash and cash
    equivalents                                      |                                                                                                  |                | 1,413   |        |   |      | (7,900  | )      |   |   | 7,529   |        
|Cash at beginning of year                                                                     |                                                                                                  |                | 8,420   |        |   |      | 16,320  |        |   |   | 8,791   |        
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Cash at end of year                                                                           |                                                                                                  | $              | 9,833   |        |   | $    | 8,420   |        |   | $ | 16,320  |        
|                                                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Supplemental disclosures of cash flow information:                                            |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|Cash paid during the period for:                                                              |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|                                                                                              | Interest                                                                                         |                | $       | 443    |   |      | $       | 98     |   |   | $       | 432     |  
|                                                                                              | Income taxes                                                                                     |                |         | 105    |   |      |         |       |   |   |         | 157     |  
|Supplemental schedule of non-cash investing and
    financing activities:                     |                                                                                                  |                |         |        |   |      |         |        |   |   |         |        
|                                                                                              | Acquisition of leased equipment                                                                  |                |         |       |   |      |         |       |   |   |         | 846     |  

See accompanying notes to consolidated financial
statements.

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MTI TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except share and per share
data)


(1) Summary of Significant Accounting
Policies



| |        
| | -------
| | Company

The Company is a systems integrator focusing on
providing end-to-end business solutions in the storage
marketplace. During fiscal year 2003, the Company was a provider
of enterprise storage solutions focusing on the mid-range
market. The Company refocused its strategy from being a
developer of MTI-branded RAID controller technology to being a
storage solutions provider for the mid-range enterprise market.
The Company partnered with independent storage technology
companies to develop, integrate and maintain high-performance,
high-availability storage solutions for the mid-range and Global
2000 companies worldwide. The Company also serviced select third
party hardware and software, and its Professional Services
organization provided planning, consulting and implementation
support for storage products from other leading vendors. The
Company believes that there is value in creating, integrating,
implementing and providing umbrella services around these
various technologies as there is in developing the raw
technology. On March 31, 2003, the Company entered into a
reseller agreement with EMC, a world leader in information
storage systems, software, networks and services, and has become
a reseller and service provider of EMC Automated Networked
StorageTM systems and software. Although the Company
will be focusing primarily on EMC products, it will continue to
support and service current customers MTI-branded RAID
controller technology and its partnered independent storage
technology.

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 inter-company 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 operating losses and has an accumulated
deficit. The Company anticipates that its existing resources,
including the $7,000 line of credit with the Comerica Bank (see
note 7), will be sufficient to meet its needs for working
capital expenditures through at least fiscal year 2004.
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 2003, 2002 and 2001 ended
on April 5, April 6 and April 7, 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 after the inventories have cleared customs, if
necessary, and upon pick-up by a common carrier for FOB origin
shipments. For FOB destination shipments, sales are recorded
upon delivery to the customer. Sales are recorded net of an
allowance for estimated returns, as long as no significant
post-delivery obligations exist and collection of the resulting
receivable is probable and the amount is fixed or determinable.
Generally, product sales are not contingent upon customer
testing, approval and/or acceptance. However, if sales require
customer acceptance or include post-delivery obligations,
revenue is recognized upon customer acceptance or fulfillment of
any post delivery obligations. Revenue from equipment
maintenance contracts is recorded as deferred income when billed
and is recognized as earned

46



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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

over the period in which the services are
provided, primarily straight-line over the term of the contract.
The Company accrues for warranty expenses at the time revenue is
recognized and maintains a warranty accrual for the estimated
future warranty obligation based upon the relationship between
historical and anticipated costs and sales volumes. 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 consolidated 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 there are no
significant Company obligations related to the sale and the
resulting receivable is deemed collectible, at the time the
software is shipped, 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.

The Company considers sales contracts that
include a combination of systems, software or services to be
multiple element arrangements. An item is considered a separate
element if it involves a separate earnings process. If an
arrangement includes undelivered elements that are not essential
to the functionality of the delivered elements, the Company
defers the fair value of the undelivered elements with the
residual revenue allocated to the delivered elements. Discounts
are allocated only to the delivered elements. Fair value is
determined based upon the price charged when the element is sold
separately. Undelivered elements typically include installation,
training, warranty, maintenance and professional services.



| |                          
| | -------------------------
| | 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 $0 and $818 in cash
equivalents at April 5, 2003 and April 6, 2002,
respectively.



| |            
| | -----------
| | 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 future sales forecasts.
Historically, the Company used rolling forecasts based upon
anticipated product orders to determine our component and
product inventory requirements. As a reseller, the Company
intends to procure inventory primarily upon receipt of purchase
orders from customers. Lead times for products, materials and
components that the Company orders may vary significantly and
depend upon factors such as specific supplier requirements,
contract terms and current market demand. As a result, the
Companys product and component requirement forecasts may
not be accurate.



| |                              
| | -----------------------------
| | 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.

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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                            
| | -------------------------------------------
| | Accounting for Stock-based
    Compensation

The Company accounts for its stock-based awards
to employees in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related interpretations,
rather than the alternative fair value accounting allowed by
Statement of Financial Accounting Standards No. (Statement) 123,
Accounting for Stock Based Compensation. APB 25
provides that compensation expense relative to the
Companys employee stock options is measured based on the
intrinsic value of stock options granted and the Company
recognizes compensation expense in its statement of operations
using the straight-line method over the vesting period for fixed
awards. Under Statement 123, the fair value of stock
options at the date of grant is recognized in earnings over the
vesting period of the options. In December 2002, the Financial
Accounting Standards Board (FASB) issued
Statement 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
Statement 148 amends Statement 123 to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. In addition, Statement 148 amends the
disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method on reported
results. The Company adopted the disclosure provisions of
Statement 148 as of April 5, 2003 and continues to
follow APB 25 for stock-based employee compensation.

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

|                                                                                                                                                  |                                |      |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                  |                                | 2003 |         | 2002  |   | 2001
|                                                                                                                                                  |                                |      |         |       |   |     
|Net loss, as reported                                                                                                                             |                                | $    | (11,219 | )     |   | $    | (59,625 | )     |   | $ | (36,441 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effects                                      |                                |      | 41      |       |   |      | 174     |       |   |   |        |      
|Deduct: Stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of related tax effects |                                |      | (9,413  | )     |   |      | (16,440 | )     |   |   | (16,138 | )    
|                                                                                                                                                  |                                |      |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                                                |                                | $    | (20,591 | )     |   | $    | (75,891 | )     |   | $ | (52,579 | )    
|                                                                                                                                                  |                                |      |         |       |   |      |         |       |   |   |         |      
|Net loss per share:                                                                                                                               |                                |      |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                                  | Basic and diluted, as reported |      | $       | (0.34 | ) |      | $       | (1.83 | ) |   | $       | (1.13 | )
|                                                                                                                                                  |                                |      |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                                  | Basic and diluted, pro forma   |      | $       | (0.63 | ) |      | $       | (2.33 | ) |   | $       | (1.63 | )
|                                                                                                                                                  |                                |      |         |       |   |      |         |       |   |   |         |      

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

|                                               |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                               |  | 2003 |      | 2002 |  | 2001
|                                               |  |      |      |      |  |     
|Weighted-average fair value of options granted |  | $    | 0.49 |      |  | $    | 1.48 |   |  | $ | 4.23 |  
|Expected volatility                            |  |      | 1.5  |      |  |      | 1.2  |   |  |   | 1.4  |  
|Risk-free interest rate                        |  |      | 2.78 | %    |  |      | 4.62 | % |  |   | 4.60 | %
|Expected life (years)                          |  |      | 5.0  |      |  |      | 5.0  |   |  |   | 5.0  |  
|Dividend yield                                 |  |      |     |      |  |      |     |   |  |   |     |  

The Black-Scholes option valuation model was
developed for use in estimating the value of traded options that
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including expected stock price
volatility. Because the Companys employee stock options
have characteristics significantly different than those of
traded options, and because

48



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

changes in the subjective input assumptions can
materially affect the estimate, in managements opinion,
the existing models do not provide a reliable single measure of
the fair value of the Companys options.



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

Under the asset and liability method of Statement
109, Accounting for Income Taxes, deferred tax
assets and liabilities are determined based on differences
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities and operating loss and
tax credit carryforwards using enacted tax rates in effect for
the year in which the differences are expected to reverse, net
of a valuation allowance for deferred tax assets which are
determined to not be more likely than not realizable. Under
Statement 109, the effect on deferred taxes of a change in
tax rates is recognized in operations in the period that
includes the enactment date.



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

In July 2001, the FASB issued Statement 141,
Business Combinations, and Statement 142,
Goodwill and Other Intangible Assets. The Company
chose to early adopt the provisions of Statement 142 effective
April 8, 2001. The Company adopted Statement 141
immediately upon its release. Statement 141 requires that
the purchase method of accounting be used for all business
combinations initiated 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.
Statement 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 142, the carrying value of the
Companys goodwill and other intangible assets was
determined to not be impaired. The Company completed its annual
assessment for goodwill impairment in the fourth quarter of
fiscal year 2003 and no impairment was found to exist. Prior to
the adoption of Statement 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 U.S. 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
accumulate as other accumulated comprehensive loss in
stockholders equity. Net foreign currency transaction
exchange gain (loss) of $639, $(542) and $(552) were
realized in fiscal years 2003, 2002 and 2001, 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.

Effective March 31, 2003, the Company became
a reseller of EMC disk-based storage products. Therefore, the
Company depends on EMC to manufacture and supply the Company
with their storage products.

49



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | 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.



| |                              
| | -----------------------------
| | Earnings (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.



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

Statement 107, Disclosure about Fair Value
of Financial Instruments, requires all entities to
disclose the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance
sheet, for which it is practicable to estimate fair value.
Statement 107 defines fair value of a financial instrument
as the amount at which the instrument could be exchanged in a
current transaction between willing parties. As of April 5,
2003, the fair value of all financial instruments approximated
their carrying value.



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

Certain reclassifications have been made to the
fiscal years 2002 and 2001 financial statements to conform to
the fiscal year 2003 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.



| |                                          
| | -----------------------------------------
| | Recently Adopted Accounting
    Standards

In October 2001, the FASB issued Statement 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 121. Statement 144 retains many
of the fundamental provisions of Statement 121.
Statement 144 also supersedes the accounting and reporting
provisions of Accounting Principles 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. The Company
adopted Statement 144 in the first quarter of fiscal year
2003. The adoption of this standard did not have a material
impact on the Companys results of operations or financial
position.

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

50



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 adopted Statement 145 in the first
quarter of fiscal year 2003. The adoption of this standard did
not have a material impact on the Companys results of
operations or financial position.

In July 2002, the FASB issued Statement 146,
Accounting for Costs Associated with Exit or Disposal
Activities. Statement 146 requires the recognition of
costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by Statement 146
include lease termination costs and certain employee severance
costs that are associated with restructuring, discontinued
operations, plant closing or other exit or disposal activities.
Statement 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued
Statement 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an
amendment of FASB Statement 123, which required prospective
application of the fair value recognition provisions to new
awards granted after the beginning of the period of adoption.
Statement 148 permits three additional transition methods for
entities that choose to adopt the fair value measurement
provisions of Statement 123. Both these methods avoid the
ramp-up effect arising from prospective application of the fair
value based method. In addition, Statement 148 amends the
disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. Statement 148 does not permit the use of
Statement 123 prospective method of transition for changes
to the fair value based method made in fiscal years beginning
after December 15, 2003. The Company adopted the disclosure
provisions of Statement 148 effective April 5, 2003. The
Company has no plans to adopt the fair value measurement
provisions of Statement 123 and, as such, believes the
adoption of this standard will not have a material impact on its
results of operations, financial position, or liquidity.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
(Interpretation 45), an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34. Interpretation 45 elaborates on
the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. Interpretation 45s
initial recognition and initial measurement provisions are
effective on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim
or annual periods ending after December 15, 2002. The
Company adopted the disclosure requirements of Interpretation 45
effective April 5, 2003.

(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 the
abandonment of either underutilized or historically unprofitable
facilities, a headcount reduction of 56 employees, and the
disposal of certain fixed assets, respectively. The cash outflow
of the restructuring charge was $277, related to severance, of
which $70 was paid in fiscal year 2002. The remaining $207 was
paid in the first quarter of fiscal year 2003.

51



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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the first quarter of fiscal year 2003, the
Company recorded a restructuring charge of $1,046 which
consisted of charges of $545 related to a headcount reduction of
39 employees, or 15% of the Companys workforce, and $501
related to the disposal or abandonment of fixed assets. Of the
39 employees terminated, 14, 3, 6, 1, 14, and 1 were from
the Sales, Marketing, General and Administrative, Customer
Service, Research and Development, and Manufacturing
departments, respectively. The cash outflow of the restructuring
charge was $545 related to severance, which was paid during
fiscal year 2003.

In the third quarter of fiscal year 2003, the
Company recorded a $221 additional restructuring charge due to
lower than anticipated lease payments from sub-lessees in its
Sunnyvale, California and Raleigh, North Carolina facilities.

In the fourth quarter of fiscal year 2003, the
Company recorded a $254 restructuring charge due to lower than
anticipated lease payments from sub-lessees in its European
facilities.

The Company also completed consolidating its
manufacturing facility to Dublin, Ireland, in July 2002, and
reduced the amount of space leased for its corporate
headquarters by moving from Anaheim, California to Tustin,
California in January 2003.

The changes to the restructuring reserve
established in the fourth quarter of fiscal year 2002 are as
follows:

|                                                     |                             |                                         |       |       |        |  
|---------------------------------------------------- | --------------------------- | --------------------------------------- | ----- | ----- | ------ | -
|Abandoned facilities:                                |                             |                                         |       |      
|                                                     | Balance as of April 6, 2002 |                                         | $     | 4,266 |       
|                                                     |                             | Add: Current year restructuring charges |       |       | 421    |  
|                                                     |                             | Less: Current year utilization          |       |       | (1,756 | )
|                                                     |                             |                                         |       |      
|                                                     | Balance as of April 5, 2003 |                                         |       | 2,931 |       
|                                                     |                             |                                         |       |      
|Workforce reduction:                                 |                             |                                         |       |      
|                                                     | Balance as of April 6, 2002 |                                         |       | 207   |       
|                                                     |                             | Add: Current year severance charges     |       |       | 545    |  
|                                                     |                             | Less: Current year severance payments   |       |       | (752   | )
|                                                     |                             |                                         |       |      
|                                                     | Balance as of April 5, 2003 |                                         |       |      |       
|                                                     |                             |                                         |       |      
|Total accrued restructuring, as of April 5,
    2003 |                             | $                                       | 2,931 |      
|                                                     |                             |                                         |       |      

(3) Inventories

Inventories consist of the following:

|                |  |          |       |          |  |   |        | 
|--------------- |  | -------- | ----- | -------- |  | - | ------ | 
|                |  | April 5, |       | April 6,
|                |  | 2003     |       | 2002    
|                |  |          |       |         
|Raw materials   |  | $        | 4,942 |          |  | $ | 7,113  | 
|Work-in-process |  |          | 296   |          |  |   | 37     | 
|Finished goods  |  |          | 3,059 |          |  |   | 7,637  | 
|                |  |          |       |          |  |   |        | 
|                |  | $        | 8,297 |          |  | $ | 14,787 | 
|                |  |          |       |          |  |   |        | 

52



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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 5, |        | April 6,
|                                               |  | 2003     |        | 2002    
|                                               |  |          |        |         
|Plant equipment, office furniture and fixtures |  | $        | 15,605 |          |  | $ | 19,653 | 
|Computer equipment                             |  |          | 12,376 |          |  |   | 20,728 | 
|Leasehold improvements                         |  |          | 2,232  |          |  |   | 2,559  | 
|                                               |  |          |        |          |  |   |        | 
|                                               |  |          | 30,213 |          |  |   | 42,940 | 
|Less accumulated depreciation and amortization |  |          | 27,380 |          |  |   | 35,399 | 
|                                               |  |          |        |          |  |   |        | 
|                                               |  | $        | 2,833  |          |  | $ | 7,541  | 
|                                               |  |          |        |          |  |   |        | 

Property under capitalized leases in the amount
of $846 at April 5, 2003 and April 6, 2002, is
included in plant equipment, office furniture and fixtures.
Accumulated amortization of this property under capital leases
amounted to $399 and $250 at April 5, 2003 and
April 6, 2002, respectively.

(5) Investment in Affiliate

In August 1999, the Company purchased
5,333,333 shares of SCO (formerly Caldera International,
Inc.), representing approximately 25% of the outstanding capital
stock of SCO upon completion of the purchase. SCO develops and
markets software based on the Linux operating system and
provides related services. Canopy owned all the issued and
outstanding shares of SCO before this transaction.

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

The original investment in SCO 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, SCO
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 SCO 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
SCO of $4,209, which was written off during the third quarter of
fiscal year 2002 as an other than temporary decline in value and
to record its proportional share of SCOs net loss. Such
loss has been included in Equity in net loss and
write-down of net investment of affiliate in the
Companys fiscal year 2002 Consolidated Statement of
Operations.

53



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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The unaudited financial information for SCO for
the quarter ended January 31, 2002, is summarized below:
(Since the Company sold its entire investment in SCO during
fiscal year 2003, SCOs financial information for the
quarter ended January 31, 2003, is not presented)

|                        |  |             |         |  
|----------------------- |  | ----------- | ------- | -
|                        |  | January 31,
|                        |  | 2002       
|                        |  |            
|Current assets          |  | $           | 42,676  |  
|Non-current assets      |  |             | 23,325  |  
|Current liabilities     |  |             | (34,850 | )
|Non-current liabilities |  |             | (6,869  | )
|Minority interest       |  |             | (173    | )
|                        |  |             |         |  
|Net assets              |  | $           | 24,109  |  
|                        |  |             |         |  

|                            |  |          |   | 
|--------------------------- |  | -------- | - | 
|                            |  | April 6,
|                            |  | 2002    
|                            |  |         
|Companys equity investment |  | $        |  | 
|                            |  |          |   | 

|                                                                  |  |               |          |  
|----------------------------------------------------------------- |  | ------------- | -------- | -
|                                                                  |  | Twelve Months
|                                                                  |  | Ended        
|                                                                  |  | January 31,  
|                                                                  |  | 2002         
|                                                                  |  |              
|Total revenue                                                     |  | $             | 57,300   |  
|Operating loss                                                    |  |               | (133,951 | )
|Net loss                                                          |  |               | (132,520 | )
|Companys equity in net loss and write-down
    of net investment |  |               | (9,504   | )

The Company owned 5,333,333 shares of
SCOs stock. SCO 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 July 23,
2002, the Company sold its remaining shares of SCO common stock
to SCO for approximately $1,070 in net proceeds, which we used
to pay down our credit line with Canopy. The Company recognized
a gain of $1,215 from the sale of SCO shares which is recorded
in other income, net in the 2003 consolidated statement of
operations.

(6) Accrued Liabilities

Accrued liabilities consist of the following:

|                      |  |          |       |          |  |   |       | 
|--------------------- |  | -------- | ----- | -------- |  | - | ----- | 
|                      |  | April 5, |       | April 6,
|                      |  | 2003     |       | 2002    
|                      |  |          |       |         
|Salaries and benefits |  | $        | 2,593 |          |  | $ | 3,687 | 
|Commissions           |  |          | 234   |          |  |   | 606   | 
|Taxes                 |  |          | 2,814 |          |  |   | 2,629 | 
|Warranty costs        |  |          | 876   |          |  |   | 897   | 
|Other                 |  |          | 1,497 |          |  |   | 1,489 | 
|                      |  |          |       |          |  |   |       | 
|                      |  | $        | 8,014 |          |  | $ | 9,308 | 
|                      |  |          |       |          |  |   |       | 

54



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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | Product Warranties

For the general non-EMC products the Company sold
in fiscal 2003, the Company provided its customers with a
warranty against defects in its proprietary hardware products
for one year domestically and for two years internationally. 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 costs and sales volumes. Upon
expiration of the warranty, the Company may sell maintenance
contracts to its customers. The Company records revenue from
equipment maintenance contracts as deferred income when billed
and it recognizes this revenue as earned over the period in
which the services are provided, primarily straight-line over
the term of the contract.

The changes in the Companys warranty
obligation for fiscal 2003 are as follows (in thousands):

|                                       |  |          |      |  
|-------------------------------------- |  | -------- | ---- | -
|                                       |  | April 5,
|                                       |  | 2003    
|                                       |  |         
|Balance at the beginning of the period |  | $        | 896  |  
|Current year warranty charges          |  |          | 275  |  
|Utilization                            |  |          | (295 | )
|                                       |  |          |      |  
|Balance at the end of the period       |  | $        | 876  |  
|                                       |  |          |      |  

(7) Debt



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

On December 5, 2002, the Company paid off
the outstanding $1,685 loan with Canopy and terminated its loan
agreement with Canopy. The Canopy Loan Agreement was entered
into on June 27, 2002, allowing the Company, subject to
certain conditions, to borrow up to an aggregate of $7,000 at an
interest rate of nine percent per annum under a revolving line
of credit. The line was secured by a security interest in
substantially all of the Companys assets. Ralph J.
Yarro, III, one of our Directors, is also a Director,
President and Chief Executive Officer of Canopy. Darcy G. Mott,
one of our Directors, is also a Vice President, Treasurer and
Chief Financial Officer of Canopy. Canopy beneficially owns
approximately 44% of our outstanding common stock.

In November 2002, the Company entered into an
agreement (the Comerica Loan Agreement) with
Comerica Bank (Comerica) for a line of credit of
$7,000 at an interest rate equal to the prime rate. The line of
credit is secured by a letter of credit that is guaranteed by
Canopy and was to mature on October 31, 2003, but on
June 30, 2003, we received a renewal on the line of credit
for $7,000 until May 31, 2004. The Canopy guarantee was to
mature on November 30, 2003, but on June 30, 2003, we
received an extension on the letter of credit for $7,000 until
June 30, 2004 (see note 13). The Comerica Loan
Agreement contains negative covenants placing restrictions on
the Companys ability to engage in any business other than
the businesses currently engaged in, suffer or permit a change
in control, and merge with or acquire another entity. Although
the Company is currently in compliance with all of the terms of
the Comerica Loan Agreement, and believes that it will remain in
compliance, there can be no assurance that it will be able to
borrow under the Comerica Loan Agreement. Upon an event of
default, Comerica may terminate the Comerica Loan Agreement and
declare all amounts outstanding immediately due and payable. As
of April 5, 2003, there was $1,740 outstanding under the
Comerica Loan Agreement.

55



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(8) Income Taxes

The components of loss before income taxes are as
follows:

|        |  |                   |         |          |  |          |         |   |  |   |         |  
|------- |  | ----------------- | ------- | -------- |  | -------- | ------- | - |  | - | ------- | -
|        |  |                  
|        |  | Fiscal Year Ended
|        |  |                  
|        |  | April 5,          |         | April 6, |  | April 7,
|        |  | 2003              |         | 2002     |  | 2001    
|        |  |                   |         |          |  |         
|U.S.    |  | $                 | (11,062 | )        |  | $        | (33,986 | ) |  | $ | (31,044 | )
|Foreign |  |                   | 48      |          |  |          | (1,041  | ) |  |   | (1,868  | )
|        |  |                   |         |          |  |          |         |   |  |   |         |  
|        |  | $                 | (11,014 | )        |  | $        | (35,027 | ) |  | $ | (32,912 | )
|        |  |                   |         |          |  |          |         |   |  |   |         |  

Income tax expense (benefit) consists of the
following:

|      |         |         |     |          |  |       |        |        |  |   |        |        | 
|----- | ------- | ------- | --- | -------- |  | ----- | ------ | ------ |  | - | ------ | ------ | 
|      |         | Current |     | Deferred |  | Total
|      |         |         |     |          |  |      
|2003: |         |         |     |          |  |       |        |        |  |   |        |       
|      | Federal |         | $   |         |  |       | $      |       |  |   | $      |       | 
|      | State   |         |     | 68       |  |       |        |       |  |   |        | 68     | 
|      | Foreign |         |     | 137      |  |       |        |       |  |   |        | 137    | 
|      |         |         |     |          |  |       |        |        |  |   |        |       
|      |         | $       | 205 |          |  | $     |       |        |  | $ | 205    |       
|      |         |         |     |          |  |       |        |        |  |   |        |       
|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  |       
|      |         |         |     |          |  |       |        |        |  |   |        |       

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

|                                    |  |                   |       |          |  |          |       |    |  |  |       |   
|----------------------------------- |  | ----------------- | ----- | -------- |  | -------- | ----- | -- |  |  | ----- | --
|                                    |  |                  
|                                    |  | Fiscal Year Ended
|                                    |  |                  
|                                    |  | April 5,          |       | April 6, |  | April 7,
|                                    |  | 2003              |       | 2002     |  | 2001    
|                                    |  |                   |       |          |  |         
|Federal statutory rate              |  |                   | (35.0 | )%       |  |          | (35.0 | )% |  |  | (35.0 | )%
|Effect of foreign operations        |  |                   | 1.2   |          |  |          | 1.2   |    |  |  | 2.0   |   
|State taxes, net of federal benefit |  |                   | (5.8  | )        |  |          | (5.8  | )  |  |  | (5.8  | ) 
|Change in valuation allowance       |  |                   | 37.0  |          |  |          | 113.8 |    |  |  | 46.0  |   
|Non-deductible expenses             |  |                   | 0.1   |          |  |          | 0.3   |    |  |  | 2.0   |   
|Other                               |  |                   | 4.3   |          |  |          | (5.1  | )  |  |  | 1.5   |   
|                                    |  |                   |       |          |  |          |       |    |  |  |       |   
|                                    |  |                   | 1.8   | %        |  |          | 69.4  | %  |  |  | 10.7  | % 
|                                    |  |                   |       |          |  |          |       |    |  |  |       |   

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 when the valuation allowance is
released.

56



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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-income-tax assets and
deferred-income-tax liabilities are as follows:

|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        | 
|----------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                                                      |  | 2003 |        | 2002 |  | 2001
|                                                                                                      |  |      |        |      |  |     
|Tax operating loss carryforwards                                                                      |  | $    | 48,348 |      |  | $    | 40,056 |  |  | $ | 26,887 | 
|Tax basis of intangible assets greater than book
    basis                                            |  |      | 3,109  |      |  |      | 3,726  |  |  |   | 4,185  | 
|Accrued expenses not deductible for tax purposes                                                      |  |      | 3,674  |      |  |      | 2,714  |  |  |   | 2,531  | 
|Inventory reserves                                                                                    |  |      | 2,185  |      |  |      | 3,544  |  |  |   | 1,661  | 
|Book depreciation greater than tax depreciation                                                       |  |      | 2,791  |      |  |      | 4,195  |  |  |   | 2,781  | 
|Recognition of income reported on different
    methods for tax purposes than for financial reporting |  |      | 361    |      |  |      | 430    |  |  |   | 1,451  | 
|Other                                                                                                 |  |      | 253    |      |  |      | 2,043  |  |  |   | 1,648  | 
|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        | 
|                                                                                                      |  |      | 60,721 |      |  |      | 56,708 |  |  |   | 41,144 | 
|Less valuation allowance                                                                              |  |      | 60,721 |      |  |      | 56,708 |  |  |   | 16,844 | 
|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        | 
|                                                                                                      |  | $    |       |      |  | $    |       |  |  | $ | 24,300 | 
|                                                                                                      |  |      |        |      |  |      |        |  |  |   |        | 

At April 5, 2003, the Company had federal
net operating loss (NOL) carryforwards, available to
offset future taxable income of $114,000. These carryforwards
begin to expire in fiscal year 2004. The utilization of these
carryforwards may be limited.

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 2002 to fiscal year 2003
was $4,013 and the change in the valuation allowance from fiscal
year 2001 to fiscal year 2002 was $39,864. Because of the
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 5, 2003.

On August 13, 2002, the Company received a
notice of deficiency in its federal income tax due for fiscal
year 1992 in the amount of $1,119. The notice of deficiency also
advised the Company of related examination changes to its
taxable income as reported for fiscal years 1993 through fiscal
year 1996. The Company filed a timely petition in the United
States Tax Court asking for a review of the IRS determinations.
The Company has since entered into a settlement with the IRS
which obligates the Company to pay an additional $164 in income
tax due for fiscal year 1992 and entitles the Company to receive
income tax refunds for fiscal years 1982 through 1990 totaling
$1,668, plus interest. The income tax refunds allowed by the IRS
are based upon the carryback of the net operating losses which
were confirmed for the fiscal years 1993, 1994 and 1995. The
settlement is scheduled to be finalized during fiscal year 2004.

57



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(9) Stockholders Equity



| |                   
| | ------------------
| | Net Loss Per Share

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

|                                      |                                                                                                 |      |       |         |   |      |       |         |   |   |       |         |  
|------------------------------------- | ----------------------------------------------------------------------------------------------- | ---- | ----- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                      |                                                                                                 | 2003 |       | 2002    |   | 2001
|                                      |                                                                                                 |      |       |         |   |     
|Numerator:                            |                                                                                                 |      |       |         |   |      |       |         |   |   |       |        
|                                      | Net loss, basic and diluted                                                                     |      | $     | (11,219 | ) |      | $     | (59,625 | ) |   | $     | (36,441 | )
|                                      |                                                                                                 |      |       |         |   |      |       |         |   |   |       |        
|Denominator:                          |                                                                                                 |      |       |         |   |      |       |         |   |   |       |        
|                                      | Denominator for net loss per share, basic and
    Diluted  weighted-average shares outstanding |      |       | 32,852  |   |      |       | 32,548  |   |   |       | 32,233  |  
|                                      |                                                                                                 |      |       |         |   |      |       |         |   |   |       |        
|Net loss per share, basic and diluted |                                                                                                 | $    | (0.34 | )       |   | $    | (1.83 | )       |   | $ | (1.13 | )      
|                                      |                                                                                                 |      |       |         |   |      |       |         |   |   |       |        

Options and warrants to purchase 10,233,404
shares of common stock were outstanding at April 5, 2003,
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
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.



| |              
| | -------------
| | 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 2001 Non-Employee Director Option
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. In the
first quarter of fiscal year 2004, the Board approved the
amended Stock Incentive Plan (the Amended SIP) to
increase the number of shares issuable over the term of the 2001
Plan by 2,500,000 shares. Under the Amended SIP, the
maximum aggregate number of shares of Common Stock available for
grant under the Amended SIP and Program shall be 6,500,000
shares, and such number is not subject to the 3% annual
adjustment. A maximum of 1,200,000 shares are authorized for
issuance under the Stock Purchase Plan. The Program functions as
part of the SIP.

In the third and fourth quarter of fiscal year
2002, the Company granted 106,043 shares and
55,083 shares of common stock, respectively, to an employee
to compensate for services for fiscal year 2002. The shares were
issued out of treasury shares at a per share price of $1.20 and
$0.57, respectively. The Company recorded compensation expense
of $234 in connection with the grants.

58



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In the third quarter of fiscal year 2003, the
Company granted 96,724 shares of common stock to an
employee to compensate him for his participation in starting up
its business in the Pacific Rim. The shares were issued at a per
share price of $0.58. The Company recorded compensation expense
of $56 in connection with the grants.



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

At April 5, 2003, warrants to purchase
190,678 shares of the Companys common stock at a
price of $2.36 per share was outstanding. The warrants were
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 warrants is five years. At April 5,
2003, the warrants were fully exercisable. The fair value of the
warrants on the grant date was $139.

At April 5, 2003, 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 5, 2003, the warrant was fully
exercisable.

At April 5, 2003, warrants to purchase
57,240 shares of the Companys common stock at a price
of $12.00 per share were outstanding. The original warrants were
issued in February 1998 to GB Storage in connection with a
French distribution agreement and expire in February 2008. On
February 12, 2002, the original warrants were replaced by
warrants issued to Gerard Bantchik, Emmanuel Moreau, Alain
Mariotta and Florence Ferraz to purchase 32,398 shares,
15,913 shares, 6,411 shares and 2,518 shares of
the Companys stock, respectively. The exercise price and
expiration date of the warrants remain unchanged. On
April 5, 2003, the warrants were fully exercisable.



| |                                          
| | -----------------------------------------
| | Non-Employee Directors Option
    Program

On July 11, 2001, the Companys
shareholders approved the 2001 Non-Employee Directors Option
Program (the 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 5, 2003, there were options to purchase
250,000 shares outstanding under this program.

Options granted typically vest over a period of
four years from the date of grant. At April 5, 2003 and
April 6, 2002, the number of options exercisable was
5,833,550 and 5,471,796 respectively, and the weighted-average
exercise price of those options was $7.08 and $7.91.

59



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                     |  |        |        |          |  |   |       | 
|------------------------------------ |  | ------ | ------ | -------- |  | - | ----- | 
|                                     |  |        |        | Weighted
|                                     |  |        |        | Average 
|                                     |  |        |        | Exercise
|                                     |  | Shares |        | Price   
|                                     |  |        |        |         
|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  | 
|Granted                              |  |        | 3,556  |          |  |   | 0.49  | 
|Exercised                            |  |        |       |          |  |   |      | 
|Cancelled                            |  |        | (3,881 | )        |  |   | 5.42  | 
|                                     |  |        |        |          |  |   |       | 
|Options outstanding at April 5, 2003 |  |        | 10,233 |          |  | $ | 4.97  | 
|                                     |  |        |        |          |  |   |       | 

The per share weighted average fair value of
stock options granted during fiscal years 2003, 2002 and 2001
was $0.49, $1.48 and $4.22, respectively, on the date of grant.

A summary of stock options outstanding at
April 5, 2003 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 Price |                     | Outstanding |  | Life        |        | Price    |  | Options        |      | Price   
|                        |                     |             |  |             |        |          |  |                |      |         
|                        | $ 0.2700 - $ 0.4600 |             |  |             | 614    |          |  |                | 9.45 |          |  | $ | 0.3857  |  |  |  | 33    |  |  | $ | 0.3800  | 
|                        | 0.5500 -   0.5500   |             |  |             | 2,359  |          |  |                | 9.24 |          |  |   | 0.5500  |  |  |  |      |  |  |   |        | 
|                        | 0.5700 -   1.1500   |             |  |             | 501    |          |  |                | 9.06 |          |  |   | 0.8534  |  |  |  | 237   |  |  |   | 0.9221  | 
|                        | 1.3500 -   1.3500   |             |  |             | 1,311  |          |  |                | 8.32 |          |  |   | 1.3500  |  |  |  | 994   |  |  |   | 1.3500  | 
|                        | 1.7500 -   2.1250   |             |  |             | 1,511  |          |  |                | 7.98 |          |  |   | 2.0193  |  |  |  | 1,176 |  |  |   | 1.9892  | 
|                        | 2.2500 -   4.1250   |             |  |             | 1,358  |          |  |                | 6.98 |          |  |   | 3.8003  |  |  |  | 1,138 |  |  |   | 3.7374  | 
|                        | 4.3125 -   8.3125   |             |  |             | 1,296  |          |  |                | 5.89 |          |  |   | 6.4445  |  |  |  | 1,202 |  |  |   | 6.5113  | 
|                        | 8.3750 -  30.0625   |             |  |             | 1,189  |          |  |                | 6.45 |          |  |   | 22.0310 |  |  |  | 979   |  |  |   | 22.3599 | 
|                        | 36.8750 -  45.8750  |             |  |             | 75     |          |  |                | 6.90 |          |  |   | 44.0750 |  |  |  | 60    |  |  |   | 44.0372 | 
|                        | 52.3440 -  52.3440  |             |  |             | 19     |          |  |                | 6.90 |          |  |   | 52.3440 |  |  |  | 15    |  |  |   | 52.3440 | 
|                        |                     |             |  |             |        |          |  |                |      |          |  |   |         |  |  |  |       |  |  |   |         | 
|                        |                     |             |  |             | 10,233 |          |  |                | 7.87 |          |  | $ | 4.9654  |  |  |  | 5,834 |  |  | $ | 7.0810  | 
|                        |                     |             |  |             |        |          |  |                |      |          |  |   |         |  |  |  |       |  |  |   |         | 



---

Note:



|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Options exercisable at April 5, 2003,
    April 6, 2002 and April 7, 2001, were 5,834, 5,472 and
    2,434, respectively.

60



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

On July 11, 2001, the Companys
shareholders approved the Stock Purchase Plan. A maximum of
1,200,000 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. The Stock Purchase
Plan was 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 2003 and 2002,
141,080 and 81,941 shares of common stock, respectively,
were issued pursuant to the Stock Purchase Plan.

(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 5,
2003 under all non-cancelable operating leases for subsequent
fiscal years are as follows:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2004       |  | $ | 3,438 | 
|2005       |  |   | 2,846 | 
|2006       |  |   | 1,619 | 
|2007       |  |   | 802   | 
|2008       |  |   | 364   | 
|Thereafter |  |   | 141   | 
|           |  |   |       | 
|           |  | $ | 9,210 | 
|           |  |   |       | 

Future minimum capital lease payments at
April 5, 2003 for subsequent fiscal years are as follows:

|                                                        |  |   |     | 
|------------------------------------------------------- |  | - | --- | 
|2004                                                    |  | $ | 210 | 
|2005                                                    |  |   | 210 | 
|2006                                                    |  |   | 80  | 
|2007 and thereafter                                     |  |   |    | 
|                                                        |  |   |     | 
|Total minimum lease payments                            |  |   | 500 | 
|Less: Amount representing interest                      |  |   | 53  | 
|                                                        |  |   |     | 
|Present value of minimum lease payments                 |  |   | 447 | 
|Less: current portion                                   |  |   | 161 | 
|                                                        |  |   |     | 
|Capital lease obligations excluding current
    portion |  | $ | 286 | 
|                                                        |  |   |     | 

61



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rent expense totaled $3,624, $5,000 and $5,383,
for fiscal years 2003, 2002 and 2001, respectively.



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

On December 3, 2002, the Company signed an
agreement for the settlement and release of all claims that had
been filed against it and several current or former officers in
In re MTI Technology Corp. Securities Litigation. The
Companys insurers will cover all but $125 of the total
settlement amount. This case had begun with the filing of
several complaints from July through September 2000; they later
were consolidated in the federal court for the Central District
of California on or about December 5, 2000. The plaintiffs
had sought unspecified damages for the Companys alleged
violation of the Securities Exchange Act of 1934 by failing to
disclose certain adverse information primarily during fiscal
year 2000. The settlement is subject to a settlement hearing by
the court, which will be held on July 28, 2003.

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 the
Companys consolidated financial position, results of
operations, or liquidity.

(11) Business Segment and International
Information

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
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 loss is revenue less cost of
revenues and direct operating expenses.

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

|                     |                          |                      |        |         |         |      |        |         |         |   |   |         |         |  
|-------------------- | ------------------------ | -------------------- | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | - | ------- | ------- | -
|                     |                          | 2003                 |        | 2002    |         | 2001
|                     |                          |                      |        |         |         |     
|Revenue:             |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     | United States            |                      | $      | 47,125  |         |      | $      | 81,300  |         |   | $ | 110,025 |        
|                     | Europe                   |                      |        | 38,861  |         |      |        | 39,662  |         |   |   | 58,052  |        
|                     | Transfers between areas  |                      |        | (3,600  | )       |      |        | (3,044  | )       |   |   | (6,387  | )      
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     |                          | Total revenue        |        | $       | 82,386  |      |        | $       | 117,918 |   |   | $       | 161,690 |  
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        
|Operating loss:      |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     | United States            |                      | $      | (11,992 | )       |      | $      | (28,362 | )       |   | $ | (30,977 | )      
|                     | Europe                   |                      |        | (669    | )       |      |        | (801    | )       |   |   | (841    | )      
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     |                          | Total operating loss |        | $       | (12,661 | )    |        | $       | (29,163 | ) |   | $       | (31,818 | )
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        
|Identifiable assets: |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     | United States            |                      | $      | 25,078  |         |      | $      | 39,189  |         |   |   |         |        
|                     | Europe                   |                      |        | 14,294  |         |      |        | 17,325  |         |   |   |         |        
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     |                          | Tangible assets      |        |         | 39,372  |      |        |         | 56,514  |   |   |         |         |  
|                     | Goodwill  United States |                      |        | 3,059   |         |      |        | 3,059   |         |   |   |         |        
|                     | Goodwill  Europe        |                      |        | 2,125   |         |      |        | 2,125   |         |   |   |         |        
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        
|                     |                          | $                    | 44,556 |         |         | $    | 61,698 |         |         |   |   |        
|                     |                          |                      |        |         |         |      |        |         |         |   |   |        

62



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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                      |        |      |        |        |  |      |         |        |  |   |         |        | 
|--------------------- | ------ | ---- | ------ | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                      |        | 2003 |        | 2002   |  | 2001
|                      |        |      |        |        |  |     
|Server:               |        |      |        |        |  |      |         |        |  |   |         |       
|                      | Vivant |      | $      | 14,727 |  |      | $       | 36,015 |  |   | $       | 42,696 | 
|                      | Other  |      |        | 7,808  |  |      |         | 9,296  |  |   |         | 25,408 | 
|Tape libraries        |        |      | 14,251 |        |  |      | 17,904  |        |  |   | 35,537  |       
|Tape related software |        |      | 3,315  |        |  |      | 6,304   |        |  |   | 8,179   |       
|Service               |        |      | 42,285 |        |  |      | 48,399  |        |  |   | 49,870  |       
|                      |        |      |        |        |  |      |         |        |  |   |         |       
|                      |        | $    | 82,386 |        |  | $    | 117,918 |        |  | $ | 161,690 |       
|                      |        |      |        |        |  |      |         |        |  |   |         |       

No single customer accounted for more than 10% of
revenue in fiscal year 2003, 2002, or 2001.

(12) Sale of Patents

Effective February 9, 1996, the Company
entered into an EMC asset purchase agreement by which it sold to
EMC substantially all of the Companys existing patents,
patent applications and related rights. Pursuant to the EMC
asset purchase 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 asset purchase 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 asset purchase 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 asset
purchase agreement in five equal annual installments. The
Company received the first three annual installments in March
2000, March 2001 and March 2002. On April 1, 2003, the
Company entered into an amended asset purchase agreement with
EMC, under which EMC paid the Company $5,857, which satisfied
all obligations of EMC under the original agreement. Also, the
Company granted EMC immunity from suit for patent infringement
with respect to its patents. Included in net product revenue and
other income for fiscal years 2003, 2002 and 2001 are $2,733,
$3,840 and $3,410, and $0, $3,600 and $4,800, respectively,
related to this agreement. In addition, pursuant to the terms of
the EMC asset purchase 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 asset purchase 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 2003,
2002 and 2001 were $104, $836 and $429, respectively. At
April 5, 2003, there was $38 due from the subsidiaries of
Canopy.

On December 5, 2002, the Company terminated
its loan agreement with Canopy and paid the outstanding balance
of $1,685. The Canopy loan agreement was entered into on
June 27, 2002, allowing the Company, subject to certain
conditions, to borrow up to an aggregate of $7,000 at an
interest rate of nine percent per annum under a revolving line
of credit. The line was secured by a security interest in
substantially all of the Companys assets. Ralph J. Yarro,
III, one of the Companys directors, is also a director,
President and Chief Executive Officer of Canopy. Darcy G. Mott,
one of the Companys directors, is also a Vice

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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

President, Treasurer and Chief Financial Officer
of Canopy. Canopy beneficially owns approximately 44% of the
Companys outstanding Common Stock.

In November 2002, the Company entered into an
agreement with Comerica Bank for a line of credit of $7,000 at
an interest rate equal to the prime rate. The line of credit is
secured by a letter of credit that is guaranteed by Canopy.
Canopys guarantee was to mature on November 30, 2003,
but the Company received an extension on the letter of credit
for $7.0 million until June 30, 2004 (see note 7).

(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 2003, 2002 and 2001, the Company did not
contribute to the plan.

(15) Goodwill and Other
Intangibles

In July 2001, the FASB issued Statement 141,
Business Combinations, and Statement 142,
Goodwill and Other Intangible Assets. The Company
chose to early adopt the provisions of Statement 142 effective
April 8, 2001. The Company adopted Statement 141
immediately upon its release. Statement 141 requires that the
purchase method of accounting be used for all business
combinations initiated 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. Statement 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 142 and the
completion of the transitional impairment test in fiscal year
2002, the Company concluded that there was no impairment to
goodwill. Changes in assumptions and estimates included within
this analysis could produce significantly different results than
those identified above and those recorded in the consolidated
financial statements. The Company completed its annual
assessment for goodwill impairment in the fourth quarter of
fiscal year 2003 and no impairment was found to exist.

The following table shows, on a 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 5,   |         | April 6, |   | April 7,
|                                               |                                                | 2003       |         | 2002     |   | 2001    
|                                               |                                                |            |         |          |   |         
|Reported net loss                              |                                                | $          | (11,219 | )        |   | $        | (59,625 | )       |   | $ | (36,441 | )      
|Add back: goodwill amortization                |                                                |            |        |          |   |          |        |         |   |   | 2,693   |        
|                                               |                                                |            |         |          |   |          |         |         |   |   |         |        
|                                               | Adjusted net loss                              |            | $       | (11,219  | ) |          | $       | (59,625 | ) |   | $       | (33,748 | )
|                                               |                                                |            |         |          |   |          |         |         |   |   |         |        
|Per share information:                         |                                                |            |         |          |   |          |         |         |   |   |         |        
|Reported net loss per share, basic and diluted |                                                | $          | (0.34   | )        |   | $        | (1.83   | )       |   | $ | (1.13   | )      
|Add back: goodwill amortization per share      |                                                |            |        |          |   |          |        |         |   |   | 0.08    |        
|                                               |                                                |            |         |          |   |          |         |         |   |   |         |        
|                                               | Adjusted net loss per share, basic and diluted |            | $       | (0.34    | ) |          | $       | (1.83   | ) |   | $       | (1.05   | )
|                                               |                                                |            |         |          |   |          |         |         |   |   |         |        

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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(16) Quarterly Financial Data
(Unaudited)

Selected quarterly financial data for continuing
operations for fiscal years 2003 and 2002 are as follows:

|      |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |       |   | 
|----- | -------------- | ------- | - | ------ | ------- | ------ | - | ---------- | ------ | ---------- | - | ------- | ------- | - | - | ----- | - |  | - | ----- | - | 
|      |                |         |   |        |         |        |   | Net Income |        | Net Income
|      |                |         |   |        |         | Net    |   | (Loss)     |        | (Loss)    
|      |                | Total   |   | Gross  |         | Income |   | Per Share, |        | Per Share,
|      |                | Revenue |   | Profit |         | (Loss) |   | Basic      |        | Diluted   
|      |                |         |   |        |         |        |   |            |        |           
|2003: |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |      
|      | Fourth quarter |         | $ | 22,383 |         |        | $ | 7,778      |        |            | $ | 602     |         |   | $ | 0.02  |   |  | $ | 0.02  |  
|      | Third quarter  |         |   | 19,644 |         |        |   | 5,957      |        |            |   | (1,389  | )       |   |   | (0.04 | ) |  |   | (0.04 | )
|      | Second quarter |         |   | 22,320 |         |        |   | 7,025      |        |            |   | 133     |         |   |   |      |   |  |   |      |  
|      | First quarter  |         |   | 18,039 |         |        |   | 1,038      |        |            |   | (10,565 | )       |   |   | (0.32 | ) |  |   | (0.32 | )
|      |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |      
|      |                | Total   |   | $      | 82,386  |        |   | $          | 21,798 |            |   | $       | (11,219 | ) |   |       |   |  |   |       |   | 
|      |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |      
|2002: |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |      
|      | Fourth quarter |         | $ | 25,724 |         |        | $ | 7,093      |        |            | $ | (10,781 | )       |   | $ | (0.33 | ) |  | $ | (0.33 | )
|      | Third quarter  |         |   | 29,827 |         |        |   | 8,895      |        |            |   | (9,617  | )       |   |   | (0.30 | ) |  |   | (0.30 | )
|      | Second quarter |         |   | 32,547 |         |        |   | 10,345     |        |            |   | (2,740  | )       |   |   | (0.08 | ) |  |   | (0.08 | )
|      | First quarter  |         |   | 29,820 |         |        |   | 5,368      |        |            |   | (36,487 | )       |   |   | (1.13 | ) |  |   | (1.13 | )
|      |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |      
|      |                | Total   |   | $      | 117,918 |        |   | $          | 31,701 |            |   | $       | (59,625 | ) |   |       |   |  |   |       |   | 
|      |                |         |   |        |         |        |   |            |        |            |   |         |         |   |   |       |   |  |   |      

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 EMC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.

The Company recorded a net tax expense of $205
for fiscal year 2003, as compared to a net tax expense of
$24,598 in fiscal year 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.
Because of the continued decline in the market value of the
Companys holding of SCO 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 5, 2003.

In fiscal years 2003, 2002 and 2001, the Company
recognized $2,733, $3,840 and $3,410 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 asset
purchase agreement in five equal annual installments. As of
April 5, 2003, the Company had received all such
installments.

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 had operated historically without a
significant backlog of orders and, as a result, net product
revenue in any quarter was dependent upon orders booked and
products shipped during that quarter. As a result of the new EMC
relationship, however, the Company may operate with a more
significant backlog

65



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MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

since its order shipments will depend on the
availability of EMC products and both the Company and EMC have
concurrent quarter ends. Even though the orders shipped
determines the Companys revenue for any given quarter, its
order backlog may not be a reliable indicator of its future
revenue since its customers have the rights to cancel or delay
shipment of their orders. 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 operating results 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 it 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.

(17) Subsequent Events
(Unaudited)

In June 2003, the Company eliminated 18 full time
employees, 1, 16 and 1 from the domestic general and
administrative, global customer solutions and manufacturing
departments, respectively. The expected cash outflow from this
reduction is $90 related to severance, which will be paid during
the first quarter of fiscal year 2004. As a result, the Company
expects to realize quarterly cost savings of $324 from the
termination of the above-mentioned employees.

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##### Table of Contents



MTI TECHNOLOGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SCHEDULE II

MTI TECHNOLOGY CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

For the Fiscal Years Ended April 5, 2003,
April 6, 2002 and April 7, 2001


|                         |                                                   |                |   |                 |  |            |   |           |   |  |   |        |   |  |   |        | 
|------------------------ | ------------------------------------------------- | -------------- | - | --------------- |  | ---------- | - | --------- | - |  | - | ------ | - |  | - | ------ | 
|                         |                                                   | Balance        |   | Charged to      |  |            |   |          
|                         |                                                   | at             |   | (Recovery From) |  |            |   | Balance  
|                         |                                                   | Beginning      |   | Revenue, Costs  |  |            |   | at End   
|Description              |                                                   | of Period      |   | and Expenses(1) |  | Deductions |   | of Period
|                         |                                                   |                |   |                 |  |            |   |          
|                         |                                                   |               
|                         |                                                   | (In thousands)
|Year ended April 5, 2003 |                                                   |                |   |                 |  |            |   |           |   |  |   |        |   |  |   |       
|                         | Allowance for doubtful accounts and sales returns |                | $ | 3,406           |  |            | $ | (602      | ) |  | $ | (538   | ) |  | $ | 2,266  | 
|                         |                                                   |                |   |                 |  |            |   |           |   |  |   |        |   |  |   |       
|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 | 
|                         |                                                   |                |   |                 |  |            |   |           |   |  |   |        |   |  |   |       



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

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##### Table of Contents



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 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    |             |  | 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.                                                                                                                                                                                            
|        | 4.2    |             |  | Specimen of Amended Stock Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | *10.1  |             |  | 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).                                                                                                                                                                                                                                                                         
|        | *10.2  |             |  | Form of Indemnification Agreement for Executive
    Officers of the Company.                                                                                                                                                                                                                                                                                                                                                                                                   
|        | *10.3  |             |  | Form of Indemnification Agreement for Directors
    of the Company.                                                                                                                                                                                                                                                                                                                                                                                                            
|        | *10.4  |             |  | Form of Change of Control Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | *10.5  |             |  | 1987 Incentive Stock Option and Nonqualified
    Stock Option Plan of the Company, incorporated by reference to
    Exhibit 10.21 of the Companys Registration Statement
    on Form S-1 (No. 33-75180).                                                                                                                                                                                                                                                                      
|        | *10.6  |             |  | 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).                                                                                                                                                                                                                                                                   
|        | *10.7  |             |  | 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).                                                                                                                                                                                                                                                                
|        | *10.8  |             |  | 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).                                                                                                                                                                                                                                                                                                                    
|        | 10.9   |             |  | Form of Independent Contractor Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.10  |             |  | Form of Confidentiality And Nondisclosure
    Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | *10.11 |             |  | 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).                                                                                                                                                                                                                                                                            
|        | 10.12  |             |  | 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).                                                                                                                                                                                                                                                                              
|        | 10.13  |             |  | Asset Purchase Agreement, dated February 9,
    1995, between EMC Corporation and the Company, 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. (Portions of this exhibit are omitted
    and were filed separately with the Secretary of the SEC pursuant
    to the Companys application requesting confidential
    treatment under Rule 406 of the Securities Act.)
|        | 10.14  |             |  | Loan and Security Agreement dated
    November 13, 2002, between Comerica Bank  California
    and the Company, incorporated by reference to Exhibit 10.70
    of the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 5, 2002.                                                                                                                                                                                                             
|        | 10.15  |             |  | 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.                                                                                                                                                                                                                                                                              
|        | *10.16 |             |  | Severance Agreement dated as of July 15,
    1998, between Thomas P. Raimondi, Jr. and the Company,
    incorporated by reference to Exhibit 10.30 of the
    Companys Annual Report on Form 10-K, as amended on
    August 2, 1999, for the fiscal year ended April 3,
    1999.                                                                                                                                                                                             
|        | *10.17 |             |  | Severance and Release Agreement dated as of
    July 7, 2000, between Dale Boyd and the 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.                                                                                                                                                                                                                                   



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | *10.18 |             |  | Severance and Release Agreement dated as of
    April 29, 2001, between Guy M. Cheney and the 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.             
|        | *10.19 |             |  | Severance and Release Agreement dated as of
    September 22, 2000, between Daniel Brown and the 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.          
|        | *10.20 |             |  | Severance Agreement dated as of February 7,
    2001, between Keith Clark and the 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.                         
|        | *10.21 |             |  | Severance Agreement dated as of May 30,
    2001, between Kenneth Simpson and the 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.                         
|        | *10.22 |             |  | Severance Agreement dated as of May 31,
    2001, between Venki Venkataraman and the 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.                      
|        | *10.23 |             |  | 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 April 7, 2001.                                                              
|        | *10.24 |             |  | MTI Technology Corporation 2001 Non-Employee
    Director Option Program, incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 7, 2001.                                              
|        | *10.25 |             |  | 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 April 7, 2001.                                                      
|        | *10.26 |             |  | Severance and Release Agreement dated as of
    July 31, 2001, between Richard L. Ruskin and the 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.
|        | *10.27 |             |  | Consulting Agreement dated as of August 1,
    2001, between Richard L. Ruskin and the 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.          
|        | *10.28 |             |  | Severance and Release Agreement dated as of
    August 20, 2001, between Dale Wight and the 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.     
|        | *10.29 |             |  | Consulting Agreement dated as of August 1,
    2001, between Dale Wight and the 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.                 
|        | *10.30 |             |  | Severance and Release Agreement dated as of
    June 6, 2002, between Paul W. Emery II and the
    Company, incorporated by reference to Exhibit 10.61 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 6, 2002.     
|        | *10.31 |             |  | Severance and Release Agreement dated as of
    July 5, 2002, between Kenneth D. Simpson and the Company,
    incorporated by reference to Exhibit 10.62 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 6, 2002.   
|        | *10.32 |             |  | Indemnification Agreement dated as of
    June 24, 2002, between Mark A. Franzen and the Company,
    incorporated by reference to Exhibit 10.63 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 6, 2002.           
|        | *10.33 |             |  | Change of Control Agreement dated as of
    June 10, 2002, between Mark A. Franzen and the Company,
    incorporated by reference to Exhibit 10.64 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 6, 2002.         
|        | *10.34 |             |  | Change of Control Agreement dated as of
    November 30, 2001, between Todd Schaeffer and the Company,
    incorporated by reference to Exhibit 10.65 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 6, 2002.      
|        | *10.35 |             |  | Indemnification Agreement dated
    September 20, 2001, between Todd Schaeffer and the Company,
    incorporated by reference to Exhibit 10.67 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended October 5, 2002.          



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                      
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | *10.36 |             |  | Change of Control Agreement dated June 11,
    2002, between Kevin Clark and the Company, incorporated by
    reference to Exhibit 10.68 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    October 5, 2002.                                      
|        | *10.37 |             |  | Indemnification Agreement dated June 11,
    2002, between Kevin Clark and the Company, incorporated by
    reference to Exhibit 10.69 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    October 5, 2002.                                        
|        | 10.38  |             |  | 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.                                
|        | 10.39  |             |  | Indemnification Agreement dated July 19,
    2002, between Darcy Mott and the Company, incorporated by
    reference to Exhibit 10.66 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    October 5, 2002.                                         
|        | 10.40  |             |  | Pilot Center Master Services Agreement, dated
    April 1, 2001, between Center 7, Inc. and the Company,
    incorporated by reference to Exhibit 10.34 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended July 7, 2001.                          
|        | 10.41  |             |  | Warrant to Purchase 190,678 shares of Common
    Stock dated January 11, 2002, issued to Silicon Valley
    Bank, 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.                  
|        | 10.42  |             |  | 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.                         
|        | 10.43  |             |  | Severance Agreement dated July 26, 2000,
    between Gary Scott and the Company incorporated by reference to
    Exhibit 10.19 of the Companys Annual Report on
    Form 10-K, as amended on June 20, 2001, for the fiscal
    year ended April 7, 2001.                            
|        | 10.44  |             |  | Loan Agreement, entered into as of June 27,
    2002, by and between the Company 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.                                               
|        | 10.45  |             |  | Security Agreement, entered into as of
    June 27, 2002, by and between the Company 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.                                           
|        | 10.46  |             |  | Promissory Note, entered into as of June 27,
    2002, by and between the Company 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.                                              
|        | 10.47  |             |  | Termination Agreement, entered into as of
    June 25, 2002, by and between the Company 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.                                           
|        | 10.48  |             |  | Stock Purchase Agreement, entered into as of
    June 26, 2002, by and between the Company and SCO Group,
    (formerly, 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.         
|        | 10.49  |             |  | Microsoft OEM License Agreement For Embedded
    Server Products dated August 1, 2001, between Microsoft
    Licensing, Inc. and the Company, incorporated by reference to
    Exhibit 10.56 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 6, 2002.
|        | 10.50  |             |  | Development, License and Distribution Agreement
    dated September 10, 2001, between FalconStor, Inc. and the
    Company, incorporated by reference to Exhibit 10.57 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 6, 2002.                  
|        | 10.51  |             |  | Amendment No.1 to Development, License and
    Distribution Agreement dated September 27, 2001, between
    FalconStor, Inc. and the Company, incorporated by reference to
    Exhibit 10.58 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 6, 2002.
|        | 10.52  |             |  | Amendment No. 2 to Development, License and
    Distribution Agreement dated February 21, 2002, between
    FalconStor, Inc. and the Company, incorporated by reference to
    Exhibit 10.59 of the Companys Annual Report on
    Form 10-K for the fiscal year ended April 6, 2002.



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                             
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.53 |             |  | Finders Fee Agreement dated
    February 20, 2002, between WebUseNet Corporation and the
    Company, incorporated by reference to Exhibit 10.60 of the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 6, 2002.                                                                              
|        | 10.54 |             |  | Standard Sublease dated November 21, 2002,
    between Safeguard Business Systems and the Company, incorporated
    by reference to Exhibit 10.71 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended January 4, 2003.                                                                    
|        | 10.55 |             |  | Sublease dated December 9, 2002, between
    Iraqi Community Association and the Company, incorporated by
    reference to Exhibit 10.72 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    January 4, 2003.                                                                             
|        | 10.56 |             |  | Sublease dated December 12, 2002, between
    Copper Dragon Books and the Company, incorporated by reference
    to Exhibit 10.73 of the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended January 4,
    2003.                                                                                    
|        | 10.57 |             |  | Sublease dated December 13, 2002, between
    Arab American Guardian, LLC and the Company, incorporated by
    reference to Exhibit 10.74 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    January 4, 2003.                                                                            
|        | 10.58 |             |  | Sublease dated December 23, 2002, between
    Leadis Technology, Inc. and the Company, incorporated by
    reference to Exhibit 10.75 of the Companys Quarterly
    Report on Form 10-Q for the quarterly period ended
    January 4, 2003.                                                                                
|        | 10.59 |             |  | Lease Agreement dated December 2, 2002,
    between Quakerbridge Venture, LLC and the Company, incorporated
    by reference to Exhibit 10.76 of the Companys
    Quarterly Report on Form 10-Q for the quarterly period
    ended January 4, 2003.                                                                        
|        | 10.60 |             |  | Consent to Sublease and Agreement dated
    September 25, 2002, between WebCommerce Group, LLC and the
    Company, incorporated by reference to Exhibit 10.77 of the
    Companys Quarterly Report on Form 10-Q for the
    quarterly period ended January 4, 2003.                                                       
|        | 10.61 |             |  | Reseller Agreement effective as of March 31,
    2003, between EMC Corporation and the Company. (Portions of this
    exhibit are omitted and were filed separately with the Secretary
    of the SEC pursuant to the Companys application requesting
    confidential treatment under Rule 406 of the Securities
    Act.)
|        | 10.62 |             |  | Professional Services Provider Agreement dated
    October 22, 2002, between Brocade communications Systems,
    Inc. and the Company.                                                                                                                                                                                      
|        | 10.63 |             |  | Qualified Support Partner Program Agreement dated
    October 22, 2002, between Brocade communications Systems,
    Inc. and the Company.                                                                                                                                                                                   
|        | 10.64 |             |  | Veritas Solutions Provider Agreement dated
    January 9, 2003, between Veritas Software Global
    Corporation and the Company.                                                                                                                                                                                            
|        | 10.65 |             |  | Reseller Agreement dated December 23, 2002,
    between Legato System, Inc. and the Company.                                                                                                                                                                                                                                
|        | 10.66 |             |  | Technical Support Provider Agreement dated
    September 1, 2002, between Legato System, Inc. and the
    Company.                                                                                                                                                                                                          
|        | 10.67 |             |  | Consulting Services Agreement dated
    March 31, 2003, between Legato System, Inc. and the Company.                                                                                                                                                                                                                        
|        | 10.68 |             |  | Amendment to the Asset Purchase Agreement dated
    April 1, 2003, between EMC Corporation and the Company.                                                                                                                                                                                                                 
|        | 10.69 |             |  | Operating Agreement dated June 9, 1997,
    between Information Leasing Corporation and the Company.                                                                                                                                                                                                                        
|        | 10.70 |             |  | Amended Information Leasing Corp agreement dated
    October 31, 2002, between Information Leasing Corporation
    and the Company.                                                                                                                                                                                         
|        | 10.71 |             |  | Sublease Agreement dated March 30, 2003,
    between Family Life World Outreach and the Company.                                                                                                                                                                                                                            
|        | 10.72 |             |  | Amendment to the Sublease Agreement dated
    May 30, 2003, between Family Life World Outreach and the
    Company.                                                                                                                                                                                                         
|        | 10.73 |             |  | First Amendment to Loan and Security Agreement
    dated June 30, 2003, between Comerica Bank and the Company.                                                                                                                                                                                                              
|        | 10.74 |             |  | Irrevocable Standby Letter of Credit dated
    October 24, 2002, issued by Bank of America, N.A.                                                                                                                                                                                                                            



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##### Table of Contents



|        |      |             |  |                                                                                                                                                           
|------- | ---- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 21   |             |  | Subsidiaries of the Company.                                                                                                                              
|        | 23   |             |  | Independent Auditors Consent.                                                                                                                            
|        | 24   |             |  | Power of Attorney (included on the signature page
    hereto).                                                                                            
|        | 99.1 |             |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, As Adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.
|        | 99.2 |             |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, As Adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.



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