MTI Technology 10Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended July 1, 2006


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				(I.R.S. Employer
incorporation or organization)				Identification No.)

17595 Cartwright Road
Irvine, California 92614
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (949) 251-1101

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. YESþ NOo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

The number of shares outstanding of the Registrant’s common stock, $.001 par value, as of August 9, 2006 was 38,421,841.

MTI TECHNOLOGY CORPORATION

INDEX


			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets as of July 1, 2006 (unaudited) and April 1, 2006		3

		Condensed Consolidated Statements of Operations for the Three Months Ended July 1, 2006 and July 2, 2005 (unaudited)		4

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 1, 2006 and July 2, 2005 (unaudited)		5

		Notes to Condensed Consolidated Financial Statements (unaudited)		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		27

	Item 4.	Controls and Procedures		27

PART II.	OTHER INFORMATION

	Item 1A.	Risk Factors		27

	Item 2.	Unregistered Sales of Equity Securities		35

	Item 6.	Exhibits		36

SIGNATURES				37

EXHIBIT INDEX				38
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I
FINANCIAL STATEMENTS

ITEM 1 – FINANCIAL STATEMENTS

MTI TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE DATA)


	July 1,			April 1,
	2006			2006
	(UNAUDITED)
ASSETS

Current assets:
Cash and cash equivalents	$	21,626		$	21,660
Accounts receivable, less allowance for doubtful accounts and sales returns of $390 and $514 at July 1, 2006 and April 1, 2006, respectively		38,459			37,803
Inventories, net		6,928			10,466
Prepaid expenses and other receivables		8,719			8,712

Total current assets		75,732			78,641
Property, plant and equipment, net		662			555
Goodwill, net		5,184			5,184
Other assets		482			242

Total assets	$	82,060		$	84,622


LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:
Line of credit	$	5,167		$	5,167
Accounts payable		35,064			36,952
Accrued liabilities		7,809			7,423
Accrued restructuring charges		637			847
Deferred revenue, current		11,716			11,820

Total current liabilities		60,393			62,209
Accrued preferred stock dividends		3,616			2,892
Deferred revenue, noncurrent		3,703			4,305

Total liabilities		67,712			69,406


Series A redeemable convertible preferred stock, 567 shares issued and outstanding at July 1, 2006 and April 1, 2006 net of discount of $6,201 and $6,584 at July 1, 2006 and April 1, 2006, respectively		8,799			8,416

Series B redeemable convertible preferred stock, 1,582 shares issued and outstanding at July 1, 2006 and April 1, 2006, net of discount of $9,192 and $9,570 at July 1, 2006 and April 1, 2006, respectively		10,808			10,430

Stockholders’ deficit:
Preferred stock, $.001 par value; 5,000 shares authorized; issued and outstanding 2,149 shares at July 1, 2006 and April 1, 2006, included in redeemable convertible preferred stock		—			—

Common stock, $.001 par value; 80,000 shares authorized; issued and outstanding 36,062 and 36,024 shares at July 1, 2006 and April 1, 2006, respectively		36			36

Additional paid-in capital		155,786			155,039
Accumulated deficit		(158,132	)		(155,779	)
Accumulated other comprehensive loss		(2,949	)		(2,926	)

Total stockholders’ deficit		(5,259	)		(3,630	)

	$	82,060		$	84,622

See accompanying notes to condensed consolidated financial statements.

MTI TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)


	Three Months Ended
	July 1,			July 2,
	2006			2005
Net product revenue	$	33,170		$	29,204
Service revenue		9,474			10,127


Total revenue		42,644			39,331


Product cost of revenue		27,036			23,481
Service cost of revenue		7,658			7,772


Total cost of revenue		34,694			31,253


Gross profit		7,950			8,078


Operating expenses:
Selling, general and administrative		9,144			9,274
Restructuring charges		—			894


Total operating expenses		9,144			10,168


Operating loss		(1,194	)		(2,090	)

Interest and other income (expense), net		48			(63	)
Gain (loss) on foreign currency transactions		313			(840	)


Loss before income tax expense		(833	)		(2,993	)
Income tax expense		36			10


Net loss		(869	)		(3,003	)

Amortization of preferred stock discount		(761	)		(320	)
Dividend on preferred stock		(724	)		(300	)


Net loss applicable to common shareholders	$	(2,354	)	$	(3,623	)


Net loss per share applicable to common shareholders:
Basic and diluted	$	(0.07	)	$	(0.10	)


Weighted average shares used in per share computations:
Basic and diluted		36,048			35,210

See accompanying notes to condensed consolidated financial statements.

MTI TECHNOLOGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended
	July 1,			July 2,
	2006			2005
Cash flows from operating activities:
Net loss	$	(869	)	$	(3,003	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		72			211
Provision for losses on accounts receivable, net		2			5
Provision for inventory obsolescence		128			128
Restructuring charges		—			894
Stock-based compensation expense		613			62
Changes in assets and liabilities:
Accounts receivable		(683	)		(443	)
Inventories		3,409			(126	)
Prepaid expenses, other receivables and other assets		(257	)		399
Accounts payable		(1,904	)		2,196
Deferred revenue		(709	)		(1,556	)
Accrued and other liabilities		156			(3,072	)

Net cash used in operating activities		(42	)		(4,305	)


Cash flows from investing activities:
Capital expenditures for property, plant and equipment		(176	)		(5	)

Net cash used in investing activities		(176	)		(5	)


Cash flows from financing activities:
Proceeds from exercise of stock options		11			240
Proceeds from issuance of preferred stock, net		—			(87	)
Payment of capital lease obligations		—			(51	)

Net cash provided by financing activities		11			102


Effect of exchange rate changes on cash		173			(182	)

Net decrease in cash and cash equivalents		(34	)		(4,390	)
Cash and cash equivalents at beginning of period		21,660			12,191

Cash and cash equivalents at end of period	$	21,626		$	7,801


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	103		$	56
Income taxes		56			31
Non-cash investing and financing activities:
Accrued dividends on preferred stock	$	724		$	300

See accompanying notes to condensed consolidated financial statements.

MTI TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Company

MTI Technology Corporation (MTI or the “Company”) is a multinational total information storage infrastructure solutions provider that offers a wide range of storage systems, software, services and solutions that are designed to help organizations get more value from their information and maximize their information technology (IT) assets. In March 2003, MTI became a reseller and service provider of EMC Automated Networked Storage™ systems and software pursuant to a reseller agreement with EMC Corporation, a world leader in information storage systems software, networks and services. Although it focuses primarily on EMC products, the Company also supports and services customers that continue to use MTI-branded RAID controller technology and partnered independent storage technology. The terms of the EMC reseller agreement do not allow the Company to sell data storage hardware that competes with EMC products. As an EMC reseller, MTI combines its 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, focusing on the CLARiiON^® family of systems. MTI designs and implements solutions that incorporate a broad array of third party products to meet customer requirements in the areas of storage area networks, network attached storage, high-availability systems for enhanced business continuance, data protection systems incorporating enhanced backup and recovery, Information Lifecycle Management, archiving and tape automation. The Company also enhances the value of its storage solutions through its 24 hour, seven days per week support and service infrastructure, which includes an international network of on-site field engineers, a storage solution laboratory, and global technical support centers. The sale of EMC products accounted for 90% and 86% of total product revenue for the three months ended July 1, 2006 and July 2, 2005, respectively.

Subsequent to the first quarter of fiscal 2007, MTI completed an acquisition of Collective Technologies, LLC, a provider of enterprise-class IT infrastructure services and solutions (see Note 11).

Overview

The interim condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such SEC rules and regulations; nevertheless, the management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2006. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position of the Company as of July 1, 2006 and the results of operations and cash flows for the three-month periods ended July 1, 2006 and July 2, 2005. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.

Certain reclassifications have been made to the fiscal year 2006 financial statements to conform with the fiscal year 2007 presentation.

References to dollar amounts in this financial statement section, except per share data, are in thousands unless otherwise specified.

Revenue Recognition

The Company derives revenue from sales of products and services. The following summarizes the major terms of the contractual relationships with customers and the manner in which the Company accounts for sales transactions.

Hardware revenue

Hardware revenue consists of the sale of disk and tape based hardware. The Company recognizes revenue pursuant to Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21) and Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104). In accordance with these revenue recognition guidelines, revenue is recognized for a unit of accounting when all of the following criteria are met:

	•		persuasive evidence of an arrangement exists;

	•		delivery has occurred;

	•		fee is fixed or determinable; and

•

collectability is reasonably assured.

Generally, product sales are not contingent upon customer testing, approval and/or acceptance. However, if sales require customer acceptance, revenue is recognized upon customer acceptance. Product sales with post-delivery obligations generally relate to professional services, including installation services or other projects. Professional services revenue is not recognized until the services have been performed, while product revenue is recognized at time of shipment as the services do not affect the functionality of the delivered items. In sales transactions directly to an end user, generally there are no acceptance clauses. However, the Company also sells to leasing companies who in turn lease the product to their lessee, the end user. For this type of sale, generally there are lessee acceptance criteria in the purchase order or contract. For these transactions, revenue is deferred until written acceptance is received from the lessee. Credit terms to customers typically range from net 30 to net 60 days after shipment.

Product returns are estimated in accordance with Statement of Financial Accounting Standards No. (Statement) 48, “Revenue Recognition When Right of Return Exists.” Customers have a limited right of return which allows them to return non-conforming products. Accordingly, reserves for estimated future returns are provided in the period of sale based on contractual terms and historical data and are recorded as a reduction of revenue. The Company also ensures that the other criteria in Statement 48 have been met prior to recognition of revenue: the price is fixed or determinable; the customer is obligated to pay and there are no contingencies surrounding the obligation or the payment; the customer’s obligation would not change in the event of theft or damage to the product; the customer has economic substance; the amount of returns can be reasonably estimated; and we do not have significant obligations for future performance in order to bring about resale of the product by the customer.

Software revenue

The Company sells various software products ranging from software that is embedded in the hardware to add-on software that can be sold on a stand-alone basis. Software that is embedded in the hardware consists of tools that provide a user-interface and assist the customer in the configuration of storage disks as well as provide performance monitoring and troubleshooting features. This software cannot be sold on a stand-alone basis and is not a significant part of sales or marketing efforts. This embedded software is considered incidental to the hardware and is not recognized as a separate unit of accounting apart from the hardware. If a maintenance contract is sold related to this software, it is accounted for in accordance with EITF 00-21, whereby the total arrangement revenue is first allocated to the maintenance contract based on fair value and the remaining arrangement revenue is allocated to the hardware elements in the transaction. Revenue from maintenance contracts is recognized ratably over the term of the contract.

The Company also sells application software that is sold as add-on software to existing hardware configurations. This software is generally loaded onto a customers’ host CPU and provides additional functionality to the storage environment, such as assisting in data back-up, data migration and mirroring data to remote locations. Based on the factors described in footnote two of AICPA Statement of Position (SOP) 97-2 “Software Revenue Recognition,” the Company considers this type of software to be more-than-incidental to hardware components in an arrangement. This assessment is based on the fact that the software can be sold on a stand-alone basis and that maintenance contracts are generally sold with the software. Software products that are considered more-than-incidental are treated as a separate unit of accounting apart from the hardware and the related software product revenue is recognized upon delivery to the customer. The Company accounts for software that is more-than-incidental in accordance with SOP 97-2, as amended by SOP 98-9, whereby the total arrangement revenue is first allocated to the software maintenance contract based on vendor specific objective evidence (VSOE) of fair value and is recognized ratably over the term of the contract. VSOE is established based on stand-alone renewal rates. The remaining revenue from the sale of software products is recognized at the time the software is delivered to the customer, provided all the revenue recognition criteria noted above have been met, except collectability must be deemed probable under SOP 97-2 versus reasonably assured under SAB 104.

In transactions where the software is considered more-than-incidental to the hardware in the arrangement, the Company also considers EITF 03-05, “Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software” (EITF 03-05). Per EITF 03-05, if the software is considered not essential to the functionality of the hardware, then the hardware is not considered “software related” and is excluded from the scope of SOP 97-2. All software sold by MTI is not essential to the functionality of the hardware. The software adds additional features and functionality to the hardware and allows the customer to perform additional tasks in their storage environment. The hardware is not dependent upon the software to function and the customer can fully utilize the hardware product without any of the software products. Therefore, in multiple-element arrangements containing hardware and software, the hardware elements are excluded from SOP 97-2 and are accounted for under the residual method of accounting per EITF 00-21 and SAB 104.

Service revenue

Service revenue is generated from the sale of professional services, maintenance contracts and time and materials arrangements. The following describes how the Company accounts for service transactions, provided all the other revenue recognition criteria noted above have been met.

Generally, professional services revenue, which includes installation, training, consulting and engineering services, is recognized upon delivery of the services. If the professional service project includes independent milestones, revenue is recognized as milestones are met and upon acceptance from the customer. Maintenance revenue is generated from the sale of hardware and software maintenance contracts. These contracts generally range from one to three years. Maintenance revenue is recorded as deferred revenue and is recognized as revenue ratably over the term of the related agreement.

Multiple element arrangements

The Company considers sales contracts that include a combination of systems, software or services to be multiple element arrangements. Revenue related to multiple element arrangements is separated in accordance with EITF 00-21 and SOP 97-2. If an arrangement includes undelivered elements, the residual method is used, whereby the fair value of the undelivered elements is deferred and the residual revenue is allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined by examining renewed service contracts and based upon the price charged when the element is sold separately or, for transactions accounted for under EITF 00-21, prices provided by vendors if sufficient stand-alone sales information is not available. Undelivered elements typically include installation, training, warranty, maintenance and professional services.

Other

Certain sales transactions are initiated by EMC and jointly negotiated and closed by EMC and MTI’s sales force. The Company recognizes revenue related to these transactions on a gross basis, in accordance with EITF 99-19, because it bears the risk of returns and collectability of the full accounts receivable. Product revenue for the delivered items is recorded at residual value upon pickup by a common carrier for Free Carrier (FCA) origin shipments. For FCA destination shipments, product revenue is recorded upon delivery to the customer. If the Company subcontracts the undelivered items such as maintenance and professional services to EMC or other third parties, it records the costs of those items as deferred costs and amortizes the costs using the straight-line method over the life of the contract. The Company defers the revenue for the undelivered items at fair value based upon list prices with EMC according to EITF 00-21. At times, MTI’s customers prefer to enter into service agreements directly with EMC. In such instances, the Company may assign the obligation to perform services to EMC, or other third parties, and therefore does not record revenue nor defer any costs related to the services.

In light of the recent acquisition of Collective and the Company’s growing emphasis on integration and consulting services, the Company is currently evaluating the financial statement presentation of product revenue on a gross versus net margin basis.

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

Shipping

Products are generally drop-shipped directly from suppliers to MTI’s customers. Upon the supplier’s delivery to a carrier, title and risk of loss pass to the company. Revenue is recognized at the time of shipment when shipping terms are Free Carrier (FCA) shipping point as legal title and risk of loss to the product pass to the customer. For FCA destination point shipments, revenue is recorded upon delivery to the customer.

Accounting for stock-based compensation

(2) RESTRUCTURING

The Company implemented restructuring programs to reduce its cost structure as a result of a shift in focus from developing technology to becoming a product integrator and reseller as well as to simplify the European operating structure. The activity for each restructuring plan is described below:

2005 Restructuring Program

In the fourth quarter of fiscal 2005, the Company implemented plans to restructure its European operations. This plan was initiated primarily in order to reduce operating costs and reduce duplication of processes throughout the European operations. The 2005 restructuring plan primarily involved the closure of the Dublin, Ireland facility and the consolidation of European finance functions within the Wiesbaden, Germany facility.

The activity for the 2005 restructuring plan for the three months ended July 1, 2006 is presented below:

Three Months Ended July 1,2006


	Beginning		Additional					Ending
Category	Balance		Charges		Utilization			Balance
Facilities actions	$	603	$	—	$	—		$	603
Workforce reduction		29		—		(2	)		27


Total	$	632	$	—	$	(2	)	$	630

The utilization of the reserve for the three-months ended July 1, 2006 is net of a $30 adjustment for foreign currency translation.

2002 Restructuring Plan

Due to a reduction in volume as well as a shift in focus from developing technology to becoming a product integrator, the Company initiated a restructuring plan in the fourth quarter of fiscal year 2002. It was determined that certain underutilized facilities would be exited and a significant number of positions, primarily in sales, marketing, research and development and manufacturing would be terminated. It was also determined that the Company’s manufacturing and integration facility would be consolidated in Dublin, Ireland. The majority of the restructuring actions were completed by the first quarter of fiscal year 2003.

The activity for the 2002 restructuring plan for the three months ended July 1, 2006 is presented below:

Three Months Ended July 1,2006


	Beginning		Additional					Ending
Category	Balance		Charges		Utilization			Balance
Facilities actions	$	215	$	—	$	(208	)	$	7

(3) INVENTORIES

Inventories consist of the following:


	July 1,		April 1,
	2006		2006
	(UNAUDITED)
Finished goods	$	6,141	$	9,611
Service spares and components		787		855


	$	6,928	$	10,466

The Company recorded an inventory provision of $128 in both the first quarter of fiscal 2007 and 2006, primarily related to spare parts inventory. The spare parts inventory was written down due to the continued decline in our legacy product installed base, and related maintenance renewals, which led to a revised estimate of the carrying value of certain spare parts.

(4) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Prepaid expenses and other receivables are summarized as follows:


	July 1,		April 1,
	2006		2006
	(UNAUDITED)
Prepaid maintenance contracts	$	6,076	$	6,312
Other		2,643		2,400


	$	8,719	$	8,712

Accrued liabilities are summarized as follows:


	July 1,		April 1,
	2006		2006
	(UNAUDITED)
Salaries and benefits	$	2,968	$	2,661
Sales tax		1,995		2,236
Customer deposits		553		519
Commissions		683		684
Warranty costs		687		662
Other		923		661


	$	7,809	$	7,423

Product warranties

Generally, the Company sells EMC hardware products with a two or three year warranty. For legacy hardware products, the Company provided its customers with a warranty against defects for one year domestically and for two years internationally. The Company maintains a warranty accrual for the estimated future warranty obligation based upon the relationship between historical and anticipated costs and sales volumes. Upon expiration of the warranty, the Company may sell extended maintenance contracts to its customers. The Company records revenue from equipment maintenance contracts as deferred revenue when billed and it recognizes this revenue as earned over the period in which the services are provided, primarily straight-line over the term of the contract.

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


	Three Months
	Ended
	July 1, 2006
Balance at beginning of period	$	662
Current period warranty charges		134
Current period utilization		(109	)

	$	687

(5) DEBT

Credit Agreement and Lines of Credit

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 The Canopy Group, Inc. (“Canopy”). On June 20, 2006, the Company renewed the Comerica line of credit through November 30, 2006 and Canopy renewed its letter of credit guarantee through December 31, 2006. Until December 30, 2004, as discussed below, the Canopy letter of credit was secured by substantially all the assets of the Company. As of July 1, 2006, there was $5,167 and $390 in borrowings and letters of credit outstanding, respectively, under the Comerica Loan Agreement and $1,443 was available for borrowing.

On December 30, 2004, the Company entered into a security agreement with EMC whereby the Company granted EMC a security interest in certain of its assets to secure the Company’s obligations to EMC under its existing supply agreements. The assets pledged as collateral consisted primarily of the Company’s accounts receivable generated from the sale of EMC products and services, related inventory and the proceeds of such accounts receivable and inventory. In exchange for this security interest, EMC increased the Company’s purchasing credit limit to $20,000. On June 7, 2006, due to the Company’s improved financial position and established payment history, EMC terminated the security agreement and released its security interest in all of the Company’s assets. On a go-forward basis, the Company’s purchasing credit limit with EMC will be determined based on the needs of the business and its financial position. The Company’s payment terms with EMC will remain at net 45 days from shipment.

The Company had previously granted a security interest in all of its personal property assets to Canopy as security for the Company’s obligations to Canopy in connection with Canopy’s guaranty of the Company’s indebtedness to Comerica Bank. To enable the Company to pledge the collateral described above to EMC, Canopy delivered to the Company a waiver and consent releasing Canopy’s security interest in the collateral to be pledged to EMC and consenting to the transaction. As part of the waiver and consent, the Company agreed not to increase its indebtedness to Comerica Bank above its then-current outstanding balance of $5,500, and to make a principal repayment to Comerica equal to $1,833 on each of February 15, 2005, May 15, 2005 and August 15, 2005 in order to eliminate the Company’s outstanding indebtedness to Comerica. In connection with the renewal of the Comerica agreement noted above, Canopy amended its waiver and consent which terminated the requirement to pay-down the indebtedness to Comerica and extended their letter of credit guarantee through December

31, 2006. In exchange for this waiver and consent amendment, the Company issued a warrant to purchase 125,000 shares of its common stock at an exercise price of $1.23 per share, the market price on the date of grant. The warrant is exercisable immediately and has a five year life. The fair value of the warrant was estimated using the Black-Scholes model to be approximately $100. This amount will be amortized into expense over the six-month term of the guarantee.

The Comerica loan agreement contains negative covenants placing restrictions on the 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. Comerica has issued a consent related to the acquisition of Collective Technologies discussed in Note 11. The Company is currently in compliance with all of the terms of the Comerica loan agreement and believes that it will remain in compliance. Upon an event of default, Comerica may terminate the Comerica loan agreement and declare all amounts outstanding immediately due and payable.

(6) BUSINESS SEGMENT AND INTERNATIONAL INFORMATION

The Company is a total information storage infrastructure solutions provider providing storage solutions for the mid-range enterprise market and has one reportable business segment.The Company has two operating segments which are identified by geographic regions, United States and Europe. These operating segments are aggregated into one reporting segment as they have similar economic characteristics. 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:


	Three Months Ended
	July 1,			July 2,
	2006			2005
Revenue:
United States	$	25,287		$	23,390
Germany		5,777			6,157
France		7,742			6,423
United Kingdom		3,838			3,361

Total revenue	$	42,644		$	39,331


Operating income(loss):
United States	$	(1,534	)	$	(796	)
Germany		(29	)		(74	)
France		155			(575	)
United Kingdom		214			(645	)

Total operating loss	$	(1,194	)	$	(2,090	)


	July 1,		April 1,
	2006		2006
Identifiable assets:
United States	$	48,178	$	51,297
Germany		8,137		7,722
France		14,245		13,460
United Kingdom		6,316		6,959
Tangible assets		76,876		79,438
Goodwill – United States		3,059		3,059
Goodwill – Europe		2,125		2,125

Total assets	$	82,060	$	84,622

No single customer accounted for more than 10% of revenue for the three-months ended July 1, 2006 or July 2, 2005.

(7) COMPREHENSIVE LOSS

The components of comprehensive loss are as follows:


	Three Months Ended
	July 1,			July 2,
	2006			2005
Net loss	$	(869	)	$	(3,003	)
Foreign currency translation adjustment		(23	)		542

Total comprehensive loss	$	(892	)	$	(2,461	)

(8) NET LOSS PER SHARE

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


	Three Months Ended
	July 1,			July 2,
	2006			2005
Numerator:
Net loss	$	(869	)	$	(3,003	)
Amortization of preferred stock discount		(761	)		(320	)
Dividend on preferred stock		(724	)		(300	)

Net loss applicable to common shareholders	$	(2,354	)	$	(3,623	)


Denominator:
Basic and diluted weighted-average shares outstanding		36,048			35,210


Net loss per share applicable to common shareholders, basic and diluted	$	(0.07	)	$	(0.10	)

Options and warrants to purchase 17,602,000 and 13,198,000 shares of common stock were outstanding at July 1, 2006 and July 2, 2005, respectively, but were not included in the computation of diluted net loss per share because their effect would be anti-dilutive. The common share equivalents related to the convertible preferred stock were not included in the computation of diluted earnings per share as the effect would be anti-dilutive for all periods presented.

(9) STOCK-BASED COMPENSATION & STOCKHOLDERS’ EQUITY

Adoption of Statement 123R

Effective April 2, 2006, the Company adopted Statement 123R, “Share Based Payment,” which revises Statement 123, “Accounting for Stock Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”Statement 123R requires that the fair value of stock-based employee compensation, including stock options and stock awards, be recognized as expense as the related services are performed. The Company previously accounted for its stock-based compensation using the intrinsic value method as defined in APB Opinion No. 25 and accordingly, prior to April 2, 2006, compensation expense for stock options was measured as the excess, if any, of the fair value of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the stock. The Company used the modified prospective transition method to adopt the provisions of Statement 123R. Under this method, unvested awards at the date of adoption are amortized based on the grant date fair value estimated in accordance with the original provisions of Statement 123. The modified prospective transition method does not allow for the restatement of results from prior periods, and as a result, year over year comparison of margins and operating expenses will be impacted by this non-cash expense for all periods of fiscal 2007. Deferred compensation which related to prior awards has been eliminated against additional paid-in capital as required by Statement 123R. Statement 123R also changes the reporting of tax-related amounts within the statement of cash flows. Benefits of expected tax deductions in excess of recognized compensation costs (“windfall benefits”) are required to be recorded as a financing activity. The Company had no realized windfall tax benefit amounts for the quarter ended July 1, 2006.

Under Statement 123, the Company previously followed an accounting policy of recognizing forfeitures as they occurred. Statement 123R requires that compensation cost be recorded only for the awards that are expected to be earned and therefore an estimate of expected forfeitures must be used. As part of the implementation of Statement 123R, the Company has estimated expected forfeitures to occur at a rate of 13%. This estimate is based upon its historical experience and expectations for the future. Total stock-based compensation expense has been recorded net of expected forfeitures.

As a result of the adoption of Statement 123R, the Company recorded $613 in stock-based compensation expense for the three months ended July 1, 2006, with no net tax benefit recognized. This reduced basic and diluted loss per share by $0.02 per share. Included in the $613 is $57 related to expense from restricted stock awards which was not impacted by the adoption of Statement 123R. The three months ended July 2, 2005 contained equity compensation expense of $62 related exclusively to expense from restricted stock awards. The following table presents the stock-based compensation expense included in our cost of revenue and selling, general and administrative expenses for the three months ended July 1, 2006 and July 2, 2005 (in thousands):


	Three Months		Three Months
	Ended July 1,		Ended July 2,
	2006		2005
Service cost of revenue	$	49	$	—
Selling, general and administrative		564		62

Total stock-based compensation expense	$	613	$	62

Prior to adopting Statement 123R, the Company recorded compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to APB Opinion No. 25. Had compensation expense for employee stock options been determined based on the fair value of the options on the date of grant, using the assumptions discussed below for the three months ended July 2, 2005, the Company’s net loss and loss per share would have been as follows (in thousands, except per share data):


	Three Months
	Ended July 2,
	2005
Net loss applicable to common shareholders, as reported	$	(3,623	)
Add: Stock-based compensation expense included in reported net loss, net of related tax effects		62
Deduct: Stock-based compensation expense determined under the fair value method for all awards, net of related tax effects		(686	)

Pro forma net loss applicable to common shareholders	$	(4,247	)


Net loss per share:
Basic and diluted, as reported	$	(0.10	)


Basic and diluted, pro forma	$	(0.12	)

The fair value of each option granted during the three months ended July 1, 2006 and July 2, 2005 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Three Months Ended			Three Months Ended
	July 1, 2006			July 2, 2005
Risk free interest rate		5.14	%		3.84	%
Expected volatility		75.0	%		90.0	%
Expected life in years		5.8			5.0
Dividend yield	None			None
Weighted-average fair value at grant date	$	0.82		$	1.20

The risk-free interest rate is based on the currently available rate on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option converted into a continuously compounded rate. The expected volatility of stock options under Statement 123R is based on an average of historical volatility of the Company for the previous three fiscal years. The Company believes that this term most accurately reflects the future volatility of the Company’s common shares. The previous three year period was used as it reflects the time that the Company has been a reseller and system integrator, which is a significantly different business model than prior to that time as an OEM manufacturer. The expected life of the Company’s options used in the valuation of options granted for the three months ended July 1, 2006 was based on the use of the simplified method as described in the SEC’s Staff Accounting Bulletin No. 107. The simplified method was used due to the lack of available data to reliably estimate future exercise patterns, as the Company excluded exercise patterns prior to becoming a reseller and system integrator. Prior to the adoption of Statement 123R, the expected life of the Company’s options was based on historical exercise patterns. The dividend yield reflects the fact that the Company has never declared or paid any cash dividends on its common shares and does not currently anticipate paying cash dividends in the future.

Equity Plans

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 Incentive Plan, at prices equal to the fair market value of the Company’s common stock at date of grant.

The Company’s stockholders approved the 2001 Stock Incentive Plan (SIP), the 2001 Non-Employee Director Option Program (Program) and the 2001 Employee Stock Purchase Plan (ESPP) 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 as of July 1, 2006, 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 by 2,500,000 shares. Under the Amended SIP, the maximum aggregate number of shares of Common Stock available for grant shall be 6,500,000 shares. A maximum of 1,200,000, 450,000 and 9,477,000 shares are authorized for issuance under the ESPP, the Program and the SIP, respectively. The Program functions as part of the SIP.

In connection with the acquisition of Collective Technologies, LLC, on June 2, 2006, the Company adopted the 2006 Stock Incentive Plan (CT), pursuant to which the options and restricted stock to be granted to employees acquired from Collective will be granted. As of July 1, 2006, there were 2,651,400 shares available for issuance under this plan.

At various times from March 2005 through March 2006, the Company issued options to purchase shares of its common stock under the 2001 Stock Incentive Plan to directors, employees and consultants, with exercise prices ranging from a minimum of $1.44 per share to a maximum of $2.45 per share, for the purpose of providing incentive compensation to those directors, employees and consultants. The aggregate exercise price of the issued options is approximately $1.2 million. The options were issued in accordance with applicable federal securities laws and registered on Form S-8. The Company believed in good faith that it could rely on a prior qualification order issued pursuant to Section 25111 of the California Corporations Code (the “Code”) or an exemption from the qualification requirements thereof; however, the options may not in fact have been issued in compliance with the provisions of Section 25110 of the Code. In order to comply with the securities laws of California, where the Company has its headquarters, the Company intends to apply for approval of the terms of a repurchase offer. Under the terms proposed to be submitted to the California Department of Corporations, the Company would offer to repurchase any outstanding options issued during such period for a cash price equal to 20% of the aggregate exercise price of the option, plus interest at an annual rate of 7%. There is no assurance that the terms of the repurchase offer will be approved, and the Company could be required to offer a higher repurchase price or to extend the offer to a greater number of persons. During this period, all of the non-employee directors received the grants described above. All of the non-employee directors have executed releases as to any claims they might have under the repurchase offer and waived any rights thereunder.

Non-Employee Directors Option Program

On July 11, 2001, the Company’s shareholders approved the 2001 Non-Employee Directors Option Program which functions as part of the SIP described above. Upon approval of the Program, the 1994 Director’s Non-Qualified Stock Option Plan was terminated, although options currently outstanding under the prior plan shall remain in effect in accordance with the respective terms of such plan. Under the Program, each non-employee director first elected to the Board of Directors following the effective date of the SIP will automatically be granted an option to acquire 50,000 shares of Common Stock at an exercise price per share equal to the fair market value of Common Stock on the date of grant. These options will vest and become exercisable in three equal installments on each anniversary of the grant date. Upon the date of each annual stockholders’ meeting, each non-employee director who has been a member of the Board of Directors for at least 11 months prior to the date of the stockholders’ meeting will receive an automatic grant of options to acquire 25,000 shares of the Company’s Common Stock at an exercise price equal to the fair market value of the Company’s Common Stock at the date of grant. These options will vest and become exercisable in three equal installments on each anniversary of the grant date. As of July 1, 2006, there were options to purchase 525,000 shares outstanding under this program.

Options granted typically vest over a period of three years from the date of grant. At July 1, 2006 the number of options exercisable was 7,570,155 and the weighted-average exercise price of those options was $4.12. As of July 1, 2006 there were 1,167,683 shares available for grant.

The Company has recorded approximately $546 of compensation expense relative to stock options for the three months ended July 1, 2006 in accordance with Statement 123R. As of July 1, 2006, there was approximately $2,100 of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.78 years. The following table summarizes our option activity under all equity plans for the three months ended July 1, 2006 as follows (shares in thousands):


				Wtd. Avg.		Wtd. Avg.		Aggregate
	Options			Exercise		Contractual		Intrinsic
	Outstanding			Price		Term (years)		Value
Balance at April 1, 2006		9,608,910		$	3.70

Granted		379,500			1.27
Exercised		(20,800	)		0.51
Forfeited/Expired		(255,000	)		2.61


Balance at July 1, 2006		9,712,610			3.64		6.4	$	947


Options exercisable at July 1, 2006		7,570,155		$	4.12		5.8	$	944

The total intrinsic value of options exercised during the three months ended July 1, 2006 was $17.

Employee Stock Purchase Plan

On July 11, 2001, the Company’s shareholders approved the ESPP. A maximum of 1,200,000 shares of common stock is authorized for issuance under the ESPP. Under the ESPP, all employees of the Company, and its designated parents or subsidiaries, whose customary employment is more than five months in any calendar year and more than 20 hours per week are eligible to participate. The ESPP was implemented through overlapping offer periods of 24 months duration commencing each January 1 and July 1. Purchase periods generally commence on the first day of each offer period and terminate

on the next following June 30 or December 31 respectively. The price per share at which shares of common stock are to be purchased under the ESPP 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. There were no shares purchased under the ESPP during the three months ended July 1, 2006. The ESPP plan is considered compensatory under Statement 123R. The Company recorded $10 in compensation expense for the three months ended July 1, 2006 related to the ESPP. The fair value of the ESPP shares were estimated using the Black-Scholes model with the following assumptions calculated as of the beginning of the offering period (January 1, 2006): Risk free interest rate – 4.37%; Expected term – six months; Volatility: 49.0%; Dividend rate – none.

Restricted Stock

During the first quarter of fiscal year 2007, the Company granted 1,175,000 shares of restricted stock to various company executives. Based on the fair market value at the date of grant, the Company will record $1,500 in compensation expense ratably over the vesting period of the restricted stock. The restricted stock vests one-third on the first anniversary date of the grant and the remaining two-thirds vests monthly thereafter over the following two years. The shares will be fully vested on the third anniversary date of the grant.

During the fourth quarter of fiscal year 2005, the Company granted 200,000 shares of restricted stock to the Company’s CEO. Based on the fair market value at the date of grant, the Company will record $540 in compensation expense ratably over the vesting period of the restricted stock. The restricted stock vests one-third on the first anniversary date of the grant and the remaining two-thirds vests monthly thereafter over the following two years. The shares will be fully vested on the third anniversary date of the grant.

The Company has recorded $57 of compensation expense related to restricted stock awards for the quarter ended July 1, 2006 in accordance with Statement 123R. As of July 1, 2006, there was $1,400 of total unrecognized compensation costs related to the restricted stock awards. These costs are expected to be recognized over a weighted average period of 2.81 years. Restricted stock activity under all plans is summarized as follows:


				Wtd. Avg.
	Restricted			Remaining
	Stock			Contractual Term
	Outstanding			(years)
Restricted shares at April 1, 2006		127,778
Awarded		1,175,000
Vested		(16,668	)
Cancelled/Forfeited		—

Restricted shares at July 1, 2006		1,286,110			2.81

The weighted average grant-date estimated fair value of restricted stock awards granted during the three months ended July 1, 2006 was $1.26 per share. The total estimated fair value of restricted stock awards vested was $22 for the three months ended July 1, 2006.

Series A Convertible Preferred Stock

On June 17, 2004, the Company sold 566,797 shares of Series A Convertible Preferred Stock (the “Series A”) in a private placement financing at $26.46 per share, which raised $13,564 in net proceeds. The sale included issuance of warrants to purchase 1,624,308 shares of the Company’s common stock at an exercise price of $3.10 per share. The warrants are exercisable on or after December 20, 2004, and expire on June 17, 2015. Each share of the Series A is convertible into common stock any time at the direction of the holders. Each share of Series A is convertible into a number of shares of common stock equaling its stated value plus accumulated and unpaid dividends, divided by its conversion price then in effect. Each share of Series A was initially convertible into ten shares of common stock, but is subject to adjustment upon certain dilutive issuances of securities by the Company. The issuance of Series B Convertible Preferred Stock (the “Series B”) as discussed below, triggered the anti-dilution provisions of the Series A. Upon issuance of the Series B on November 2, 2005, the conversion price of the Series A was reduced from $2.6465 to $2.0650 per share. As of April 1, 2006, each share of Series A is convertible into approximately 12.8 shares of common stock. As part of the private placement, a representative of the investors joined the Company’s Board of Directors.

The Series A contains a beneficial conversion discount because the Series A was priced based on 90% of the average closing price of the Company’s common stock during the 20 trading days prior to the Series A issuance. The beneficial conversion discount is computed at $8,835 including $3,000 attributable to the estimated fair value of the warrants. The estimated fair value of the warrants was computed based on the Black-Scholes model using the following assumptions: Risk free rate – 4.71%; Volatility – 87%; Expected life – 10 years. The beneficial conversion discount is amortized as a non-cash charge to retained earnings, and included in the computation of earnings per share, over the five year period using the effective interest method from the Series A issuance date until the first available redemption date. Amortization of the beneficial conversion discount was $2,634 at July 1, 2006. At July 1, 2006, the Series A is recorded net of the unamortized discount of $6,201.

The Series A carries a cumulative dividend of 8% per year payable when and if declared by the Board of Directors. At July 1, 2006, the Company had accrued dividends of $2,549 for the Series A. In the event of liquidation, dissolution or winding up of the Company, the holders of the Series A will be senior in all respects to all other equity holders of the Company, except that they will be junior to the holders of the Series B. The Company has the option to pay the dividends in cash or common stock, when approved by the Board of Directors.

Beginning in June 2009, the holders of the Series A will have the right to require the Company to redeem all or any portion of the Series A for an amount equal to its stated value plus accrued and unpaid dividends. Beginning in June 2009, the Company may redeem all or any portion of the Series A at the greater of (i) the fair market value of the Series A based upon the underlying fair value of the common stock into which the preferred stock is convertible, or (ii) the stated value of the Series A, plus accrued and unpaid dividends. Given that the investor redemption right is outside the control of the Company, the Series A was recorded outside of permanent equity.

The Series A is entitled to 8.5369 votes per share on all matters, except the election of directors, where the Series A has the right to elect one director to the Board. The Series A has approval rights as well with respect to certain significant corporate transactions. Pursuant to the terms of a related investors’ rights agreement, the Company agreed to register the sale of shares of common stock issuable upon conversion of the Series A. The registration statement for the Series A was declared effective on December 15, 2005. As part of the private placement financing, the Series A investors and Canopy entered into a proxy agreement whereby the Series A investors are able to vote Canopy’s shares as it relates to certain significant corporate transactions (see further discussion in “Risk Factors” in Item 1A of this Form 10-Q.

Series B Convertible Preferred Stock

On August 19, 2005, the Company entered into an agreement to sell shares of Series B in a private placement financing, which is referred to as the “Series B financing,” for $20,000 in gross proceeds, before payment of professional fees. The purchasers in the private placement were the Series A holders. The sale of the Series B was subject to stockholder approval and was approved by stockholders at the Company’s annual stockholder meeting on November 1, 2005.

Accordingly, on November 2, 2005, 1,582,023 shares of Series B were issued at a purchase price of $12.6420 per share, which was equal to ten times 90% of the average closing price of the Company’s common stock during the 15 trading days prior to the Series B issue date. The sale of Series B raised $19,140 in net proceeds. The Series B is convertible any time at the direction of the holders. Each share of Series B is convertible into a number of shares of common stock equaling its stated value plus accumulated and unpaid dividends, divided by its conversion price then in effect. Each share of Series B is initially convertible into ten shares of common stock, but is subject to adjustment upon certain dilutive issuances of securities by the Company. The Series B financing included the issuance of warrants to purchase 5,932,587 shares of the Company’s common stock at an exercise price of $1.26 per share. The warrants are exercisable immediately and have a ten year life. As part of the private placement, the Series B investors have the right to elect a director to the Company’s Board of Directors. As of July 1, 2006, the Series B holders have not yet elected to designate a director nominee. In conjunction with the Series B financing, the rights, preferences and privileges of the Series A were amended to: (i) remove the conversion limitation which previously limited the number of shares of common stock that could be issued upon aggregate conversions of the Series A; (ii) revise the liquidation preferences of the Series A in light of the issuance of the Series B; and (iii) make conforming changes to the preemptive rights of the Series A to reflect the issuance of the Series B.

The Series B contains a beneficial conversion discount because the Series B was priced based on 90% of the average closing price of the Company’s common stock during the 15 trading days prior to the Series B issuance. The beneficial conversion discount is computed at $10,169 including $2,490 attributable to the estimated fair value of the warrants. The estimated fair value of the warrants was computed based on the Black-Scholes model using the following assumptions: Risk free rate – 4.58%; Volatility – 84%; Expected life – 10 years. The beneficial conversion discount is amortized as a non-cash charge to retained earnings, and included in the computation of earnings per share, over the five year period using the effective interest method from the Series B issuance date until the first available redemption date. Amortization of the beneficial conversion was $977 at July 1, 2006. At July 1, 2006, the Series B is recorded net of the unamortized discount of $9,192.

The Series B carries a cumulative dividend of 8% per year payable when and if declared by the Board of Directors. At July 1, 2006, the Company had accrued dividends of $1,067 for the Series B. In the event of liquidation, dissolution or winding up of the Company, the holders of the Series B is senior in all respects to all other equity holders of the Company. The Company has the option to pay the dividends in cash or common stock, when approved by the Board of Directors.

Beginning November 2010, the holders of the Series B will have the right to require the Company to redeem all or any portion of the Series B for an amount equal to its stated value plus

accrued but unpaid dividends. Beginning in November 2010, the Company may redeem all or any portion of the Series B at the greater of (i) the fair market value of the Series B based upon the underlying fair value of the common stock into which the preferred stock is convertible, or (ii) the stated value of the Series B, plus accrued and unpaid dividends. Given that the investor redemption right is outside the control of the Company, the Series B is recorded outside of permanent equity on the balance sheet.

The Series B is entitled to 8.7792 votes per share on all matters, except the election of directors, where the Series B has the right to elect one director to the Board. The Series B has certain approval rights as well. Pursuant to the terms of a related investors’ rights agreement, the Company agreed to register the sale of shares of common stock issuable upon conversion of the Series B. The registration statement for the Series B was declared effective on December 15, 2005. After completion of the Series A and Series B transactions, affiliates of Advent and EMC own approximately 46.3% of the outstanding shares of the Company’s capital stock, on an as converted basis assuming conversion of all the shares of Series A and Series B and exercise of all the warrants they presently hold. On a combined basis, EMC, Canopy and affiliates of Advent own approximately 68.1% of the outstanding shares of the Company’s capital stock on an as converted basis. Furthermore, if the Company has an indemnity obligation under the Securities Purchase Agreement the Company entered into in connection with the Series B financing, then the Company may, if the Company and the Series B investors agree, settle up to $2,000 of that indemnity obligation by issuing up to an additional $2,000 (158,203 shares) of Series B and warrants to purchase 37.5% of the number of shares of common stock into which such additional shares of Series B are convertible when issued. If any such indemnity obligation is not satisfied by issuing shares of Series B and warrants, then it will be satisfied through a cash payment.

(10) RELATED-PARTY TRANSACTIONS

As discussed in Note 9, EMC was a participating investor in the Series A and Series B offerings. EMC contributed $4,000 of the $15,000 gross proceeds in the Series A offering and $5,000 of the $20,000 gross proceeds in the Series B offering. As of July 1, 2006, EMC beneficially owned 7,808,405 shares, or 12% of the Company’s common stock assuming conversion of the Series A and Series B and related warrants. At July 1, 2006 and July 2, 2005, there was $28,030 and $16,400 payable to EMC and $735 and $606 in trade receivables due from EMC, respectively. The sale of EMC products represented 90% and 86% of product revenue for the three months ended July 1, 2006 and July 2, 2005 respectively.

As discussed in Note 9, the holders of the Series A convertible stock appointed Mr. Pehl to the Company’s Board of Directors. Mr. Pehl is a director at Advent International. As of July 1, 2006, Advent beneficially owned 34% of the company’s common stock, assuming conversion of the Series A and Series B and related outstanding warrants.

In the normal course of business, the Company sells and purchases goods and services to and from subsidiaries of Canopy. Goods and services purchased from companies affiliated with Canopy were $30 for both the three months ended July 1, 2006 and July 2, 2005. There were no goods and services sold to companies affiliated with Canopy for the three months ended July 1, 2006 or July 2, 2005. Through December 17, 2004, Ralph J. Yarro III, one of the Company’s Directors, was a Director, President and Chief Executive Officer of Canopy. Also through December 17, 2004, Darcy G. Mott, one of the Company’s Directors, was Vice President, Treasurer and Chief Financial Officer of Canopy. Effective March 10, 2005, Mr. Yarro and Mr. Mott resigned from their positions as Directors of the Company. Mr. Mustard replaced Mr. Yarro as President and CEO of Canopy until December 23, 2005 when Mr. Mustard resigned from Canopy. Mr. Mustard is a Director of the Company. On June 15, 2006, Mr. Mustard announced his decision to not stand for reelection to our Board of Directors. As of July 1, 2006, Canopy beneficially owned 22% of the Company’s common stock, assuming conversion of the Series A and Series B and related outstanding warrants. Canopy also acts as a guarantor related to the Company’s loan agreement with Comerica (see Note 5).

(11) SUBSEQUENT EVENTS

On June 6, 2006, the Company entered into an Asset Purchase Agreement with Collective Technologies, LLC and effective July 2, 2006, the acquisition was closed. Pursuant to the Asset Purchase Agreement, the Company acquired specified assets and liabilities of Collective for a purchase price consisting of:

	•		$6,000 in cash;

	•		a note in the amount of $2,000 bearing interest at 5% and due in twelve quarterly payments beginning 90 days after closing;

	•		2,272,727 shares of the Company’s common stock;

	•		a warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.32 per share;

	•		assumption of certain liabilities.

The shares issued as consideration in the transaction are subject to a 12 month lock-up agreement and have piggyback registration rights. The purchase price is subject to certain adjustments specified in the Asset Purchase Agreement. The Company will also issue up to 306,303 shares of restricted stock and up to 1,608,481 stock options to former employees of Collective that it acquired in the transaction, or increase the purchase price in lieu thereof in certain instances.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q and the MD&A contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 30, 2006. The following discussion contains forward-looking statements and should also be read in conjunction with the risk factors set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.

The MD&A that follows is designed to provide information that will assist readers in understanding our consolidated financials statements, changes in certain items in those statements from year to year and the primary factors that caused those changes and how certain accounting principles, policies and estimates affect our financial statements.

FORWARD LOOKING STATEMENTS AND SAFE HARBOR

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include statements regarding our expectations, hopes or intentions regarding the future, including but not limited to, statements regarding our relationship with EMC, storage solution trends, strategy, backlog, competition, demand seasonality, acquisition of Collective Technologies, LLC, financing, revenue, margins, operations, capital expenditures, service offerings, personnel, dividends, litigation and compliance with applicable laws. In particular, this Quarterly Report on Form 10-Q contains forward-looking statements regarding:

	•		our market strategy to become the preferred provider for sales, professional services and maintenance to the mid-enterprise market for information infrastructure solutions;

	•		our total solutions approach and the ability of the EMC product brand to meet our customers’ needs and to track their buying decisions;

	•		our belief that order backlog as of any particular date is not meaningful as it is not necessarily indicative of future sales levels;

	•		our anticipation of demand for our products and services to follow seasonal patterns;

	•		our expectations about future product revenue and margin percentages;

	•		our expectations about the effects of our acquisition of Collective on our service revenue;

	•		our beliefs regarding our ability to grow revenue and achieve profitability;

	•		our estimate of expected award forfeitures;

	•		our expectation to incur significant costs in connection with our acquisition of Collective Technologies, LLC;

	•		the factors upon which our future depends, which, in addition to our cost-reduction initiatives, include improving revenues and margins, continuing our relationship with EMC, expanding our service offerings, receiving market acceptance of new products and services, recruiting, hiring, training and retaining significant numbers of qualified personnel, forecasting revenues and expenses, controlling expenses, and managing assets;

	•		our belief that our current cash and receivable balances will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months;

	•		our belief regarding the timing and risk of undetected software or hardware errors;

	•		our belief that our success is dependent to a significant extent on our personnel, including our executive officers;

	•		our belief that we are currently in compliance with Nasdaq Capital Market continued listing requirements;

	•		our belief that we will remain in compliance with all the terms of the Comerica loan agreement;

	•		our expectation to retain earnings and not to declare or pay any cash dividends in the near future;

	•		our expectation that the loss of hardware maintenance revenue will be mitigated by an increase in professional service revenue and software maintenance revenue; and

	•		our business outlook, including all statements in the section titled “Outlook” in Item 2 below.

Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks described in greater detail under the heading “Risk Factors” in Item 1A of Part II of this report. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and, except as otherwise required by law, we assume no obligation to

update or revise any forward-looking statement to reflect new information, events or circumstances after the date hereof.

All 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. Words such as “expect,” “believe,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “seek,” “estimate,” “should,” “may,” “assume,” and “continue,” as well as variations of such words and similar expressions, also identify forward-looking statements.

OVERVIEW AND EXECUTIVE SUMMARY

Our financial objective is to achieve profitable growth. Management believes that by providing a combination of systems, software, services and solutions to meet customers’ needs, we will be able to further grow revenues and achieve profitability. In March 2003, we became a reseller and service provider of EMC storage systems and software, pursuant to a reseller agreement with EMC Corporation. This shift from a developer of technology to a reseller and total information storage infrastructure solutions provider has had the following primary financial implications:

	•		We have increased product revenue significantly during the past two fiscal years. We recorded product revenue of $93.7 million in fiscal 2005 a 102% increase from fiscal 2004. Furthermore, we recorded product revenue of $116.3 million in fiscal 2006, a 24% increase from fiscal 2005. In order to achieve this revenue growth, we invested heavily in sales and service resources which led to increased losses in fiscal 2005. In fiscal 2006, we moderated headcount additions and reduced spending which led to decreased operating losses as compared to fiscal 2005.

	•		Maintenance revenue has been negatively impacted due to the comprehensive warranty provided on EMC products. We resell EMC hardware products with up to a three-year warranty and a seven-day, twenty-four hour service level. In contrast, MTI proprietary products were generally sold with a one year warranty and a five day, nine hour service level. Therefore, the sale of proprietary products provided an opportunity to generate maintenance revenue earlier due to the shorter warranty period and allowed the Company to generate maintenance revenue during the warranty period by selling maintenance contracts increasing the service level to seven days a week, twenty-four hours a day. We expect the loss of hardware maintenance revenue to be mitigated by an increase in professional service revenue as well as software maintenance revenue on new technology installations.

	•		Our exclusive reliance on EMC products as our core product solution has inherent challenges, such as obtaining sufficient product quantities to satisfy customer requirements, developing the ability to ship products to meet customer imposed deadlines, developing the ability to control the cost of the product, reliance on the ability of EMC to respond to changing technology and our reliance on EMC to continue to provide an adequate purchasing credit line.

Some of the key financial highlights for the first quarter of fiscal 2007 include:

	•		Revenue –We recorded total revenue of $42.6 million in the first quarter of fiscal 2007, an increase of 8% from the same period of the prior fiscal year;

	•		Gross Profit Margins –We recorded product and service gross profit percentage of 18.5% and 19.2%, respectively in the first quarter of fiscal 2007 compared to 19.6% and 23.3%, respectively in the same quarter of the prior fiscal year;

	•		Operating Loss –We recorded an operating loss of $1.2 million in the first quarter of fiscal 2007 compared to a loss of $2.1 million in fiscal 2005.

Our results of operations in the first quarter of fiscal 2007 were impacted by a significant increase in stock-based compensation expense as a result of our adoption of Financial Accounting Standard Board (“FASB”) Statement No. 123R, “Share-Based Payment.” We selected the modified prospective transition method, which does not allow for the restatement of results from prior periods, and as a result, year over year comparison of margins and operating expenses will be impacted by this non-cash expense for all periods of fiscal 2007. Total stock-based compensation expense, which consists of expenses from employee stock options, our employee stock purchase plan (“ESPP”) and restricted stock awards, was $0.6 million in the first quarter of fiscal 2007. Total stock-based compensation in the first quarter of fiscal 2006 was $0.06 million related exclusively to expense from restricted stock awards. The impact of the adoption of Statement 123R is further discussed below in “Results of Operations” and in Note 9 to our consolidated financial statements.

OUTLOOK

The following information summarizes management’s outlook for the remainder of fiscal 2007:

	•		We expect product revenue to continue to grow in fiscal 2007. We expect product revenue to follow, to some extent, the seasonal patterns experienced in fiscal 2006.

	•		We have recently revised the terms of our purchasing arrangement with EMC. As a result, we expect to improve our product purchase pricing, net of rebates, on a go-foward basis. Therefore, we expect our product margin percentage to increase modestly as compared to fiscal 2006 and the first quarter of fiscal 2007, however, our product margins can be volatile and are subject to many factors including competitive market forces.

	•		As discussed in Note 11 to our consolidated financial statements, we completed our acquisition of Collective Technologies, LLC (“Collective) effective July 2, 2006. If we are able to effectively integrate this acquisition, we expect service revenue to increase primarily due to increased professional service revenue. We also expect service revenue to be driven by sales of hardware maintenance contracts as the warranty period on EMC products sold in previous years begin to expire. If we are able to achieve growth in service revenue, we expect service margins to improve as we are able to further leverage our existing service resources.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements requires estimates and judgments that affect the reported amounts of revenues, expenses, assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying values of assets and liabilities. Critical accounting policies are defined as those that are most important to the portrayal of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and could potentially produce materially different results under different assumptions and conditions. For a detailed discussion of the application of the following critical accounting policies and other accounting policies, see Notes to the Consolidated Financial Statements on our Form 10-K for the year ended April 1, 2006.

Revenue recognition.We derive revenue from sales of products and services. The following summarizes the major terms of the contractual relationships with customers and the manner in which we account for sales transactions.

Hardware revenue

Hardware revenue consists of the sale of disk and tape based hardware. We recognize revenue pursuant to Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21) and Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB 104). In accordance with these revenue recognition guidelines, revenue is recognized for a unit of accounting when all of the following criteria are met:

	•		persuasive evidence of an arrangement exists;

	•		delivery has occurred;

	•		fee is fixed or determinable; and

	•		collectability is reasonably assured.

Generally, product sales are not contingent upon customer testing, approval and/or acceptance. However, if sales require customer acceptance, revenue is recognized upon customer acceptance. Product sales with post-delivery obligations generally relate to professional services, including installation services or other projects. Professional services revenue is not recognized until the services have been performed, while product revenue is recognized at time of shipment as the services do not affect the functionality of the delivered items. In transactions where we sell directly to an end user, generally there are no acceptance clauses. However, we also sell to leasing companies who in turn lease the product to their lessee, the end user. For this type of sale, generally there are lessee acceptance criteria in the purchase order or contract. For these transactions, we defer the revenue until written acceptance is received from the lessee. Credit terms to customers typically range from net 30 to net 60 days after shipment.

Product returns are estimated in accordance with Statement of Financial Accounting Standards No. (Statement) 48, “Revenue Recognition When Right of Return Exists.” Customers have a limited right of return which allows them to return non-conforming products. Accordingly, reserves for estimated future returns are provided in the period of sale based on contractual terms and historical data and are recorded as a reduction of revenue. We also ensure that the other criteria in Statement 48 have been met prior to recognition of revenue: the price is fixed or determinable; the customer is obligated to pay and there are no contingencies surrounding the obligation or the payment; the customer’s obligation would not change in the event of theft or damage to the product; the customer has economic substance; the amount of returns can be reasonably estimated; and we do not have significant obligations for future performance in order to bring about resale of the product by the customer.

Software revenue

We sell various software products ranging from software that is embedded in the hardware to add-on software that can be sold on a stand-alone basis. Software that is embedded in the hardware consists of tools that provide a user-interface and assist the customer in the configuration of storage disks as well as provide performance monitoring and troubleshooting features. This software can not be sold on a stand-alone basis and is not a significant part of sales or marketing efforts. This embedded software is considered incidental to the hardware and is not recognized as a separate unit of accounting apart from the hardware. If a maintenance contract is sold related to this software, it is accounted for in accordance with EITF 00-21, whereby the total arrangement revenue is first allocated to the maintenance contract based on fair value and the remaining arrangement revenue is allocated to the hardware elements in the transaction. Revenue from maintenance contracts is recognized ratably over the term of the contract.

We also sell application software that is sold as add-on software to existing hardware configurations. This software is generally loaded onto a customers’ host CPU and provides additional functionality to the storage environment, such as assisting in data back-up, data migration and mirroring data to remote locations. Based on the factors described in footnote two of AICPA Statement of Position (SOP) 97-2 “Software Revenue Recognition,” we consider this type of software to be more-than-incidental to hardware components in an arrangement. This assessment is based on the fact that the software can be sold on a stand-alone basis and that maintenance contracts are generally sold with the software. Software products that are considered more-than-incidental are treated as a separate unit of accounting apart from the hardware and the related software product revenue is recognized upon delivery to the customer. We account for software that is more-than-incidental in accordance with SOP 97-2, as amended by SOP 98-9, whereby the total arrangement revenue is first allocated to the software maintenance contract based on vendor specific objective evidence (VSOE) of fair value and is recognized ratably over the term of the contract. VSOE is established based on stand-alone renewal rates. The remaining revenue from the sale of software products is recognized at the time the software is delivered to the customer, provided all the revenue recognition criteria noted above have been met, except collectability must be deemed probable under SOP 97-2 versus reasonably assured under SAB 104.

In transactions where the software is considered more-than-incidental to the hardware in the arrangement, we also consider EITF 03-05, “Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software” (EITF 03-05). Per EITF 03-05, if the software is considered not essential to the functionality of the hardware, then the hardware is not considered “software related” and is excluded from the scope of SOP 97-2. All software sold by MTI is not essential to the functionality of the hardware. The software adds additional features and functionality to the hardware and allows the customer to perform additional tasks in their storage environment. The hardware is not dependent upon the software to function and the customer can fully utilize the hardware product without any of the software products. Therefore, in multiple-element arrangements containing hardware and software, the hardware elements are excluded from SOP 97-2 and are accounted for under the residual method of accounting per EITF 00-21 and SAB 104.

Service revenue

Service revenue is generated from the sale of professional services, maintenance contracts and time and materials arrangements. The following describes how we account for service transactions, provided all the other revenue recognition criteria noted above have been met. Generally, professional services revenue, which includes installation, training, consulting and engineering services, is recognized upon delivery of the services. If the professional service project includes independent milestones, revenue is recognized as milestones are met and upon acceptance from the customer. Maintenance revenue is generated from the sale of hardware and software maintenance contracts. These contracts generally range from one to three years. Maintenance revenue is recorded as deferred revenue and is recognized as revenue ratably over the term of the related agreement.

Multiple element arrangements

We consider sales contracts that include a combination of systems, software or services to be multiple element arrangements. Revenue related to multiple element arrangements is separated in accordance with EITF 00-21 and SOP 97-2. If an arrangement includes undelivered elements, we use the residual method, whereby we defer the fair value of the undelivered elements with the residual revenue allocated to the delivered elements. Discounts are allocated only to the delivered elements. Fair value is determined by examining renewed service contracts and based upon the price charged when the element is sold separately or, for transactions accounted for under EITF 00-21, prices provided by vendors if sufficient stand-alone sales information is not available. Undelivered elements typically include installation, training, warranty, maintenance and professional services.

Other

Certain of our sales transactions are initiated by EMC and jointly negotiated and closed by EMC and MTI’s sales force. We recognize revenue related to these transactions on a gross basis, in accordance with EITF 99-19, because we bear the risk of returns and collectability of the full accounts receivable. Product revenue for the delivered items is recorded at residual value upon pickup by a common carrier for Free Carrier (FCA) origin shipments. For FCA destination shipments, product revenue is recorded upon delivery to the customer. If we subcontract the undelivered items

such as maintenance and professional services to EMC or other third parties, we record the costs of those items as deferred costs and amortize the costs using the straight-line method over the life of the contract. We defer the revenue for the undelivered items at fair value based upon list prices with EMC according to EITF 00-21. At times, our customers prefer to enter into service agreements directly with EMC. In such instances, we may assign the obligation to perform services to EMC, or other third parties, and therefore we do not record revenue nor defer any costs related to the services.

In light of the recent acquisition of Collective and our growing emphasis on integration and consulting services, we are currently evaluating the financial statement presentation of our product revenue on a gross versus net margin basis.

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

Shipping

Products are generally drop-shipped directly from suppliers to our customers. Upon the supplier’s delivery to a carrier, title and risk of loss pass to MTI. Revenue is recognized at the time of shipment when shipping terms are Free Carrier (FCA) shipping point as legal title and risk of loss to the product pass to the customer. For FCA destination point shipments, revenue is recorded upon delivery to the customer.

Significant estimates which impact the timing and classification of revenue involve the calculation of fair value of the undelivered elements in a multi-element arrangement. If the fair value of the undelivered elements changes, the timing and classification of revenue could be impacted.

Product warranty.We maintain a warranty accrual for the estimated future warranty obligation based upon the relationship between historical and anticipated costs and sales volumes. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty calls and repair cost. We continue to assess the adequacy of the warranty accrual each quarter. Should actual warranty calls and repair cost differ from our estimates, the amount of actual warranty costs could materially differ from our estimates.

Allowance for doubtful accounts and product returns.We maintain an allowance for doubtful accounts for estimated returns and losses resulting from the inability of our customers to make payments for products sold or services rendered. We analyze accounts receivable, including past due balances, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. All new customers are reviewed for credit-worthiness upon initiation of the sales process. The allowance for product returns is established based on historical return trends. Historically, we have not experienced significant losses on accounts receivable, however, if the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required. The decrease in the allowance during the first quarter of fiscal 2007 was due to the write-off of an account that was previously reserved due to a bankruptcy filing.

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. 109, “Accounting for Income Taxes” (Statement 109). Under the asset and liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse, net of a valuation allowance. We have recorded a full valuation allowance against our deferred tax assets as management has determined that it is more likely than not that these assets will not be utilized. In the event that actual results differ from our estimates, our provision for income taxes could be materially impacted.

Valuation of goodwill.We assess the impairment of goodwill in accordance with Financial Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible Assets” (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. We completed our annual assessment for goodwill impairment in the fourth quarter of fiscal year 2006. Based upon factors such as the market valuation approach, comparison between the reporting units’ estimated fair value using discounted cash flow projections over the next three years, and carrying value, we concluded that there was no impairment of our goodwill. Changes in assumptions and estimates included within this analysis could produce significantly different results than those identified above and those recorded in the consolidated financial statements. No events occurred in the first quarter of fiscal 2007 that caused us to further update our goodwill impairment assessment. We plan to update our assessment during the fourth quarter of fiscal 2007 or as other facts and circumstances indicate.

Inventories.Our inventory consists of spare parts inventory and production inventory. Spare parts inventory is used for product under maintenance contracts and warranty, and is not held for re-sale. As of July 1, 2006, we had net spare parts inventory of $0.8 million and net production inventory of $6.1 million. Inventories are valued at the lower of cost (first-in, first-out) or market, net of an allowance for obsolete, slow-moving, and unsalable inventory. The allowance is based upon management’s review of inventories on-hand, historical product sales, and future sales forecasts. Historically, we used rolling forecasts based upon anticipated product orders to determine our component and product inventory requirements. As a reseller, we primarily procure inventory upon receipt of purchase orders from customers and as a result we believe the risk of EMC production inventory obsolescence is low. At times, in order to take advantage of favorable pricing, we may procure inventory in advance of receiving customer orders. Our allowance for spare parts inventory is calculated based on a review of product lifecycles and comparison to current and projected maintenance revenue. As maintenance contracts expire and are not renewed, the amount of spare parts inventory needed to support the legacy installed base decreases. Management regularly evaluates the carrying value of the spare parts inventory relative to the remaining legacy maintenance contracts. 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 Condensed Consolidated Statements of Operations as a percentage of total revenue for the periods indicated, except for product gross profit and service gross profit, which are expressed as a percentage of the related revenue. This information should be read in conjunction with the Condensed Consolidated Financial Statements included elsewhere herein:


	For The Three Months Ended
	July 1,			July 2,
	2006			2005
Net product revenue		77.8	%		74.3	%
Service revenue		22.2			25.7


Total revenue		100.0			100.0

Product gross profit		18.5			19.6
Service gross profit		19.2			23.3


Gross profit		18.6			20.5

Selling, general and administrative		21.4			23.6
Restructuring charges		—			2.3


Operating loss		(2.8	)		(5.3	)

Interest and other income (expense), net		0.1			(0.2	)
Gain (loss) on foreign currency transactions		0.7			(2.1	)
Income tax expense		—			—


Net loss		(2.0	)%		(7.6	)%

Net product revenue:The components of product revenue by geographic region for the first quarter of fiscal 2007 and 2006 are shown in the table below (in millions):


	Three-months ended July 1, 2006						Three-months ended July 2, 2005
	US		Europe		Total		US		Europe		Total
Server revenue	$	15.6	$	9.7	$	25.3	$	12.7	$	8.4	$	21.1
Software revenue		4.2		0.7		4.9		4.4		1.2		5.6
Tape library revenue		1.4		1.6		3.0		1.5		1.0		2.5

Total product revenue	$	21.2	$	12.0	$	33.2	$	18.6	$	10.6	$	29.2

Net product revenue for the first quarter of fiscal 2007 increased $4.0 million, or 14% from the same quarter of the prior year. This increase was comprised of a $2.6 million and $1.4 million increase in domestic and international product revenue, respectively. The increase in product revenue was comprised of an increase in server and tape library revenue of $4.2 million and $0.5 million, respectively, partially offset by a decrease in software revenue of $0.7 million. Server,

software and tape library revenue accounted for 76%, 15% and 9% of total product revenue in the first quarter of fiscal 2007 as compared to 72%, 19% and 9% for the same quarter of the prior year, respectively. We believe the increase in product revenue is a result of our continued effort to reach new customers through new and existing sales channels. In the second and third quarters of fiscal 2006, we increased our marketing and inside-sales teams, adding 12 new telemarketing employees and expanding our marketing exposure through attendance at tradeshows and increased advertising campaigns. We believe this has helped to generate new name accounts and provide further opportunities for our outside-sales teams. In the first quarter of fiscal 2007, sales of EMC products represented $29.7 million, or 90% of total product revenue compared with $25.0 million or 86% of total product revenue for the same quarter of the prior year. We ended our first quarter of fiscal 2007 with a product order backlog of $4.8 million. It should be noted that backlog is not necessarily indicative of future revenue.

Service Revenue:The components of service revenue for the first quarter of fiscal 2007 and 2006 are shown in the table below (in millions):


	Three-months ended July 1, 2006						Three-months ended July 2, 2005
	US		Europe		Total		US		Europe		Total
Professional services revenue	$	1.7	$	1.2	$	2.9	$	2.1	$	1.1	$	3.2
Maintenance revenue		2.4		4.2		6.6		2.7		4.2		6.9

Total service revenue	$	4.1	$	5.4	$	9.5	$	4.8	$	5.3	$	10.1

Total service revenue for the first quarter of fiscal 2007 decreased $0.6 million, or 6% from the same quarter of the prior year. The decrease was attributable to a decrease of $0.3 million in both professional services and maintenance revenue.

Most EMC hardware products are sold with up to a 3-year, 24x7 warranty. As a result, any revenue associated with post-warranty service contracts for those hardware product sales would not occur until expiration of the warranty period. We believe this factor, along with declining renewal rates of legacy maintenance contracts, caused maintenance revenue to decrease compared to the first quarter of fiscal 2006. The decline in hardware maintenance was partially offset by new maintenance contracts sold on software products.

Professional services revenue decreased $0.3 million or 9% from the same quarter of the prior year. This decrease is primarily related to customer delays on implementation projects as well as a significant amount of our quarterly product booking occurring at the end of the quarter such that the professional services associated with these product sales could not be delivered prior to the end of the quarter. As discussed in the “Outlook” section, if we are able to effectively integrate the Collective acquisition, we expect professional service revenue to increase in the second quarter of fiscal 2007.

Product Gross Profit:Product gross profit was $6.1 million for the first quarter of fiscal 2007, an increase of $0.4 million or 7% from the same quarter of the prior year. The gross profit percentage for net product sales was 18.5% for the first quarter of fiscal 2007 compared to 19.6% for the same quarter of the prior year. The decrease in the product gross profit percentage was primarily due to several product fulfillment transactions which carried lower than normal product margins. Rebates earned from EMC were comparable to the first quarter of fiscal 2006.

Service Gross Profit:Service gross profit was $1.8 million for the first quarter of fiscal 2007, a decrease of $0.5 million, or 23% from the same quarter of the prior year. The service gross profit percentage was 19.2% in the first quarter of fiscal 2007 compared to 23.3% in the same quarter of the prior year. The decrease in service gross profit was primarily due to a decline in service revenue over a relatively fixed service cost structure. See above for discussion of the decrease in service revenue. Service cost of revenue increased $0.1 million compared to the first quarter of fiscal 2006. This increase was primarily related to increased sub-contractor costs. Due to the pending acquisition of Collective, we refrained from hiring additional service resources until Collective could be integrated. This resulted in the need to utilize sub-contractors in certain geographies. Service cost of revenue in the first quarter of fiscal 2007 included a charge of $0.05 million related to stock-based compensation due to the adoption of Statement 123R.

Selling, General and Administrative:Selling, general and administrative expenses for the first quarter of fiscal 2007 decreased $0.1 million, or 1% from the same quarter of the prior year. As a percentage of total revenue, selling, general and administrative expenses for the first quarter of fiscal 2007 were 21.4% as compared to 23.6% for the same quarter of the prior year. Selling, general and administrative costs in the first quarter of fiscal 2007 included a charge of $0.6 million related to stock-based compensation due to the adoption of Statement 123R. Stock-based compensation charges in the first quarter of fiscal 2006 were $0.06 million related exclusively to expense from restricted stock awards. Excluding the stock-based compensation charges, selling, general and administrative expenses as a percentage of total revenue was 20.1% in the first quarter

of fiscal 2006 compared to 23.4% in the same quarter of the prior year. The decrease in selling, general and administrative expenses was primarily due to decreases of $0.1 million in fixed charges and $0.1 million in marketing expenses, partially offset by an increase in salaries and related benefits of $0.1 million (including the equity compensation charge noted above).

Restructuring:In the fourth quarter of fiscal 2005, we announced plans to restructure our European operations. This plan was initiated primarily in order to reduce operating costs and simplify processes throughout the European operations. The 2005 restructuring plan primarily involved the closure of the Dublin, Ireland facility and the consolidation of European finance functions within the Weisbaden, Germany facility. In the first quarter of fiscal 2006, we recorded $0.7 million in additional charges related to the 2005 restructuring plan, primarily due to the closure of the Dublin, Ireland facility. Also, in the first quarter of fiscal 2006, we recorded an additional charge of $0.2 million related to our 2002 restructuring plan due to lower than expected sub-lease income at our abandoned Sunnyvale, California facility. There were no such restructuring charges in the first quarter of fiscal 2007.

Interest and Other Income (Expense), Net:Interest and other income (expense), net for the first quarter of fiscal 2007 increased from a net expense of $0.06 million in the first quarter of fiscal 2006 to net income of $0.05 million in the first quarter of fiscal 2007. The fluctuation is primarily due to increased interest income generated from the proceeds received from our Series B Convertible Preferred Stock offering, partially offset by increased interest expense due to higher interest rates on our line of credit. The interest rate on our line of credit with Comerica is based on the prime rate.

Gain (loss) on Foreign Currency Transactions:We recorded a gain on foreign currency transactions of $0.3 million in the first quarter of fiscal 2007, compared to a loss of $0.8 million in the same quarter of the prior year. The gain primarily resulted from the weakening value of the US Dollar as compared to the Euro and British Pound Sterling during the first quarter of fiscal 2007.

Liquidity and Capital Resources

As of July 1, 2006, we had working capital of $15.3 million, compared to $16.4 million as of April 1, 2006. We had cash and cash equivalents of $21.6 million as of July 1, 2006, compared to $21.7 million as of April 1, 2006. The $0.1 million decrease in cash and cash equivalents was primarily the result of $0.2 million in capital expenditures and $0.04 million in cash used in operating activities, partially offset by a $0.2 million increase in cash related to the impact of foreign exchange rates. The cash used in operating activities was primarily due to the $0.9 million net loss and a $2.5 million decrease in accounts payable and accrued expenses, including deferred revenue, partially offset by a $3.4 million decrease in inventory. Also included in the net loss was a non-cash charge of $0.6 million related to equity compensation charges due to the adoption of Statement 123R. The decrease in accounts payable was primarily due to decreased purchases from EMC and other vendors, particularly in the last month of the quarter. The decrease in inventory was primarily due to sales of EMC branded inventory purchased in the previous quarter.

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 The Canopy Group, Inc. (“Canopy”). On June 20, 2006, we renewed the Comerica line of credit through November 30, 2006 and Canopy renewed its letter of credit guarantee through December 31, 2006. Until December 30, 2004, as discussed below, the Canopy letter of credit was secured by substantially all the assets of the Company. As of July 1, 2006, there was $5.2 million and $0.4 million in borrowings and letters of credit outstanding, respectively, under the Comerica Loan Agreement and $1.4 million was available for borrowing.

On December 30, 2004, we entered into a security agreement with EMC whereby we granted EMC a security interest in certain assets of the Company to secure our obligations to EMC under our existing supply agreements. The assets pledged as collateral consisted primarily of the Company’s accounts receivable generated from the sale of EMC products and services, related inventory and the proceeds of such accounts receivable and inventory. In exchange for this security interest, EMC increased our purchasing credit limit to $20.0 million. On June 7, 2006, due to our improved financial position and established payment history, EMC terminated the security agreement and released its security interest in all of our assets. On a go-forward basis, our purchasing credit limit with EMC will be determined based on the needs of our business and our financial position. Our payment terms with EMC will remain at net 45 days from shipment.

We had previously granted a security interest in all of our personal property assets to Canopy as security for our obligations to Canopy in connection with Canopy’s guaranty of our indebtedness to Comerica Bank. To enable us to pledge the collateral described above to EMC, Canopy delivered a waiver and consent releasing Canopy’s security interest in the collateral to be pledged to EMC and consenting to the transaction. As part of the waiver and consent, we agreed not to increase our indebtedness to

Comerica Bank above our then-current outstanding balance of $5.5 million, and to make a principal repayment to Comerica equal to $1.8 million on each of February 15, 2005, May 15, 2005 and August 15, 2005 in order to eliminate our outstanding indebtedness to Comerica. In connection with our renewal of the Comerica agreement noted above, Canopy amended its waiver and consent which terminated the requirement to pay-down the indebtedness to Comerica and extended their letter of credit guarantee through December 31, 2006. In exchange for this waiver and consent amendment, we issued a warrant to Canopy to purchase 125,000 shares of our common stock at an exercise price of $1.23 per share, the market price on the date of grant. The warrant is exercisable immediately and has a five year life.

The Comerica loan agreement contains negative covenants placing restrictions on our ability to engage in any business other than the businesses currently engaged in, suffer or permit a change in control, and merge with or acquire another entity. Comerica has issued a consent related to our acquisition of Collective Technologies discussed below. We are currently in compliance with all of the terms of the Comerica loan agreement and believe that we will remain in compliance. Upon an event of default, Comerica may terminate the Comerica loan agreement and declare all amounts outstanding immediately due and payable.

On June 6, 2006, we entered into an Asset Purchase Agreement with Collective Technologies, LLC. The acquisition was completed effective July 2, 2006. Pursuant to the Asset Purchase Agreement, we acquired specified assets and liabilities of Collective for a purchase price consisting of:

	•		$6.0 million in cash;

	•		a note in the amount of $2.0 million bearing interest at 5% and due in twelve quarterly payments beginning 90 days after closing;

	•		2,272,727 shares of our common stock;

	•		a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $1.32 per share;

	•		assumption of certain liabilities.

The shares issued as consideration in the transaction are subject to a 12 month lock-up agreement and have piggyback registration rights. We will also issue up to 306,303 shares of restricted stock and up to 1,608,481 stock options to former employees of Collective that were acquired in the transaction, or increase the purchase price in lieu thereof in certain instances. The purchase price is subject to certain adjustments specified in the Asset Purchase Agreement. See further discussion in Note 11 of the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q.

At various times from March 2005 through March 2006, we issued options to purchase shares of our common stock under our 2001 Stock Incentive Plan to our directors, employees and consultants, with exercise prices ranging from a minimum of $1.44 per share to a maximum of $2.45 per share, for the purpose of providing incentive compensation to those directors, employees and consultants. The aggregate exercise price of the issued options is approximately $1.2 million. The options were issued in accordance with applicable federal securities laws and registered on Form S-8. We believed in good faith that we could rely on a prior qualification order issued pursuant to Section 25111 of the California Corporations Code (the “Code”) or an exemption from the qualification requirements thereof; however, the options may not in fact have been issued in compliance with the provisions of Section 25110 of the Code. In order to comply with the securities laws of California, where we have our headquarters, we intend to apply for approval of the terms of a repurchase offer. Under the terms proposed to be submitted to the California Department of Corporations, we would offer to repurchase any outstanding options issued during such period for a cash price equal to 20% of the aggregate exercise price of the option, plus interest at an annual rate of 7%. There is no assurance that the terms of the repurchase offer will be approved, and we could be required to offer a higher repurchase price or to extend the offer to a greater number of persons. During this period, all of our non-employee directors received the grants described above. All of our non-employee directors have executed releases as to any claims they might have under our repurchase offer and waived any rights thereunder.

The Company’s principal sources of liquidity are cash and cash equivalents. We believe that our current cash and receivable balances will be adequate to fund operations for at least the next 12 months. Our credit terms with EMC are net 45 days from shipment. Our credit terms with our customers generally range from 30 to 60 days. Often there is a gap between when we pay EMC and when we ultimately collect the receivable from our customer. This gap is funded by our working capital. If we experience a significant deterioration in our receivable collections, or if we are not successful in growing revenues and improving operating margins, we may need to seek additional sources of liquidity to fund operations. Our future is dependent upon many factors, including but not limited to, improving revenues and margins, continuing our relationship with EMC, expanding our service offerings, successfully integrating our recently announced acquisition of Collective, receiving market acceptance of new products and services, recruiting, hiring, training and retaining qualified personnel, forecasting revenues, controlling expenses and managing assets. If we are not successful in these areas, our future results of operations could be adversely affected. If we need additional funds such as for acquisition or expansion or to fund a downturn in sales or increase in expenses, there are no assurances that adequate financing will be available on acceptable terms, if at all. We may in the future seek additional financing from public or private debt or equity financing. There can be no assurance such financing will be available on terms favorable to us or at all, or that necessary approvals to obtain any such financing will be received. To the extent any such financing involves the issuance of equity securities, existing stockholders could suffer dilution.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our European operations transact in foreign currencies, which exposes us to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound Sterling and the Euro. We have used and may, in the future, use hedging programs, currency forward contracts, currency options and/or other derivative financial instruments commonly used to reduce financial market risks. As of July 1, 2006, we had no outstanding forward contracts. Should we decide to use hedging programs in the future, 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. As of July 1, 2006, the balance on our line of credit was $5.2 million. Therefore, a 1% increase in interest rates would increase annual interest expense by $0.05 million.

ITEM 4 — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective to ensure that we are able to accumulate and communicate to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, information that we are required to disclose in the reports that we file with the Securities Exchange Commission, and to record, process, summarize and report that information within the required time periods.

Changes in Internal Control over Financial Reporting

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

In the second quarter of fiscal year 2005, we began implementation of our project to document and test our internal control procedures in order to satisfy the requirements of section 404 of the Sarbanes-Oxley Act. We have engaged a third party consulting firm to assist us in this effort. We are currently in the documentation phase of the project. If our public float at the end of our second quarter of fiscal 2007 is less than $75 million, we may not need to comply with section 404 until the end of fiscal 2008. However, if our public float at the end of our second quarter of fiscal 2007 is greater than $75 million, we may be required to comply with section 404 by the end of fiscal 2007. Management has not identified any deficiencies in internal control that would constitute a material weakness. There have not been significant changes in our internal control over financial reporting as a result of our documentation efforts. However, as we move into the remediation phase of the project we expect that there will be changes to our internal control structure in order to comply with section 404.

As noted previously, in the fourth quarter of fiscal 2005, we implemented plans to close our facility in Dublin, Ireland. Subsequent to fiscal 2005, all finance and accounting functions that were previously performed in Dublin have been transitioned to our Wiesbaden, Germany facility. There were no significant changes in internal control procedures over financial reporting as a result of this consolidation. However, the personnel performing the controls are now primarily located in Germany.

PART II

OTHER INFORMATION

ITEM 1A – RISK FACTORS

Our business, financial condition and operating results can be affected by a number of factors, including those listed below, any one of which could cause our actual results to differ materially from recent results or from our anticipated future results. Any of these risks could also materially and adversely affect our business, financial condition or the price of our common stock.

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

In March 2003, we entered into a Reseller Agreement with EMC whereby we became a reseller of EMC storage products. The agreement gives us a right to sell and license EMC hardware and software products, but also restricts our ability to resell data storage hardware platforms that compete with EMC products. As a result of the agreement, we depend on EMC to manufacture and supply us with its 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 its channel strategy, it may cease supplying us with its 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 or of acceptable quality. 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 operating at our current level of operations.

In the first quarter of fiscal 2005 we became an EMC Premier Velocity Partner, which has allowed us to earn certain performance based and service rebates. We recorded EMC rebates of $1.5 million and $0.4 million in fiscal 2006 and the first quarter of fiscal 2007, respectively. There is no guarantee that we will earn these rebates in the future or that EMC will continue to offer such rebate program. Our failure to receive these performance rebates could have an adverse impact on our results of operations.

Our stock ownership is concentrated in a few stockholders who may be able to influence corporate decisions.

Our stock ownership is concentrated in a few stockholders who are able to influence corporate decisions. As a result of this concentration, these few stockholders are able to influence actions of the Company that require stockholder approval, in particular with regard to significant corporate transactions. Among other things, this concentration may delay or prevent a change in control of the Company that may be favored by other stockholders, and may in general make it difficult for the Company to effect certain actions without the support of the larger stockholders.

As of July 1, 2006, The Canopy Group, Inc. (“Canopy”) beneficially owned 22% of the Company’s common stock assuming conversion of the Series A and Series B and related warrants outstanding, but excluding outstanding options. Mr. William Mustard serves on our Board of Directors and was President and CEO of Canopy until December 23, 2005 when he resigned from Canopy. On June 15, 2006, Mr. Mustard announced his decision to not stand for reelection to our Board of Directors.

In addition, the holders of our Series A and Series B, as a result of their acquisition of securities issued in our June 2004 and November 2005 private placements, currently beneficially own approximately 46.3% of the Company’s outstanding common stock, assuming conversion and exercise of all shares of preferred stock and warrants which they presently hold. Other than with respect to the election of directors, the holders of Series A and Series B generally have the right to vote on any matter with the holders of common stock, and each share of Series A is entitled to 8.5369 votes and each share of Series B is entitled to 8.7792 votes. The approval of the holders of a majority of the Series A and Series B, each voting as a separate class, will be required to approve certain corporate actions, including:

	•		any amendment of the Company’s charter or bylaws that adversely affects the holders of Series A, or Series B, as applicable;

	•		any authorization of a class of capital stock ranking senior to, or on parity with, the Series A, or Series B, as applicable;

	•		any increase in the size of the Company’s Board of Directors to greater than eight members or any change in the classification of the Board of Directors;

	•		certain redemptions or repurchases of capital stock;

	•		acquisitions of capital stock or assets from other entities;

	•		effecting, or entering into any agreement to effect, any merger, consolidation, recapitalization, reorganization, liquidation, dissolution, winding up or similar transaction (a “Liquidation Event”) involving the Company or any of its subsidiaries;

	•		any sale of assets of the Company or a subsidiary which is outside the ordinary course of business;

	•		any purchase of assets of or an equity interest in another entity for more than $5.0 million; and

	•		any incurrence of additional debt for borrowed money in excess of $1.0 million.

The holders of Series A and Series B are each entitled to elect one member of the Company’s Board of Directors.

In connection with the Series A financing, the Series A investors, the Company and The Canopy Group, Inc. entered into a Voting Agreement, pursuant to which, when any matter involving a significant corporation transaction (such as a merger, consolidation, liquidation, significant issuance of voting securities by the Company, sale of significant Company assets, or acquisition of significant assets or equity interest of another entity) is submitted to a vote of the Company’s stockholders, Canopy has agreed that either (a) the common stock of the Company that Canopy holds will be voted in proportion to the Series A investors’ votes on the matter, or (b) if Canopy wishes that any of its common stock be voted differently than in proportion to the Series A investors’ votes, Canopy will, if so required by a Series A investor, purchase from the Series A investor(s) with which the Canopy votes are not aligned all or any portion (as required by the Series A investor) of such investor’s Series A Convertible Preferred Stock. The per share price in any such purchase is to equal two times the sum of (x) the stated value of a share of Series A Convertible Preferred Stock plus (y) any accrued but unpaid dividends thereon. At any stockholder meeting at which members of the Board are to be elected and the Series A investors do not then have either a Series A Director on the Board or the power at such election to elect a Series A Director to the Board, Canopy has agreed to vote in favor of one nominee of the Advent Funds and the Series A investors have agreed to vote in favor of a Canopy nominee. Currently, Canopy beneficially owns approximately 21% of the Company’s outstanding common stock (calculated assuming conversion of all outstanding Series A Preferred and Series B Preferred and the warrants held by the holders of our preferred stock, but excluding outstanding options).

Our recent acquisition of the operating assets of Collective Technologies, LLC is expected to benefit us, but we may not realize any anticipated benefits due to challenges associated with integrating our companies and costs we incur from the acquisition.

The success of our recent acquisition of Collective will depend in large part on the success of our management in integrating the operations, technologies, service capabilities and personnel of Collective into our company following the acquisition. Our failure to meet the challenges involved in integrating successfully the operations of Collective or otherwise to realize any of the anticipated benefits of the acquisition could adversely impact our combined results of operations. In addition, the overall integration of Collective may result in unanticipated operational problems, expenses, liabilities and diversion of management’s attention. The challenges involved in this integration include the following:

	•		successfully integrating our operations, technologies, products and services with those of Collective;

	•		retaining and expanding customer and supplier relationships;

	•		coordinating and integrating the service capabilities of Collective into our company;

	•		preserving service and other important relationships that we and Collective have, and resolving potential conflicts that may arise;

	•		assimilating the personnel of Collective and integrating the business cultures of both companies;

	•		maintaining employee morale and motivation; and

	•		reducing administrative costs associated with the operations of Collective.

We may not be able to successfully integrate the operations of Collective in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of the acquisition to the extent or in the time frame anticipated.

Our stockholders may be diluted by the conversion of outstanding Series A and Series B and the exercise of warrants to purchase common stock issued in our June 2004 and November 2005 private placements.

There are currently 566,797 shares of our Series A Convertible Preferred Stock outstanding, which are convertible at any time at the direction of their holders. Each share of Series A is convertible into a number of shares of common stock equaling its stated value plus accumulated and unpaid dividends, divided by its conversion price then in effect. Each share of Series A is presently convertible into approximately 12.8 shares of common stock, but is subject to adjustment upon certain dilutive issuances of securities by the Company. The outstanding shares of Series A are currently convertible into an aggregate of approximately 7.3 million shares of common stock. Dividends accrue on the Series A at an annual rate of 8%, and the holders of Series A may convert the accrued dividends into shares of common stock to the extent the Company has not previously paid such dividends in cash. Accrued and unpaid Series A dividends totaled $2.5 million at July 1, 2006. The holders of Series A are also entitled to anti-dilution protection, pursuant to which the conversion price would be reduced using a weighted-average calculation in the event the Company issues certain additional securities at a price per share less than the conversion price then in effect. In addition, the holders of Series A have preemptive rights to purchase a pro rata portion of certain future issuances of equity securities by the Company.

There are also currently 1,582,023 shares of our Series B outstanding, which are convertible at any time at the direction of their holders. Each share of Series B is convertible into a number

of shares of common stock equaling its stated value plus accumulated and unpaid dividends, divided by its conversion price then in effect. Each share of Series B is presently convertible into 10 shares of common stock, but is subject to adjustment upon certain dilutive issuances of securities by the Company. The outstanding shares of Series B are currently convertible into an aggregate of approximately 15.8 million shares of common stock. Dividends accrue on the Series B at an annual rate of 8%, and the holders of Series B may convert the accrued dividends into shares of common stock to the extent the Company has not previously paid such dividends in cash. Accrued and unpaid Series B dividends totaled $1.1 million at July 1, 2006. The holders of Series B are also entitled to anti-dilution protection, pursuant to which the conversion price would be reduced using a weighted-average calculation in the event the Company issues certain additional securities at a price per share less than their conversion price then in effect. In addition, the holders of Series B have preemptive rights to purchase a pro rata portion of certain future issuances of equity securities by the Company.

There are currently warrants outstanding to purchase up to 1,624,308 shares of our common stock, which are held by the Series A investors. The exercise price for such warrants is $3.10 per share. The warrants are currently exercisable and expire in December 2014. There are currently warrants outstanding to purchase up to 5,932,587 shares of our common stock, which are held by the Series B investors. The exercise price for such warrants is $1.26 per share. The warrants are currently exercisable and expire in November 2015.

Furthermore, if we have an indemnity obligation under the Securities Purchase Agreement we entered into in connection with the Series B financing, then we may, if we and the Series B investors agree, settle up to $2.0 million of that indemnity obligation by issuing up to an additional $2.0 million (158,203 shares) of Series B and warrants to purchase 37.5% of the number of shares of common stock into which such additional shares of Series B are convertible when issued. If any such indemnity obligation is not satisfied by issuing shares of Series B and warrants, then it will be satisfied through a cash payment.

If the holders of our Series A or Series B convert their shares or exercise the warrants they now hold, or that they may in the future be issued as a result of any indemnity obligations that we may have in connection with the Series B financing, the Company would be required to issue additional shares of common stock, resulting in dilution of existing common stockholders and potentially a decline in the market price of our common stock.

Additionally, subsequent to July 1, 2006, we have issued 2,272,272 shares of common stock, a warrant to purchase 1 million shares of common stock in connection with our acquisition of Collective. We have also agreed to issue options to purchase up to 1,608,481 shares of common stock and up to 306,303 shares of restricted stock to employees acquired in the acquisition (unless, under certain circumstances, the purchase price is increased in lieu thereof), all of which could cause further dilution to existing stockholders.

A significant portion of our revenues occurs in the last month of a given quarter. Consequently, our results of operations for any particular quarter are 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. In fiscal year 2006, 59%, 65%, 61% and 60%, respectively, of our total revenue was recorded in the last month of each successive 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 difficult and uncertain. If we do not receive orders that we have anticipated or complete shipments within a given quarter, our results of operations could be harmed materially for that quarter. Additionally, due to receiving a significant portion of our orders in the last month of the quarter, we may experience a situation in which we have exceeded our credit limits with our vendors, thereby making our ability to ship to our customers very difficult. If we experience such situations and are unable to extend our credit limits with our vendors, this could materially harm our results of operations.

We have a history of operating losses, and our future operating results may depend on the success of our cost reduction initiatives and on other factors.

We have a history of recurring losses and net cash used in operations. In fiscal 2006 and 2005, we incurred net losses of $8.1 million and $15.8 million, respectively. Our cash used in operations was $11.2 million and $4.4 million and for fiscal year 2006 and 2005, respectively. We had $15.3 million in working capital as of July 1, 2006.

In fiscal year 2005, we implemented additional restructuring activities related to the closure of our Dublin, Ireland facility. These measures included reductions in our workforce and the partial or complete closure of certain under-utilized facilities, including offices. 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 by, among other things, making it difficult to motivate and retain the remaining employees, which in turn may affect our ability to deliver our products in a timely fashion. We also cannot assure you that these

measures will be successful in achieving the expected benefits within the expected time frames, or at all, or that the workforce reductions will not impair our ability to achieve our current or future business objectives.

Our future is dependent upon many other factors in addition to our cost reduction initiatives, including but not limited to, improving revenues and margins, continuing our relationship with EMC, expanding our service offerings, successfully integrating our recent acquisition of Collective, receiving market acceptance of new products and services, recruiting, hiring, training and retaining significant numbers of qualified personnel, forecasting revenues and expenses, controlling expenses and managing assets. If we are not successful in these areas, our future results of operations could be adversely affected.

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

International sales represented approximately 40% and 42% of total revenue for fiscal year 2006 and 2005, respectively. International sales represented approximately 41% of total revenue for the first quarter of fiscal 2007. As a result, our results of operations are subject to the financial and operating risks of conducting business internationally, including:

	•		fluctuating exchange rates, tariffs and other barriers;

	•		difficulties in staffing and managing foreign subsidiary operations;

	•		changes in a country’s economic or political conditions;

	•		greater difficulties in accounts receivable collection and longer payment cycles;

	•		unexpected changes in, or impositions of, legislative or regulatory requirements;

	•		import or export restrictions;

	•		potentially adverse tax consequences;

	•		potential hostilities and changes in diplomatic and trade relationships; 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. If we are faced with significant changes in the regulatory and business climate in our international markets, our business and results of operations could suffer.

The 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 become obsolete. When we became a reseller of EMC disk-based storage products, we agreed not to 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.

The markets for the products and services that we sell are intensely competitive, which may lead to reduced sales of our products, reduced profits and reduced market share for our business.

The market for our products and services is intensely competitive. If we fail to maintain or enhance our competitive position, we could experience pricing pressures and reduced sales, margins, profits and market share, each of which could materially harm our business. Furthermore, new products and technologies developed by third parties may depress the sales of existing products and technologies. Our customers’ requirements and the technology available to satisfy those requirements are continually changing. We must be able to respond to these changes in order to remain competitive. Since we emphasize integrating third party products, our ability to respond to new technologies will be substantially dependent upon our contractual relationships with the third parties whose products we sell, particularly EMC. 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 we are not exclusive resellers, the third party products we sell are available from a large number of sources. Therefore, we must distinguish ourselves by the quality of our service and support. The principal elements of competition in our markets include:

	•		quality of professional services consulting and support;

	•		responsiveness to customer and market needs;

	•		product price, quality, reliability and performance; and

	•		ability to sell, service and deploy new technology.

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

Certain of our sales transactions are generated through sales leads received from EMC. Although EMC’s primary sales focus is currently on large-enterprise customers, should EMC change its strategy and begin to sell directly to the small-to-mid-enterprise customers, or work more closely with other resellers, it could have an adverse impact on our results of operations.

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

We require substantial working capital to fund our operations. We have historically used 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. Additionally, there is often a time gap between when we are required to pay for a product received from EMC (which is due net 45 days from shipment) and the time when we receive payment for the product from our customer (which often occurs after payment is due to EMC). Due to our sales growth since fiscal year 2004, a significant and increasingly larger portion of our working capital resources must be used to cover amounts owed to EMC during the gap periods. If we are not able to maintain sufficient working capital resources to fund payments due to EMC during these gap periods, we could default on or be late in our payments to EMC, which could harm our relationship with EMC, cause EMC to stop or delay shipments to our customers or otherwise reduce the level of business it does with us, harm our ability to serve our customers and otherwise adversely affect our financial performance and operations.

We believe that our current cash and receivable balances will be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months. Projections for our capital requirements are subject to numerous uncertainties including the actual costs of the integration of Collective, the amount of service and product revenue generated in fiscal 2007 and general economic conditions. If we do not improve revenues and margins, successfully integrate Collective and achieve profitability, we expect to 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. Any such activity requires the approval of the Series A and Series B investors. No assurance can be given that our Series A and Series B investors will consent to such new financing, 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 would adversely affect our ability to:

	•		grow the business;

	•		maintain or enhance our product or service offerings;

	•		respond to competitive pressures; and

	•		continue operations.

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

	•		dilution in percentage of ownership in MTI;

	•		economic dilution if the pricing terms offered to investors are more favorable to them than the current market price; and

	•		subordination of the rights, preferences or privileges of common stockholders to the rights, preferences or privileges of new security holders.

We are party to long term, non-cancelable facility leases for facilities which we do not use and may not be able to sublease on terms that will offset our lease obligations, which may result in a continuing unfavorable impact on our cash position.

We are party to long term, non-cancelable facility leases with respect to facilities we no longer utilize. For example, we no longer utilize our facilities in Sunnyvale, California and various facilities in Europe. As a result, we are obligated to continue making lease payments related to our unutilized facilities. In the aggregate, in fiscal year 2007 and 2008, we are obligated to pay gross lease payments of approximately $0.6 million each fiscal year, for facility space which we no longer utilize, and we cannot assure you that we will be able to continue to sublease the unutilized facilities on terms that will significantly offset these obligations.

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 size, timing and terms of customer orders;

	•		the introduction of new products by our competitors and competitive pricing pressures;

	•		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;

	•		decreases in our gross profit as a percentage of revenues for mature products; and

	•		changes in foreign currency exchange rates.

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. Failure to be profitable on a quarterly basis or to meet such expectations could cause a significant decrease in the trading price of our common stock. The following table quantifies the fluctuations in our period-to-period results for fiscal year 2006 (amounts in thousands).


								NET LOSS
					OPERATING			ATTRIBUTABLE
	TOTAL		GROSS		INCOME			TO COMMON
	REVENUE		PROFIT		(LOSS)			SHAREHOLDERS
2006
Fourth quarter	$	43,915	$	8,589	$	(117	)	$	(1,253	)
Third quarter		40,162		7,887		(1,557	)		(2,988	)
Second quarter		31,635		6,401		(3,463	)		(4,148	)
First quarter		39,331		8,078		(2,090	)		(3,622	)


Total	$	155,043	$	30,955	$	(7,227	)	$	(12,011	)

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

Although we have not experienced significant undetected software or hardware errors to date, given the complex nature of our solutions, we believe the risk of undetected software or hardware errors may occur in networking products primarily when they are first introduced or as new versions of products are released. These errors, if significant, could:

	•		adversely affect our sales;

	•		cause us to incur significant warranty and repair costs;

	•		cause significant customer relations problems;

	•		harm our competitive position;

	•		hurt our reputation; and

	•		cause purchase delays.

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

Substantially all domestic employment at MTI, including employment of our domestic key personnel, is “at will.”

Both MTI and its U.S. employees, excluding the president and chief operating officer of our Collective Technologies division, have the right to terminate their 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, who have been instrumental in setting our strategic plans. 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 may have difficulty managing any future growth effectively.

Our facilities, personnel, operating and financial systems may not be sufficient to effectively manage our expected future growth and, as a result, we may lose our ability to respond to new opportunities promptly. Additionally, our expected revenue growth may not materialize and increases in our operating expenses in response to the expected revenue growth may harm our operating results and financial condition.

Our growth strategy is currently focused on increasing EMC product sales and providing a broad range of professional services. To accomplish these goals, we are dependent upon many factors, including but not limited to, recruiting, hiring, training and retaining significant numbers of qualified sales and professional services personnel in various geographic regions.

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

Although we have not experienced material costs with respect to proprietary rights infringement cases, there is risk that 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 are expected to 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 and adversely affected. In addition, we may receive communications from other parties asserting that our employees’ or our own intellectual property infringes on their proprietary rights. If we become liable to any third party for infringing its intellectual property rights, we could be required to pay substantial damage awards and to develop non-infringing technology, obtain licenses, or to cease selling the applications that contain the infringing intellectual property. Litigation is subject to inherent uncertainties, and any outcome unfavorable to us could materially harm our business. Furthermore, we could incur substantial costs in defending against any intellectual property litigation, and these costs could increase significantly if any dispute were to go to trial. Our defense of any litigation, regardless of the merits of the complaint, likely would be time-consuming, costly, and a distraction to our management personnel. Adverse publicity related to any intellectual property litigation also could harm the sale of our products and damage our competitive position.

If we and 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 United States and internationally. Any new products and product enhancements that we sell in the future also must meet industry standards and government regulations at the time they are introduced. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals could materially harm our business. In addition, such compliance may be time-consuming and costly. Our solutions integrate SAN, NAS, DAS and CAS technologies into a single storage architecture. Components of these architectures must comply with evolving industry standards, and we depend upon our suppliers to provide us with products that 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 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 a number of factors upon the market price of our common stock, including the following:

	•		failure of our results from operations to meet the expectations of public market analysts and investors;

	•		the timing and announcement of new or enhanced products or services by us, our partners or by our competitors;

	•		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 and the trading price of shares of technology companies generally.

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

We may not have registered, or we may not have had an exemption from registering, certain options under the California securities laws and may incur liability to repurchase the options or face potential claims under the California securities laws.

At various times from March 2005 through March 2006, we issued options to purchase shares of our common stock under our 2001 Stock Incentive Plan, as amended, to our directors, employees and consultants, with exercise prices ranging from a minimum of $1.44 per share to a maximum of $2.45 per share, for the purpose of providing incentive compensation to those directors, employees and consultants. The aggregate exercise price of the issued options is approximately $1.2 million. The recipients of the issued options did not pay the Company for the options, and none of the options has been exercised as of the date hereof. In order to comply with the securities laws of California, where we have our headquarters, we intend to apply for approval of the terms of a repurchase offer. Under the terms proposed to be submitted to the California Department of Corporations, we would offer to repurchase any outstanding options issued during such period for a cash price equal to 20% of the aggregate exercise price of the option, plus interest at an annual rate of 7%. There is no assurance that the terms of the repurchase offer will be approved, and we could be required to offer a higher repurchase price or to extend the offer to a greater number of persons.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors regarding our assessments. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. Due to the recent Collective acquisition, we will need to integrate Collective into our internal control procedures, and as a result, may identify deficiencies. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time; we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our stock price. Based on our current market capitalization and the current legislation as written, we do not expect to be required to comply with Section 404 of the Sarbanes-Oxley Act until our fiscal year 2008. However, changes in our market capitalization or changes to the legislation may require us to comply earlier.

We may fail to comply with Nasdaq Marketplace Rules.

Our securities have traded on the Nasdaq Capital Market since August 16, 2002. We believe we are currently in compliance with Nasdaq Capital Market continued listing requirements. However, we failed to comply with Nasdaq Marketplace Rules, specifically with the minimum bid price requirement, in fiscal year 2002, and may in the future fail to comply with the minimum bid price requirement, or other continued listing requirements. If that happens and we do not regain compliance by the end of any applicable grace period, our stock would be delisted and we would likely seek to list 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 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 our Series A Preferred Stock, Series B and any other 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 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 20, 2006, we entered into an Amendment to Second Waiver and Consent (the “Waiver”) with The Canopy Group, Inc. (“Canopy”). Under the Waiver, Canopy agreed to consent to our entering into and performing our obligations under that certain Third Amendment to Loan and Security Agreement, dated June 15, 2005, by and between Comerica Bank (“Comerica”) and us, which extended our line-of-credit maturity date for a year to May 31, 2006. Canopy also agreed to guarantee our line of credit with Comerica through December 31, 2006, and to delete a provision of Second Waiver and Consent, dated as of December 28, 2004, regarding our obligation to make certain principal repayments under the Loan and Security Agreement with Comerica, dated November 13, 2002, as amended (the “Comerica Loan”). In exchange, we issued a warrant (the “Warrant”) to Canopy to purchase up to 125,000 shares of our common stock at a purchase price of $1.23 per share, the fair market value of the date of the grant. The Warrant is immediately exercisable and has a term of five years. The

Warrant was issued pursuant to the exemptions from registration contained in Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D. The foregoing description of the Warrant is qualified in its entirety by reference to the complete terms of the Warrant, a copy of which is filed as Exhibit 4.1 hereto.

ITEM 6 — EXHIBITS

(a) Exhibits:

See index to Exhibits on page 39 of this report

SIGNATURES

Pursuant to the requirements 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 14th day of August, 2006.


	MTI TECHNOLOGY CORPORATION
	By:	/s/ Scott Poteracki
		Scott Poteracki
		Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

(a) The following documents are filed as a part of this Annual Report on Form 10-Q:


Exhibit			Incorporated by Reference
Number	Exhibit Description	Form	Exhibit(s)		Filing Date
2.1	Asset Purchase Agreement, dated June 6, 2006, between MTI Technology Corporation and Collective Technologies, LLC.	10-K		2.1	June 30, 2006

2.2	Amendment No. 1 to Asset Purchase Agreement dated June 28, 2006, by and among the Company, Collective and Pencom.	8-K		2.1	July 11, 2006

2.3	Amendment No. 2 to Asset Purchase Agreement, dated July 5, 2006, by and among the Company, Collective and Pencom.	8-K		2.2	July 11, 2006

4.1	Form of Common Stock Purchase Warrant.	8-K		4.1	July 11, 2006

4.2	Registration Rights Agreement, dated July 5, 2006, by and between the Company and Collective.	8-K		4.1	July 11, 2006

10.1	Fourth Amendment to Loan and Security Agreement, entered into as of June 20, 2006, by and between Comerica Bank and the Company.	8-K		10.1	June 26, 2006

10.2	Amendment to Second Waiver and Consent, entered into as of May 31, 2006 by and between The Canopy Group, Inc. and the Company.	8-K		10.2	June 26, 2006

10.3	Warrant to Purchase Common Stock of the Company dated June 20, 2006, issued to The Canopy Group, Inc.	8-K		10.3	June 26, 2006

10.4	Form of Promissory Note.	8-K		10.1	July 11, 2006

10.5	Employment Agreement, dated July 5, 2006, by and between the Company and Edward C. Ateyeh, Jr.	8-K		10.2	July 11, 2006

10.6*	MTI Technology Corporation 2006 Stock Incentive Plan (CT).	10-K		10.33	June 30, 2006

10.7*	Form of Restricted Stock award Agreement under the 2006 Stock Incentive Plan (CT).	10-K		10.34	June 30, 2006

10.8*	Form of Stock Option award Agreement (Officers) under the 2006 Stock Incentive Plan (CT).	10-K		10.35	June 30, 2006

10.9*	Form of Stock Option award Agreement (Employees) under the 2006 Stock Incentive Plan (CT).	10-K		10.36	June 30, 2006

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) /Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) /Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1	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 (filed herewith).

32.2	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 (filed herewith).

* Management or compensatory plan or arrangement.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

MTI Technology (MTIC) Inactive 10-Q2007 Q1 Quarterly report

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