SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 7, 2001

[ ] 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.)

4905 East La Palma Avenue
Anaheim, California 92807
(Address of principal executive offices, zip code)

Registrant's telephone number, including area code: (714) 970-0300

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

The number of shares outstanding of the issuer's common stock, $.001 par
value, as of August 7, 2001 was 32,482,183.

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MTI TECHNOLOGY CORPORATION

INDEX

Page
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of July 7, 2001
and April 7, 2001 3

Condensed Consolidated Statements of Operations for the
Three Months Ended July 7, 2001 and July 1, 2000 4

Condensed Consolidated Statements of Cash Flows for the
Three Months Ended July 7, 2001 and July 1, 2000 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12

Item 3. Quantitative and Qualitative Disclosures about Market
Risk 15

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 16

Item 6. Exhibits and Reports on Form 8-K 16

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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

JULY 7, APRIL 7,
2001 2001
--------- ---------

ASSETS

Current assets:
Cash and cash equivalents ...................................................... $ 13,339 $ 16,320
Accounts receivable, net ....................................................... 18,417 21,514
Inventories .................................................................... 22,751 29,112
Deferred income tax benefit .................................................... -- 1,020
Prepaid expenses and other receivables ......................................... 5,854 5,615
--------- ---------
Total current assets ...................................................... 60,361 73,581

Property, plant and equipment, net ................................................ 16,404 17,182
Deferred income tax benefit ....................................................... -- 23,280
Investment in affiliate ........................................................... 7,801 9,504
Goodwill, net ..................................................................... 5,184 5,184
Other ............................................................................. 93 229
--------- ---------
Total assets .............................................................. $ 89,843 $ 128,960
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of capital lease obligations ................................... 130 127
Accounts payable ............................................................... 9,899 11,042
Accrued liabilities ............................................................ 13,656 14,684
Deferred income ................................................................ 20,514 20,214
--------- ---------
Total current liabilities ................................................. 44,199 46,067

Capital lease obligations ......................................................... 583 621
Other ............................................................................. 2,825 3,522
--------- ---------
Total liabilities ......................................................... 47,607 50,210

Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000 shares; issued and
outstanding, none ............................................................ -- --
Common stock, $.001 par value; authorized 80,000 shares; issued (including
treasury shares) and outstanding 32,811 and 32,732 shares at July 7, 2001
and April 7, 2001, respectively .............................................. 33 33
Additional paid-in capital ..................................................... 135,272 135,132
Accumulated deficit ............................................................ (87,537) (51,050)
Less cost of treasury stock (375 shares at July 7, 2001 and
April 7, 2001) ............................................................... (1,348) (1,348)
Accumulated other comprehensive loss ........................................... (4,184) (4,017)
--------- ---------
Total stockholders' equity ................................................ 42,236 78,750
--------- ---------
Total liabilities and stockholders' equity ................................ $ 89,843 $ 128,960
========= =========

See accompanying notes to condensed consolidated financial statements.

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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED
-----------------------
JULY 07, JULY 01,
2001 2000
-------- --------

Net product revenue ........................................ $ 17,270 $ 25,443
Service revenue ............................................ 12,550 12,467
-------- --------
Total revenue ...................................... 29,820 37,910

Product cost of revenue .................................... 16,786 17,147
Service cost of revenue .................................... 7,666 8,573
-------- --------
Total cost of revenue .............................. 24,452 25,720
-------- --------
Gross profit ....................................... 5,368 12,190
-------- --------

Operating expenses:
Selling, general and administrative .................... 12,395 18,660
Research and development ............................... 3,476 5,185
-------- --------
Total operating expenses ........................... 15,871 23,845
-------- --------

Operating loss ..................................... (10,503) (11,655)

Interest and other income (expense), net ................... (83) 985
Equity in net loss of affiliate ............................ (1,703) (1,094)
Gain (loss) in foreign currency transactions ............... 102 (176)
-------- --------

Loss before income taxes ................................... (12,187) (11,940)
Income tax expense (benefit) ............................... 24,300 (3,200)
-------- --------
Net loss ........................................... $(36,487) $ (8,740)
======== ========

Net loss per share:
Basic and diluted ...................................... $ (1.13) $ (0.27)
======== ========

Weighted-average shares used in per share computations:
Basic and diluted ...................................... 32,417 32,085
======== ========

See accompanying notes to condensed consolidated financial statements.

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MTI TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

THREE MONTHS ENDED
-----------------------
JULY 7, JULY 1,
2001 2000
-------- --------

Cash flows from operating activities:
Net loss .................................................................. $(36,487) $ (8,740)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 1,508 3,916
Provision for sales returns and losses on accounts receivable, net ....... 581 1,033
Net loss in equity of affiliate .......................................... 1,703 1,094
Provision for inventory obsolescence ..................................... 4,880 637
Loss on disposal of fixed assets ......................................... -- 350
Deferred income tax expense (benefit) .................................... 24,300 (3,200)
Deferred income .......................................................... (402) (1,144)
Changes in assets and liabilities:
Accounts receivable ...................................................... 2,453 25,627
Inventories .............................................................. 1,459 (4,137)
Prepaid expenses, other receivables and other assets ..................... 37 (884)
Accounts payable ......................................................... (1,164) (4,858)
Accrued and other liabilities ............................................ (1,082) (4,587)
-------- --------
Net cash provided by (used in) operating activities ............................... (2,214) 5,107
-------- --------

Cash flows from investing activities:
Capital expenditures for property, plant
and equipment, net ...................................................... (878) (2,388)
-------- --------
Net cash used in investing activities ............................................. (878) (2,388)
-------- --------

Cash flows from financing activities:
Proceeds from issuance of common stock and
exercise of options and warrants ......................................... 140 1,740
Payment of capital lease .................................................. (35) --
-------- --------
Net cash provided by financing activities ......................................... 105 1,740
-------- --------

Effect of exchange rate changes on cash ........................................... 6 101
-------- --------

Net increase (decrease) in cash and cash equivalents .............................. (2,981) 4,560

Cash and cash equivalents at beginning of period .................................. 16,320 8,791
-------- --------

Cash and cash equivalents at end of period ........................................ $ 13,339 $ 13,351
======== ========

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 19 $ 2
Income taxes ............................................................ 44 42

Supplemental schedule of noncash investing and financing activities:
Note issued in connection with equity investment in affiliate ................ -- 1,500

See accompanying notes to condensed consolidated financial statements.

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MTI TECHNOLOGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Overview

The interim condensed consolidated financial statements included herein
have been prepared by MTI Technology Corporation (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 the 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 7, 2001. 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 7, 2001 and April 7, 2001, and the condensed
consolidated results of operations and cash flows for the three month
periods ended July 7, 2001 and July 1, 2000. The results of operations
for the interim periods are not necessarily indicative of the results of
operations for the full year. References to amounts are in thousands,
except per share data, unless otherwise specified.

2. Inventory

Inventories consist of the following:

JULY 7, APRIL 7,
2001 2001
------- -------

Raw Materials ........... $ 3,559 $ 8,665
Work in Process ......... 719 705
Finished Goods .......... 18,473 19,742
------- -------
$22,751 $29,112
======= =======

3. Line of Credit

The Company entered into a Loan and Security Agreement (the "Loan
Agreement") with Silicon Valley Bank and General Electric Capital
Corporation as of July 22, 1998, and amended July 22, 1999, whereby the
Company may borrow up to $30.0 million under an asset-secured domestic
line of credit, limited by the value of pledged collateral. Effective
September 22, 2000, the Company renewed its agreement with Silicon
Valley Bank and General Electric Capital Corporation. The agreement
allows the Company to borrow at a rate equal to the prime rate plus 1%.
Borrowings under the line of credit are subject to certain financial and
operating covenants, including, without limitation, various financial
covenants requiring the Company to maintain a minimum quick ratio,
debt-net worth ratio, tangible net worth, and a maximum net loss, and
restricts the Company from paying any dividends. The term of the
agreement is for one year. The quick ratio, the profitability, and the
maximum net loss covenants of the Loan Agreement were further amended on
May 31, 2001.

As of July 7, 2001, there were no borrowings outstanding under the Loan
Agreement and the Company was in default under the Amended Loan
Agreement for failing to comply with covenants relating to the maximum
debt to tangible net worth ratio and the maximum net loss. The Company
is in the process of applying for a waiver,

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forbearance or amendment. There is no assurance that a waiver,
forbearance or amendment will be received or that, if received, the
Company will be in compliance with the covenants in future periods.

The Company's current line of credit agreement will expire on September
22, 2001. The Company has begun negotiations for a renewal of its
existing credit facility. No assurance can be given that a renewal will
be available or, if available, will be on terms favorable to the
Company. If a renewal is not available, the Company would seek another
source of financing. However, there can be no assurance that a new
source of financing would be available. Should the Company be unable to
secure a new financing arrangement, the Company's activities may be
severely constrained.

4. Income Taxes

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

The Company recorded a tax expense of $24,300 related to the valuation
allowance for deferred-tax assets in the first quarter of fiscal year
2002. Because of the continued decline in the market value of the
Company's holding of Caldera stocks and continued softness in the
American and European markets for the Company's products, management
believes that it is more likely than not that the Company will not
realize the benefits of the net deferred tax asset existing on July 7,
2001.

5. Net Loss per Share

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

THREE MONTHS ENDED
-----------------------
JULY 7, JULY 1,
2001 2000
-------- --------

Numerator:
Net loss .......................................... $(36,487) $ (8,740)
======== ========

Denominator:
Denominator for net loss per share, basic -
weighted-average shares outstanding .............. 32,417 32,085

Effect of dilutive securities:
Dilutive options outstanding ..................... -- --
-------- --------

Denominator for net loss per share,
diluted - adjusted weighted-average shares ..... 32,417 32,085
======== ========

Net loss per share, basic and diluted ................ $ (1.13) $ (0.27)
======== ========

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Options and warrants to purchase 8,991 shares of common stock were
outstanding at July 7, 2001, but were not included in the computation of
diluted loss per share for the three months ended July 7, 2001, because
the effect would be antidilutive.

Options and warrants to purchase 6,824 shares of common stock were
outstanding at July 1, 2000, but were not included in the computation of
diluted loss per share for the three months ended July 1, 2000, because
the effect would be antidilutive.

6. Business Segment Information

The Company is engaged in the design, manufacture, sale, and service of
high-performance storage systems, software, and related products. The
Company's reportable business segments are based upon geographic areas.
The Company's operations are structured to achieve consolidated
objectives. As a result, significant interdependence and overlap exists
among the Company's geographic areas. Accordingly, revenue, operating
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 7, JULY 1,
2001 2000
-------- --------

Revenue:
United States ................. $ 20,432 $ 29,808
Europe ........................ 10,067 11,196
Transfers between areas ....... (679) (3,094)
-------- --------
Total revenue ..................... $ 29,820 $ 37,910
======== ========

Operating loss:
United States ................. $(10,524) $(10,022)
Europe ........................ 21 (1,633)
-------- --------
Total operating loss .............. $(10,503) $(11,655)
======== ========

JULY 7, APRIL 7,
2001 2001
-------- --------

Identifiable assets:
United States ............ $ 66,103 $105,170
Europe ................... 23,740 23,790
-------- --------
Total assets ................. $ 89,843 $128,960
======== ========

7. Goodwill and Other Intangibles

In July 2001, the FASB issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible
Assets." Statement 141

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requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement
141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately. Statement 142
will require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement
142 will also require that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with Statement 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of."

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

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

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

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\
As of July 7, 2001, the Company had remaining goodwill related to the
acquisition of National Peripherals, Inc. ("NPI") of $5,184 and the
investment in Caldera of $4,209. Because of the adoption of Statement
142, $463 and $1,852 of goodwill amortization expense incurred in the
same quarter of the prior year and in fiscal year 2001, respectively,
will no longer be recognized.

Because of the extensive effort needed to comply with the adoption of
Statements 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial
statements as of July 7, 2001, as it relates to whether the Company will
be required to recognize any transitional impairment losses as the
cumulative effect of a change in accounting principle. An evaluation of
goodwill impairment will be performed in the second quarter of fiscal
year 2002.

8. Comprehensive Loss

The components of comprehensive loss are as follows:

THREE MONTHS ENDED
---------------------
JULY 7, JULY 1,
2001 2000
-------- --------

Net loss .................................... $(36,487) $ (8,740)
Foreign currency translation adjustment ..... (167) (164)
-------- --------
Total comprehensive loss .................... $(36,654) $ (8,904)
======== ========

9. Related Party Transactions

In the normal course of business, the Company sold goods and services to
Center 7, Inc. ("Center 7"), a subsidiary of the Canopy Group, Inc.
("Canopy"). Goods and services sold to Center 7 in the first quarter of
fiscal years 2002 and 2001 were $200 and $92, respectively. Raymond J.
Noorda, Chairman of the Board of Directors of the Company, is the
Chairman of the Board of Directors of Canopy. Ralph J. Yarro, III, our
Director, is also the Director and President and Chief Executive Officer
of Canopy. Canopy beneficially owns approximately 45% of our outstanding
common stock. At July 7, 2001 and April 7, 2001, there was $50 and $15
due from Center 7, respectively.

On April 1, 2001, MTI entered into a PilotCenter Master Services
Agreement with Center 7. Under this Agreement, Center 7 provides for a
number of enterprise management services to MTI. The enterprise
management services include monitoring and management of certain of
MTI's "Managed Assets" (Managed Assets includes: installation and
operation of an advanced help desk function for MTI customers, MTI field
service representatives and the MTI Network Operations Center ("NOC").
As part of this service, Center 7 provides MTI customers with email
notification of help desk ticket status and MTI Field representatives
with robust email notifications of tickets. The Agreement further
provides an improvement in functionality for the NOC, demonstration
capabilities of functionality for select MTI product models, and
operation, management and monitoring of the help desk systems on a
twenty four hours, seven days a week and three hundred and sixty five
days a year basis. These services are provided based upon a Center 7
owned appliance that is installed at MTI and connected to Center 7's
operations in Lindon, Utah. Additionally, the Agreement provides
software, maintenance, implementation, hardware, monitoring, updates,
AHD integration, and Center 7 PCC service. MTI pays Center 7 $50 per
month for the services. The Initial Term of the Agreement is 36 months.
Upon the expiration of the Initial Term, the term of the Agreement is
extended automatically on a month-to-month basis, unless and until
either party gives the other no less than thirty (30) days' notice of
termination,

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provided, that either party may terminate the Agreement for any reason,
with or without cause, after the Initial Term. Management believes that
the above amount represents the fair value of services provided.

The Company is negotiating a Management Services Development Agreement
with Center 7. Under the Agreement, Center 7 will develop certain
software in support of the Company's management services offering,
designed to allow the Company to better integrate with enterprise
management infrastructure frameworks. The cost aggregate of the project
under this Agreement is not currently expected to exceed $500. In the
first quarter of fiscal year 2002, the Company paid $320 to Center 7
under this Agreement.

10. Subsequent Event

At the Company's Annual Meeting of Stockholders held on July 11, 2001,
the Company's stockholders approved the 2001 Stock Incentive Plan, the
2001 Non-Employee Director Option Program and the 2001 Employee Stock
Purchase Plan. A maximum of 4,000 shares and 1,200 shares are authorized
for issuance under the 2001 Stock Incentive Plan (the "SIP") and the
2001 Employee Stock Purchase Plan. The maximum aggregate number of
shares allocated for the SIP shall be increased by 3% annually, subject
to terms and conditions of the SIP. The 2001 Non-Employee Director
Option Program functions as part of the SIP.

11. Litigation.

In July through September 2000, several class action complaints were
filed against the Company and certain officers, alleging violations of
the provisions of the Securities Exchange Act of 1934 and the rules
promulgated thereunder. The plaintiffs in those various cases filed a
Consolidated Amended Complaint in the federal court for the Central
District of California on or about December 5, 2000, making similar
allegations. On March 27, 2001, the court granted the Company's motion
to dismiss the complaint on the grounds plaintiffs had failed to state a
legally-cognizable claim and had failed to plead the allegations
consistently with the requirements of the Private Securities Litigation
Reform Act. The court gave plaintiffs sixty days to attempt again to
file a legally sustainable complaint. Plaintiffs then filed a First
Amended Consolidated Complaint. As with the earlier version, this
complaint alleges a class period from July 22, 1999 to July 27, 2000 and
alleges that the defendants were aware of certain adverse information
that they failed to disclose during that period. The Company believes
the lawsuit is without merit, has moved to dismiss the new complaint,
and intends to continue to defend the suit vigorously.

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

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PART I

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

Certain statements set forth herein are not historical or based on historical
facts and constitute "forward-looking statements" involving known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements,
expressed or implied, by such forward-looking statements. Forward-looking
statements include, but are not limited to, statements about the Company's
revenue, markets, margin, the effect of accounting changes, attempts to modify
its banking facility, proprietary product sales, customers, service and support
costs, investment in research and development, foreign currency hedging
activity, dependence on new products, international sales and quarterly
fluctuations. The Company's transition to sales of its proprietary products and
its focus of sales efforts on Global 2000 accounts may not be successful. The
Company may fail to achieve anticipated revenue levels and efficiencies of
operation. Given these uncertainties, investors in the Company's common stock
are cautioned not to place undue reliance on such forward-looking statements.
Additional information on potential factors that could affect the Company's
financial results are included in the Company's Annual Report on Form 10-K for
the year ended April 7, 2001.

Our current line of credit agreement will expire on September 22, 2001 and we
have begun negotiations for a renewal of our existing credit facility. No
assurance can be given that a renewal will be available or, if available, will
be on terms favorable to us. If a renewal is not available, we would seek
another source of financing. However, there can be no assurance that a new
source of financing would be available.

Our securities are currently traded on the Nasdaq National Market. To maintain
our listing, we must continue to meet the required continued listing standards
including minimum stockholders' equity, number of shareholders and bid price.
One of such requirements is a minimum trading price of $1.00 per share. As of
July 7, 2001, we were in compliance with the continued listing requirements. On
August 17, 2001, our closing price was $1.05 per share. There can be no
assurance that we will be in compliance with the standards in the future.
Failure to comply with any of requirements may cause our stock to be removed
from listing on Nasdaq. Should this happen, we may not be able to secure listing
on other exchanges or quotation systems. This would have a negative effect on
the price and liquidity of our stock.

OVERVIEW

MTI Technology Corporation is a leading provider of high-availability,
fault-tolerant solutions for the enterprise-storage marketplace. We design,
develop, manufacture, sell and support a complete line of integrated products
and services that provide customers with a full range of hardware, software and
networking components as well as sophisticated professional services, which we
combine into one solution to provide continuous access to online information. We
have historically sold our products and services to Global 2000 companies for
their data center computing environments. During fiscal 2000, the Company's
markets expanded to include e-commerce Internet-related businesses, or IRBs such
as content providers, online retailers and web-based advertisers. However,
during fiscal 2001, because of the lack of liquidity and resulting higher risk
of success of the IRBs, the Company experienced a decrease in demand for its
proprietary products from IRBs. The Company elected to pursue sales from Fortune
1000 and Global 2000 customers.

Our solutions are compatible with Sun Solaris, HP-UX, Windows NT, Novell
Netware, IBM AIX, Compaq Tru64 and Linux operating systems, which enable us to
address a broad range of customer applications and markets. Our customers
represent a cross section of industries and governmental agencies and range from
Fortune 500 companies to small businesses.

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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 7, JULY 1,
2001 2000
------ ------

Net product revenue ............................. 57.9% 67.1%
Service revenue ................................. 42.1 32.9
----- -----
Total revenue .............................. 100.0 100.0

Product gross profit ............................ 2.8 32.6
Service gross profit ............................ 38.9 31.2
----- -----
Gross profit ............................... 18.0 32.2

Selling, general and administrative ............. 41.6 49.2
Research and development ........................ 11.7 13.7
----- -----
Operating loss ............................. (35.2) (30.7)

Interest and other income (expense), net ........ (0.3) 2.6
Equity in net loss of affiliate ................. (5.7) (2.9)
Gain (loss) in foreign currency transactions .... 0.3 (0.5)
Income tax expense (benefit) .................... 81.5 (8.4)
----- -----
Net loss ................................... (122.4)% (23.1)%
===== =====

Net Product Revenue: Net product revenue for the first quarter of fiscal 2002
decreased $8.2 million, or 32.1% from the same quarter of the prior year. This
decrease was primarily because of a $7.4 million, or 38.6%, and a $0.8 million,
or 12.6% decrease in domestic and international product revenue, respectively.
The current economic downturn contributed significantly to the decreasing demand
for our information-storage systems and software.

Service Revenue: Service revenue for the first quarter of fiscal 2002 increased
$0.1 million, or 0.7% over the same quarter of the prior year. This increase was
primarily because of increased revenue from domestic maintenance contracts.

Product Gross Profit: Product gross profit was $0.5 million for the first
quarter of fiscal 2002, a decrease of $7.8 million, or 94.1% from the same
quarter of the preceding year, and the gross profit percentage of net product
sales was 2.8% for the first quarter of fiscal 2002 as compared to 32.6% for the
same period of the prior year. The product gross profit percentage decrease was
mainly because of additional inventory reserves of $4.9 million, which consisted
primarily of additional reserves for Gladiator 6700 inventory, and reduced
manufacturing efficiencies resulting from lower production volumes as well as
changes in product mix. Vivant sales that carried a higher product margin have
declined. Before recording the additional reserves for Gladiator 6700 inventory,
the product gross profit was $4.7 million, a decrease of $3.6 million or 42.9%
from the same quarter of the preceding year.

Service Gross Profit: Service gross profit was $4.9 million for the first
quarter of fiscal 2002, an increase of $1.0 million, or 25.4% from the same
period of the previous year. The gross profit percentage of service revenue
increased to 38.9% in

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the first quarter of fiscal 2002 as compared to 31.2% in the same quarter of the
preceding year. The increase in service gross profit is primarily attributable
to increased revenue from domestic maintenance contracts coupled with decreased
Field Service Costs resulting from reduced manpower and travel related expenses.

Selling, General and Administrative: Selling, general and administrative
expenses for the first quarter of fiscal 2002 decreased $6.3 million, or 33.6%
over the same quarter of the preceding year. This decrease was primarily because
of a $2.4 million decrease in compensation-related sales costs resulting from
reduced revenues and commission related expenses, a reduction of $2.2 million of
goodwill impairment charge and the elimination of $0.3 million of goodwill
amortization expense related to NPI resulting from the adoption of Statement 142
and a $0.5 million decrease in travel related expenses.

Research and Development: Research and development expenses for the first
quarter of fiscal 2002 decreased $1.7 million, or 33.0% over the same quarter of
the preceding year. This decrease was primarily attributable to a decrease in
inflows of expensed components to complete the development of new products. In
the first quarter of fiscal year 2002, materials moved into engineering
primarily consisted of non-expensed, inventoriable items.

Interest and Other Income (Expense), Net: The net other expense for the first
quarter of fiscal 2002 was $0.1 million, as compared to the net other income of
$1.0 million from the same quarter of the preceding year. Despite an increase in
interest income from our short-term investments, the decrease reflected a
reduction in patent income from EMC Corporation ("EMC") that was fully paid in
January 2001 and an increase in interest expense.

Inflation and Foreign Currency Exchange: We recorded $0.1 million in foreign
exchange gain during the first quarter of fiscal year 2002, as compared to $0.2
million in foreign exchange loss in the same quarter of the prior year. In order
to minimize the risk of foreign exchange loss, we have used hedging programs,
currency forward contracts, currency options and/or other derivative financial
instruments commonly used to reduce financial-market risks, none of which were
outstanding at July 7, 2001. There can be no assurance, however, that such
actions successfully will reduce our exposure to financial-market risks.

Income Tax Expense (Benefit): The income tax expense for the first quarter of
fiscal 2002 was $24.3 million, as compared with the income tax benefit of $3.2
million for the same period last year. We recorded a valuation allowance against
the remaining $24.3 million net deferred-tax asset because our management
believes that it is more likely than not that we will not realize the benefits
of the net deferred tax asset existing on July 7, 2001 because of the continued
decline in the market value of our holding of Caldera stocks and continued
softness in the American and European markets for our products.

NEW ACCOUNTING STANDARDS

In September 2000, Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued. Statement 140 replaces Statement of Financial
Accounting Standards No. 125 and is effective for the Company in the second
quarter of fiscal year 2002. The adoption of SFAS 140 is not expected to have a
material effect upon the Company's financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and working capital were $13.3 million and $16.2
million, respectively, at July 7, 2001. Decreases in cash and cash equivalents
from April 7, 2001, were mostly because of cash used in operations. Net
operating activities used cash of $2.2 million for the first three months of
fiscal 2002, which was primarily attributable to the net loss of $36.5 million
which was partially offset by non-cash adjustments of $32.4 million for deferred
tax assets, provision for inventory obsolescence, depreciation and net loss in
equity investment of affiliate.

Effective February 9, 1996, we entered into an agreement (the "EMC Agreement")
by which we sold to EMC substantially all of our existing patents, patent
applications

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and related rights. Pursuant to the EMC Agreement, we were entitled to receive
$30.0 million over the life of this agreement, in six equal annual installments
of $5.0 million each. As of January 2001, we had received all installments. We
also were to receive royalty payments in the aggregate of up to a maximum of
$30.0 million over the term of the EMC Agreement. As part of the maximum $30.0
million of royalties, minimum royalties of $10.0 million were to be received in
five annual installments, beginning within thirty days of the first anniversary
of the effective date of the EMC Agreement, and within thirty days of each
subsequent anniversary thereof. As of March 2001, we had received all
installments. Also, pursuant to the terms of the EMC Agreement, $10.0 million of
the maximum $30.0 million of royalties, will be received in five equal annual
installments as a result of a computer and technology agreement between EMC and
International Business Machines Corporation announced in March 1999. The first
two annual installments were received in March 2000 and March 2001.

We entered into a Loan and Security Agreement (the "Loan Agreement") with
Silicon Valley Bank and General Electric Capital Corporation as of July 22,
1998, and amended July 22, 1999, whereby we may borrow up to $30.0 million under
an asset-secured domestic line of credit, limited by the value of pledged
collateral. Effective September 22, 2000, we renewed its agreement with Silicon
Valley Bank and General Electric Capital Corporation. The agreement allows us to
borrow at a rate equal to the prime rate plus 1%. Borrowings under the line of
credit are subject to certain financial and operating covenants, including,
without limitation, various financial covenants requiring us to maintain a
minimum quick ratio, debt-net worth ratio, tangible net worth, and a maximum net
loss, and restricts us from paying any dividends. The term of the agreement is
for one year. The quick ratio, the profitability, and the maximum net loss
covenants of the Loan Agreement were further amended on May 31, 2001.

As of July 7, 2001, there were no borrowings outstanding under the Loan
Agreement and we were in default under the Amended Loan Agreement for failing to
comply with covenants relating to the maximum debt to tangible net worth ratio
and the maximum net loss. We are in the process of applying for a waiver,
forbearance or amendment. There is no assurance that a waiver, forbearance or
amendment will be received or that, if received, we will be in compliance with
the covenants in future periods.

In the event our operations do not improve and our working capital does not
increase, we expect to require additional funds to support our working capital
requirements, including financing of accounts receivable and inventory, or for
other purposes, and may seek to raise such funds through public or private
equity financing, bank lines of credit or from other sources. In addition, we
will receive a minimum of $2.0 million in March for the next three years as part
of the EMC agreement. No assurance can be given that additional financing will
be available or that, if available, such financing will be on terms favorable to
us. Should we be unable to secure a new financing arrangement, our activities
may be severely constrained.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our European operations transact in foreign currencies and may be exposed to
financial market risk resulting from fluctuations in foreign currency exchange
rates, particularly the British Pound sterling and the Euro. We have and may
continue to utilize hedging programs, currency forward contracts, currency
options and/or other derivative financial instruments commonly used to reduce
financial market risks, none of which were outstanding at July 7, 2001. There
can be no assurance that such actions will successfully reduce our exposure to
financial market risks.

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We maintain a $30 million credit line. The interest rate applied to any debt
outstanding under this credit line is equal to the prime rate plus 1% and is,
therefore subject to a certain amount of risk arising from fluctuations in these
rates. However, we believe that a 10% increase in interest rates would not have
a material impact on our results of operations.

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PART II

OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

In July through September 2000, several class action complaints were filed
against the Company and certain officers, alleging violations of the provisions
of the Securities Exchange Act of 1934 and the rules promulgated thereunder. The
plaintiffs in those various cases filed a Consolidated Amended Complaint in the
federal court for the Central District of California on or about December 5,
2000, making similar allegations. On March 27, 2001, the court granted the
Company's motion to dismiss the complaint on the grounds plaintiffs had failed
to state a legally-cognizable claim and had failed to plead the allegations
consistently with the requirements of the Private Securities Litigation Reform
Act. The court gave plaintiffs sixty days to attempt again to file a legally
sustainable complaint. Plaintiffs then filed a First Amended Consolidated
Complaint. As with the earlier version, this complaint alleges a class period
from July 22, 1999 to July 27, 2000 and alleges that the defendants were aware
of certain adverse information that they failed to disclose during that period.
The Company believes the lawsuit is without merit, has moved to dismiss the new
complaint, and intends to continue to defend the suit vigorously.

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

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

3.2. Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit A of the Registrant's
Information Statement on Schedule 14C filed with the Commission on
April 3, 2000).

10.34. PilotCenter Master Services Agreement, dated April 1, 2001, between
Center 7, Inc. and the Registrant.

10.35. Statement of Work under PilotCenter Master Services Agreement, dated
April 1, 2001.

10.36. Description of Understanding between Center 7, Inc. and the Registrant
(terms and conditions of the Understanding are subject to change).

(b) Reports on Form 8-K:

None.

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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 21st day of August, 2001.

MTI TECHNOLOGY CORPORATION

By: /s/ Paul W. Emery, II
--------------------------------------
Paul W. Emery, II
Chief Operating Officer, Acting Chief
Financial Officer
(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number Description
- ------- -----------

10.34. PilotCenter Master Services Agreement, dated April 1, 2001, between
Center 7, Inc. and the Registrant.

10.35. Statement of Work under PilotCenter Master Services Agreement, dated
April 1, 2001.

10.36. Description of Understanding between Center 7, Inc. and the Registrant
(terms and conditions of the Understanding are subject to change).