8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

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

Date of report (Date of earliest event reported) April 26, 2005
(April 25, 2005)

STORAGE TECHNOLOGY CORPORATION
(Exact Name of Registrant As Specified In Its Charter)

Delaware	1-7534	84-0593263
(State or jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

One StorageTek Drive, Louisville, Colorado 80028-4309
(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code (303) 673-5151

Not applicable
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02   Results of Operations and Financial Condition

The following information is furnished pursuant to Item 2.02, “Results of Operations and Financial Condition.”

On April 25, 2005, StorageTek announced its results of operations and financial condition for the fiscal quarter ended April 1, 2005 in a Press Release, dated April 25, 2005, a copy of which is furnished as Exhibit 99.1.

On April 25, 2005, StorageTek conducted its First Quarter 2005 Financial Results Conference Call (the “Conference Call”) for the fiscal quarter ended April 1, 2005. A copy of the script of the prepared remarks of StorageTek’s Chairman of the Board, President and Chief Executive Officer, Patrick J. Martin, for the Conference Call is furnished as Exhibit 99.2. A copy of the script of the prepared remarks of StorageTek’s Corporate Vice President, Chief Financial Officer, Robert S. Kocol, for the Conference Call is furnished as Exhibit 99.3.

Item 7.01    Regulation FD Disclosure

The information furnished under Item 2.02 of this Report on Form 8-K is hereby incorporated in Item 7.01 by reference.

Item 9.01    Financial Statements and Exhibits

    (c) Exhibits

99.1 Press Release, dated April 25, 2005 relating to StorageTek’s results of operations and financial condition for the fiscal quarter ended April 1, 2005.

99.2 Script of prepared remarks of StorageTek’s Chairman of the Board, President and Chief Executive Officer, Patrick J. Martin, for the Conference Call.

99.3 Script of prepared remarks of StorageTek’s Corporate Vice President, Chief Financial Officer, Robert S. Kocol, for the Conference Call.

Certain statements, projections and forecasts contained herein and in the exhibits furnished herewith regarding StorageTek’s future performance and financial results, future products, and business plans constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” and “believes.” There are a number of risks and uncertainties that could cause StorageTek’s actual results to differ materially.

Some of these risks and uncertainties include, but are not limited to, StorageTek’s ability to develop, manufacture and market new products and services successfully; the effect of product mix and distribution channel mix on our gross margins; our ability to execute our Information Lifecycle Management strategy; competitive pricing pressures; rapid technological changes in the markets in which we compete; our ability to attract and retain highly skilled employees; changes in our management; our ability to protect and develop intellectual property rights; our reliance on certain sole source suppliers; our ability to obtain quality parts and components in a timely manner; general economic conditions in the United States and globally; and other risks described in StorageTek’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K that are filed with the Securities and Exchange Commission and which are available on the SEC’s website.

2

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: April 25, 2005 Storage Technology Corporation


By: /s/ Thomas G. Arnold
——————————————
Vice President,
Corporate Controller

3

EX-99

Exhibit 99.1

Storage Technology Corporation
One StorageTek Drive
Louisville, CO 80028-4130
303.673.5020

NEWS RELEASE

Contact:	Joe Fuentes	Dana Johnson
	Manager, Global Public Relations	Investor Relations
	303.661.2523	303.661.2676
	joe_fuentes@storagetek.com	dana_johnson@storagetek.com

STORAGETEK ANNOUNCES FIRST QUARTER REVENUE AND EPS NUMBERS

LOUISVILLE, Colo. – Monday, April 25, 2005 – StorageTek^® (Storage Technology Corporation, NYSE: STK), today announced first quarter 2005 net income of $23.4 million, or $0.22 diluted earnings per share. These amounts compare to net income of $23.3 million, or $0.21 diluted earnings per share, for the first quarter of 2004. Revenue for the first quarter of 2005 was $499.3 million compared to $515.1 million for the first quarter of 2004.

“While we grew our profits on a year-over-year basis, this was not the quarter that we had expected to deliver,” said Patrick J. Martin, StorageTek chairman, president and chief executive officer. “However, as we enter the second quarter, our backlog and pipeline of business have improved and we anticipate delivering better results for the remainder of 2005.”

Tape automation products continue to show strong growth as evidenced by the 70 percent year-over-year increase in sales. “We are pleased to see that our SL8500 high-end library and the SL500 mid-range library are gaining widespread market acceptance. Customers are coming to truly value our automated tape solutions as the preferred choice for data protection and archiving,” continued Martin.

Financial highlights for the first quarter include a cash and investment balance of $1.15 billion, cash flow from operations of approximately $52 million, and share repurchases of approximately $57 million. “The balance sheet and financial strength of StorageTek continue to remain solid,” said Robert S. Kocol, StorageTek's chief financial officer. “We will continue to focus on operational disciplines in order to drive continuous improvement in our business.”

StorageTek will conduct the first quarter 2005 financial results conference call today at 5 p.m. EDT. Media and analysts may join StorageTek for a live audio Web cast at http://storagetek.shareholder.com/medialist.cfm. Media and analysts who prefer to join via telephone line may dial 1-800-818-5264 at least 5 minutes prior to the start of the conference call. International participants should dial +1-913-981-4910.

A replay of the conference call will be available on the Web and can be accessed through the StorageTek Web site. The replay will also be available via telephone beginning at 8 p.m. EDT today and run through midnight EDT April 30, by dialing 1-888-203-1112. If calling internationally, dial +1-719-457-0820. Both the domestic and international replay call-in numbers require pass code 4255206.

This press release contains certain statements, projections and forecasts regarding StorageTek’s future business plans, financial results, products and performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” and “believes.” There are a number of risks and uncertainties that could cause the company’s actual results to differ materially.

Some of these risks and uncertainties include, but are not limited to, StorageTek’s ability to develop, manufacture and market new products and services successfully; the effect of product mix and distribution channel mix on our gross margins; our ability to execute our Information Lifecycle Management strategy; competitive pricing pressures; rapid technological changes in the markets in which we compete; our ability to attract and retain highly skilled employees; changes in our management; our ability to protect and develop intellectual property rights; our reliance on certain sole source suppliers; our ability to obtain quality parts and components in a timely manner; general economic conditions in the United States and globally; and other risks described in StorageTek’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K that are filed with the Securities and Exchange Commission and which are available on the SEC’s website.

About StorageTek

StorageTek is a $2.2 billion global company that enables businesses, through its information lifecycle management strategy, to align the cost of storage with the value of information. The company’s innovative storage solutions manage the complexity and growth of information, lower costs, improve efficiency and protect investments. For more information, see www.storagetek.com, or call 1.800.786.7835.

TRADEMARKS: StorageTek and the StorageTek logo are registered trademarks of Storage Technology Corporation. Other names mentioned may be trademarks of Storage Technology Corporation or other vendors/manufacturers.

STORAGE TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In Thousands, Except Per Share Amounts)

	Quarter Ended
		04/01/05			03/26/04
Revenue
Storage products	$	266,202		$	294,606
Gross profit margin		51	%		49	%
Storage services		233,054			220,466
Gross profit margin		43	%		42	%
Total revenue		499,256			515,072
Cost of revenue		264,680			276,869
Gross profit		234,576			238,203
Gross profit margin		47	%		46	%
Research and development costs		47,371			48,502
Selling, general, and administrative expense		164,645			162,685
Operating profit		22,560			27,016
Interest income		7,176			3,181
Interest expense		(219	)		(377	)
Income before income taxes		29,517			29,820
Provision for income taxes		(6,092	)		(6,471	)
Net income	$	23,425		$	23,349
EARNINGS PER COMMON SHARE
Earnings per share:
Basic	$	0.22		$	0.21
Diluted	$	0.22		$	0.21
Weighted average shares:
Basic		106,070			110,551
Diluted		108,532			113,353
SUPPLEMENTAL FINANCIAL DATA – STORAGE PRODUCTS REVENUE

Tape products	$	211,898	$	223,089
Disk products		32,491		44,218
Network products		12,798		17,014
Other		9,015		10,285
Total storage products	$	266,202	$	294,606

STORAGE TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	04/01/05			12/31/04
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,000,403	$	853,410
Short-term investments		105,117		281,028
Accounts receivable		432,027		519,273
Inventories		134,369		123,459
Deferred income tax assets		166,840		174,253
Other current assets		4,425		1,062
Total current assets		1,843,181		1,952,485
Long-term investments		45,591		48,408
Property, plant, and equipment		180,720		177,371
Spare parts for maintenance		50,309		49,048
Deferred income tax assets		46,475		46,569
Other assets		142,170		133,960
Total assets	$	2,308,446	$	2,407,841
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	1,318	$	1,551
Accounts payable		105,950		121,019
Accrued liabilities		486,106		533,839
Income taxes payable		231,617		239,253
Other current liabilities		22,715		59,365
Total current liabilities		847,706		955,027
Long-term debt		10,263		11,006
Total liabilities		857,969		966,033
STOCKHOLDERS’ EQUITY

Common stock, $0.10 par value		11,462			11,288
Capital in excess of par value		1,065,479			1,019,101
Retained earnings		623,520			600,095
Accumulated other comprehensive loss		(27,374	)		(38,772	)
Treasury stock		(190,718	)		(134,148	)
Unearned compensation		(31,892	)		(15,756	)
Total stockholders’ equity		1,450,477			1,441,808
Total liabilities and stockholders’ equity	$	2,308,446		$	2,407,841

STORAGE TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

	Quarter Ended
		04/01/05			03/26/04
OPERATING ACTIVITIES
Cash received from customers	$	576,374		$	569,589
Cash paid to suppliers and employees		(521,580	)		(493,952	)
Interest received		5,859			2,634
Interest paid		(194	)		(307	)
Income taxes paid		(8,609	)		(7,516	)
Net cash provided by operating activities		51,850			70,448
INVESTING ACTIVITIES
Purchases of investments		(27,050	)		(151,700	)
Proceeds from sale of investments		205,460			125,665
Purchases of property, plant, and equipment		(19,704	)		(14,738	)
Proceeds from sale of property, plant, and equipment		46			11
Other assets		(4,207	)		(25,602	)
Net cash provided by (used in) investing activities		154,545			(66,364	)
FINANCING ACTIVITIES
Repurchases of common stock		(56,570	)		(29,190	)
Proceeds from employee stock plans		23,915			27,788
Proceeds from other debt		647			416
Repayments of other debt		(978	)		(491	)
Net cash used in financing activities		(32,986	)		(1,477	)
Effect of exchange rate changes in cash		(26,416	)		(16,265	)
Increase (decrease) in cash and cash equivalents		146,993			(13,658	)
Cash and cash equivalents - beginning of the period		853,410			727,354
Cash and cash equivalents - end of the period	$	1,000,403		$	713,696
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income	$	23,425		$	23,349
Depreciation and amortization expense		18,400			20,117
Inventory writedowns		4,814			2,862
Translation loss		8,028			8,981
Other non-cash adjustments to income		25,597			29,120
(Increase) decrease in assets:
Accounts receivable		77,118			54,517
Inventories		(12,445	)		7,144
Other current assets		(8,975	)		2,449
Spare parts		(6,589	)		(6,032	)
Deferred income tax assets		195			(384	)
Increase (decrease) in liabilities:
Accounts payable		(14,100	)		(27,191	)
Accrued liabilities		(37,925	)		(11,297	)
Other current liabilities		(17,865	)		(25,326	)
Income taxes payable		(7,828	)		(7,861	)
Net cash provided by operating activities	$	51,850		$	70,448

EX-99

Exhibit 99.2

StorageTek

Q1 2005 Conference Call

Script of Prepared Remarks of Pat Martin

Good afternoon everyone, and thank you for joining us today. I’ll make a few opening remarks, and then I’ll turn it over to Bobby, who will cover some of the additional financial information on our first quarter performance.

By now, I’m sure you have had the opportunity to read our earnings release. We generated just under $500 million in revenue and earned $0.22 per share, up from $0.21 per share in the same period last year. While we grew our profits on a year-over-year basis, this was not the quarter that we had expected to deliver.

You will recall that we had a very strong fourth quarter, one that substantially exceeded expectations, both those internally and those in the finance community. As a result we entered this year with a backlog and pipeline of business prospects that was significantly smaller than a year ago. However, we felt that, with our new products, we were well positioned to rebuild the pipeline and deliver a strong Q1. And indeed that was the case, in the early part of the quarter. As we entered the last few weeks of the quarter, we had enough deals that were far enough along, we were still expecting to deliver results that were more in line with our own expectations. Obviously, that didn’t happen.

The good news is that we did not lose transactions, instead they were delayed or pushed out to later quarters. And we find that we were not unique in this situation. As evidenced by several others in our industry, many customers in the quarter delayed purchases, for a variety of reasons. I must add that the transactions we were involved with at the end of the quarter is not business that we lost, it is business that we must go out and close in the current and following quarters.

Having said that, our current backlog and pipeline positions have improved from the start of the first quarter of the year and have improved from the second quarter of last year and we expect to deliver better results for the remainder of the year. That is, we expect to return to year-over-year revenue growth in the second quarter and get back to delivering the earnings growth we anticipated coming into the year.

In addition, there were a significant amount of positive results we delivered in the quarter that should not be overlooked.

Our service business continues to perform well. Service revenue was up 6% for the quarter. And we continue to grow our professional services expertise which delivered double-digit revenue growth in the quarter. We continue to see a lot of opportunity in the services area. Our customers look to our professional services as a key enabler and a key component required to successfully integrate and implement an Information Lifecycle Management solution. We believe the addressable markets will continue to be primary storage, data protection and archival requirements.

We are beginning to see the disruption of the primary storage market, as new technologies come to market. Through our existing offerings and those that will be coming out throughout this year, we are enabling customers to make backup and recovery simple and reliable. As corporations identify and establish long-term archival policies and requirements, we bring hardware, software and services that support them in this process. Customers are adopting technologies and services in ways they never have before. We won several new accounts in the first quarter due in large part to our ILM solutions. As an example, one large medical instrument systems provider chose a StorageTek ILM solution including our SL8500, FlexLine disk, and professional services. The customer consolidated three competitor libraries into a single SL8500 and chose the SL8500 because of its redundancy features.

Revenue from our automated tape solutions continued its strong growth and was up 70% from first quarter last year. Our SL8500 high-end library and the SL500 mid-range library both are gaining widespread market acceptance. During the first quarter, we surpassed our 500^th SL500 modular library system shipped. Customers are using the system to archive and protect their business critical information. The SL500 was also named Datamation’s 2005 product of the year.

Our automated tape solutions are the preferred solutions of choice for data protection and archiving, in the mid-range, and especially in the high-end compute environments. One customer, a major financial services company was struggling to migrate from a mainframe to an open systems environment. Continual upgrades to the mainframe resulted in increasingly higher costs. The customer purchased two SL8500 libraries with drives, and our professional services team not only helped the customer reduce back-up time, but reduce costs as well. This is just one example in the quarter where the StreamLine library series saved customers time and money while we made back-up and recovery simpler, more predictable, and more reliable.

As we look forward, throughout the year, we will be delivering enhancements to our automation and VSM product lines and we will launch our next generation tape drive and archive software solution. With our current product line and these new offerings, we will continue to distance ourselves from the competition, which should translate into improved revenue performance.

The RD&E investments that we have made over the past few years produced a steady stream of new solutions for our customers. Solutions that have spanned the total storage spectrum, from Tape, Automation to our ILM offerings. This year we are maintaining the pace of our traditional new product introductions, refreshing our product line and introducing next generation storage solutions.

Our disk revenue declined a disappointing 27% from the first quarter of 2004. Clearly, part of the transactions that were pushed out included some of our ILM solutions. Here again, this is more pipeline than anything else. However our Customers continue to recognize that they need an additional tier of storage with price/performance characteristics that bridge the gap between disk and tape. We revenued 45% more terabytes of Bladestore in this quarter, than we did in Q1 of last year. Our Bladestore is being selected as part of the solution in a variety of environments and for a variety of applications, such as disk-to-disk backup and recovery, which is primarily targeted to customers who have shrinking backup windows. BladeStore gives them the opportunity to do a two-stage backup, moving their backup to ATA very rapidly and then, on to tape. Going forward, throughout the year, we will be bringing out our new ATA product offering and new ILM software solutions, and thus we are expecting stronger performance in this business area in the quarters ahead.

In the quarter, we had a couple of wins in our open systems disk business that I would like to talk about. The first transaction was with the US federal government for disk and networking components. We were able to compete and win this business based on our ability to combine our FlexLine disk subsystem along with a high performance file system. The agency had rigid demands for data sharing and data movement across a large enterprise storage environment and SAN infrastructure. In another transaction, we won a major surveillance opportunity with the Canadian government. By partnering with a surveillance software solutions firm, we were able to provide a complete solution using our FlexLine 280 to provide a cost effective and reliable infrastructure on which to store this data with the ability to have a rapid recall when needed. In the second phase of this implementation the customer will be adding a back-end tape archive to accomplish the long-term storage requirement of this data. Our ability to provide a complete ILM solution, that will manage the data from creation to destruction, was critical in our ability to win this deal.

Coming off a very strong fourth quarter and anticipating a continuing strong IT spend in the first quarter, we made investments and expanded our sales channel. This hiring actually started towards the end of last year. Over the last two quarters we added over 80 quality people to our sales force around the world. As these employees become more familiar with our products and the services, we expect them to be productive towards the end of the year.

We also filled some key executive positions this year. We hired Brenda Zawatski as vice president and general manager of Information Lifecycle Management Solutions. Her background is an ideal fit to help our customers look for ways to achieve primary storage efficiency, simplify and automate their backup and recovery processes, and create a flexible compliance and archiving architecture. Prior to joining us, Brenda was vice president of Product and Solutions Marketing for VERITAS Software, where she was responsible for product and solutions strategy, market/customer segmentation, marketing campaigns, and product launches. Her wealth of experience and product management leadership skills will be a major asset to strengthen our market focus and accelerate growth. Prior to VERITAS, Brenda built a distinguished 20-year career at IBM.

In addition to Brenda, we recently hired Nigel Dessau to the position of Chief Marketing Officer, where he will be responsible for all aspects of the company’s marketing, communication and branding efforts. Nigel has spent nearly 20 years in sales, marketing, and executive management positions at IBM in both the U.S. and Europe. He most recently was vice president of their Virtualization Solutions Systems and Technology Group.

John Kitlen also joined us as director of Internal Audit. He came from Level 3 Communications where he led their internal audit function. John is a CPA and began his career at Deloitte & Touche.

I would be remiss, if I didn’t mention that for the fourth consecutive year, Fortune Magazine has named StorageTek number one in the computer peripheral category in its annual ranking of America’s Most Admired Companies. This is a great tribute to not only the employees of StorageTek, but also to our customers and partners who have contributed to our ongoing success.

As I reflect on the quarter, it is clear that the IT market is choppy, as it has been for the past few years. While customers are more optimistic, they continue to be cautious. Having said this, I expect that the IT environment will improve throughout the year. Of the many customers I’ve met with throughout the quarter, most were more optimistic than they were a year ago. However, the majority are still telling me that they haven’t seen any real growth in their budgets. These sentiments were recently substantiated by a recent IDC survey. Our customers continue to try to do more within their existing spending limits and our Information Lifecycle Management strategy is singularly focused on helping them manage exponential data growth while lowering costs and enhancing the efficiency of their overall storage operations.

As I look to the remainder of the year, I am optimistic. As I said we are entering the quarter with a stronger backlog and pipeline than we started the year with. We will be bringing out new products and product enhancements in our tape drive, our tape automation, our ATA family, our virtualization products for both open and MVS, and our ILM software suite. These products and enhancements will continue to strengthen our position in the marketplace, while we continue to expand our addressable markets. More importantly, they match the current IT environment where customer needs are increasing, as their budgets are shrinking. Through our expanded services offerings and cutting-edge technologies, we have an opportunity to position ourselves as a premier partner with our customers.

Similar to other companies in our industry, we experienced a more cautious IT spending environment in the first quarter than we expected coming into the year. While we believe the overall environment, as well as our own circumstances with new product releases, will improve as the year progresses, taking into account our first quarter results, it would be prudent to adjust our revenue growth expectations for the year to be in the 2 to 4% range over last year’s results. However even with the slight decline in our revenue forecasts for the year, we still expect to deliver around $260 million of pre-tax income for the full year.

At this time, I’ll turn it over to Bobby Kocol.

EX-99

Exhibit 99.3

StorageTek

Q1 2005 Conference Call

Script of Prepared Remarks of Bobby Kocol

In order to provide additional insight into our first quarter, let me take a little time to go over some of our results in more detail.

First quarter revenues of $499 million resulted in earnings of $.22 per diluted share, a slight improvement over Q1 of last year. Product sales in the first quarter were $266 million, made up of $212 million in tape sales, $32 million in disk, and $22 million in network and other sales. Service revenues increased to $233 million, an increase of 6% over Q1 of last year. Geographically, North America represented about 46% of the total worldwide revenue, Europe approximately 39%, with the Pacific Rim and Latin America making up the rest. On a year over year basis, North American revenues were down 8%, European revenues down 1%, Asia was down 8%, while Latin American revenues were up 29%. Overall, on a consolidated basis, excluding our hedging activities, currency impacts were favorable to revenue on a year over year basis by about 3 points. Most of the revenue shortfall we experienced was due to direct sales transactions that have been pushed out into subsequent quarters. As a result of that, our total product sales were skewed to a higher percentage of indirect sales, which represented about 57% of the total. But going forward, we see this getting back to more traditional splits with indirect sales around 45 to 50% of the total.

Working down the P&L, most of the key financial metrics remain very solid. “Total” gross margins in the quarter were 47%, an increase of 70 basis points from Q1 of last year. “Product” margins exceeded 50%, an improvement of 140 basis points over last year, mostly due to a product mix skewed toward more tape automation and virtual software sales. Our efforts in driving operational efficiencies and ongoing cost reduction activities have continued and clearly contributed to the strength we had in product margins. As we mentioned on our earnings call last quarter, the upcoming year will be somewhat different than prior years with respect to product margins. While the first quarter was somewhat of an aberration regarding product margins, keep in mind, many of the offerings we are bringing to the market this year are aimed at the small and medium business segments. As we sell more tape and disk solutions into the SMB space, and do this through our indirect channels where we typically achieve lower margins on a percentage basis, there should be downward pressure at the “product” margin level. In light of that, we are anticipating “annualized” product margins to be flat or perhaps slightly below last year’s levels. As the revenue mix develops throughout the year, we should be able to get a clearer picture of how this will work out.

Service margins for the quarter were 43%, an increase of 50 basis points year over year. We continued to see solid performance in this area. Together, product support and multi-vendor systems support together grew 4% year over year. And as expected, our professional services revenue grew 15% over Q1 of last year, and increased to 12% of the total services revenue. The mix of services should continue to shift to more professional services which carry lower gross margins. So, while we are slightly ahead of our guidance on service margins after the first quarter results, it is still appropriate to assume “annualized” service margins will be relatively flat compared to last year’s levels.

Combining both products and services, “total” gross margins should be flat to slightly down for the full year.

Total operating expenses for the first quarter were $212 million, relatively flat to last year. R&D expenditures were $47 million while SG&A expenses were $165 million. First quarter R&D expenditures were lighter than anticipated as prototype material for new product launches was minimal. With significant product launch activity on the forefront, we anticipate R&D expenditures to climb back to the $50 million range per quarter. SG&A expenses were very close to last year’s levels and our guidance of SG&A being around 28% for the full year remains intact. Net interest income added approximately $7 million to pre-tax earnings. And finally, shifts in the income projections through our international operations should allow our annual effective tax rate to be around 21%, slightly better than we anticipated, although immaterial to this quarter’s results.

The balance sheet and financial strength of StorageTek continue to remain solid. Cash and investment balances are approaching $1.2 billion. This includes us investing another $57 million in the first quarter through the repurchase of roughly 1.8 million shares of our stock. At this pace, we would exhaust the current share repurchase authorization somewhere near the middle of next year. Cash flow from operations was $52 million for the quarter. DSO at 79 days is 6 days better than Q1 of last year. Using the average accounts receivable balance during the quarter instead of the ending balance which is skewed by end of quarter shipments, DSO’s were 64 days. Inventory levels were $134 million and inventory turns were just under four.

Headcount was just above 7100 at the end of the quarter. We had about 50 additions during the first quarter, mostly in sales, service and engineering. In the quarter, capital expenditures were $20 million while depreciation and amortization was just over $18 million, both on target for what we anticipated for the year.

In summary, it was a challenging quarter. And while it’s one that puts us slightly behind where we wanted to be at the end of the first quarter, we believe there are steps we can take in order to get back on track going forward. Granted, there are uncertainties that still exist with the macro-economic environment. But we will continue driving operational disciplines and take the necessary steps to achieve consistent and improving results. As Pat said, with Q1 behind us, we’re going to assume a range of 2 to 4% revenue growth for the year. But we still believe at these levels, we can generate pre-tax income in a range of $260 million. After tax, this should provide an increase in earnings per share close to 10% over the prior year. The new products we have brought to market thus far are having great success. And yet, we have a significant number of new product offerings that we plan to bring to market in the current and subsequent quarters. That, coupled with the growing service expertise we have, which allows us to solve the complex storage issues our customers face, gives us much to look forward to in the upcoming quarters.