function storage() {
  static $storage = array('x', 'y');
  return $storage;
}

works as well.

You are using the same array in nested foreach() loops.
Apparently the array pointer is moved is the parent loop, which affect the nested one.
No bug here.

I think this is still a bug. See my first comment -- that differs very slightly and yet it works.

I thought best is if I provide one script...
<?php
function s($key) {
  static $storage = array('a' => array('x', 'y'));
  return $storage[$key];
}
function s1($key) {
  static $storage = array('a' => array('x', 'y'));
  return (array)$storage[$key];
}
function s2() {
  static $storage = array('x', 'y');
  return $storage;
}
function invoke($op, $st) {
  foreach ($st('a') as $k => $function) {
    echo "$op $k\n";
    $function($op, $st);
  }
}
function x($op, $st) {
  if ($op == 'op1') invoke('op2', $st);
}
function y() {
}
invoke('op1', 's');
echo "\n";
invoke('op1', 's1');
echo "\n";
invoke('op1', 's2');
?>
You get

op1 0
op2 0
op2 1

op1 0
op2 0
op2 1
op1 1

op1 0
op2 0
op2 1
op1 1

if this is not a bug then why they differ?

The simplified example:

Reproduce code:
---------------
<?php
function s() {
  static $storage = array(array('x', 'y'));
  return $storage[0];
}

foreach (s('a') as $k => $function) {
  echo "op1 $k\n";
  if ($k == 0) {
    foreach (s('a') as $k => $function) {
      echo "op2 $k\n";
    }
  }
}
?>
Expected result:
----------------
op1 0
op2 0
op2 1
op1 1

Actual result:
--------------
op1 0
op2 0
op2 1

The bug is similar to bug #35106 (nested foreach fails when array variable has a reference), but has different reason.

Fixed in CVS HEAD and PHP_5_1.

Please fix in 4.x, too. Thanks.

Dmitry, please also fix this in PHP 4.4.

Fixed in PHP_4_4 too.