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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    
|     |  | October 31, 2001 OR                                                                                                       
|[  ] |  | 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: 0-13994

COMPUTER NETWORK TECHNOLOGY CORPORATION

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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Minnesota                |  | 41-1356476                          
|                         |  |                                     
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

6000 Nathan Lane North, Minneapolis, Minnesota 55442

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(Address of principal executive offices)    (Zip Code)


Telephone Number: (763) 268-6000

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(Registrants telephone number, including area code)


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 the filing
requirements for at least the past 90 days. Yes [X]  No [  ]

As of December 1, 2001, the registrant had 30,011,183 shares of $.01 par value
common stock issued and outstanding.



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TABLE OF CONTENTS



|                                        |                                                                                               |                                            |  |  |  |  |  | 
|--------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                                        |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                        |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                        |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                        |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                        | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION             
|                                        | Item 1-5. None                                                                               
|                                        | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                             
|Statement Re: Computation of Net Income



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##### Table of Contents



COMPUTER NETWORK TECHNOLOGY CORPORATION

INDEX

|           |  |                                                                                                      |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                      |  | Page
|           |  |                                                                                                      |  |     
|PART I.    |  | FINANCIAL INFORMATION                                                                                |  |     
|Item 1.    |  | Financial Statements (unaudited)                                                                     |  |     
|           |  | Consolidated Statements of Operations for the
three and nine months ended October 31, 2001
and 2000. |  | 3   
|           |  | Consolidated Balance Sheets as of October 31, 2001
and January 31, 2001.                             |  | 4   
|           |  | Consolidated Statements of Cash Flows for the
nine months ended October 31, 2001 and 2000.           |  | 5   
|           |  | Notes to Consolidated Financial Statements                                                           |  | 6   
|Item 2.    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                |  | 10  
|PART II.   |  | OTHER INFORMATION                                                                                    |  | 18  
|Item 1-5.  |  | None                                                                                                 |  |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                     |  | 18  
|SIGNATURES |  |                                                                                                      |  | 19  

2



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##### Table of Contents






|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |        |        |         | 
|------------------------------------------------------------ | ----------------------- | ---------------------------------------------------- | ------------------------ | ------ | ------------------------------ | ------ | ------ | ----------------------------- | ------ | ------ | ------- | ------ | ------- | ------- | ------ | ------ | ------ | ------- | 
|                                                             |                         |                                                      |                          |        | Three months ended October 31, |        |        | Nine months ended October 31, |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |       
|                                                             |                         |                                                      |                          |        | 2001                           |        |        | 2000                          |        |        | 2001    |        |         | 2000    |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |       
|Revenue:                                                     |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             |                         | Product sales                                        |                          | $      | 40,392                         |        |        | $                             | 33,239 |        |         | $      | 84,111  |         |        | $      | 92,279 |        
|                                                             |                         | Service fees                                         |                          |        | 14,970                         |        |        |                               | 12,959 |        |         |        | 42,247  |         |        |        | 36,867 |        
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             |                         |                                                      | Total revenue            |        |                                | 55,362 |        |                               |        | 46,198 |         |        |         | 126,358 |        |        |        | 129,146 | 
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Cost of revenue:                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             |                         | Cost of product sales                                |                          |        | 23,471                         |        |        |                               | 14,190 |        |         |        | 48,488  |         |        |        | 38,597 |        
|                                                             |                         | Cost of service fees                                 |                          |        | 9,864                          |        |        |                               | 7,802  |        |         |        | 28,818  |         |        |        | 21,920 |        
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             |                         |                                                      | Total cost of revenue    |        |                                | 33,335 |        |                               |        | 21,992 |         |        |         | 77,306  |        |        |        | 60,517  | 
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Gross profit                                                 |                         |                                                      | 22,027                   |        |                                |        | 24,206 |                               |        |        | 49,052  |        |         |         | 68,629 |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Operating expenses:                                          |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             |                         | Sales and marketing                                  |                          |        | 14,040                         |        |        |                               | 10,690 |        |         |        | 36,789  |         |        |        | 30,741 |        
|                                                             |                         | Engineering and development                          |                          |        | 6,023                          |        |        |                               | 5,267  |        |         |        | 17,441  |         |        |        | 16,742 |        
|                                                             |                         | General and administrative                           |                          |        | 2,290                          |        |        |                               | 2,020  |        |         |        | 7,227   |         |        |        | 6,329  |        
|                                                             |                         | Abandoned facility                                   |                          |        |                               |        |        |                               | (287   | )      |         |        |        |         |        |        | (287   | )      
|                                                             |                         | Restructuring charge                                 |                          |        |                               |        |        |                               |       |        |         |        | 996     |         |        |        |       |        
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             |                         |                                                      | Total operating expenses |        |                                | 22,353 |        |                               |        | 17,690 |         |        |         | 62,453  |        |        |        | 53,525  | 
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Income (loss) from operations                                |                         |                                                      | (326                     | )      |                                |        | 6,516  |                               |        |        | (13,401 | )      |         |         | 15,104 |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Other income (expense):                                      |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             |                         | Interest income                                      |                          |        | 1,501                          |        |        |                               | 859    |        |         |        | 4,966   |         |        |        | 1,526  |        
|                                                             |                         | Interest expense                                     |                          |        | (86                            | )      |        |                               | (71    | )      |         |        | (214    | )       |        |        | (246   | )      
|                                                             |                         | Loss on sale and write-down of webMethods stock      |                          |        |                               |        |        |                               |       |        |         |        | (10,283 | )       |        |        |       |        
|                                                             |                         | Other                                                |                          |        | (195                           | )      |        |                               | (57    | )      |         |        | (309    | )       |        |        | (328   | )      
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             |                         |                                                      | Other income (expense)   |        |                                | 1,220  |        |                               |        | 731    |         |        |         | (5,840  | )      |        |        | 952     | 
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Income (loss) from continuing operations
before income taxes |                         |                                                      | 894                      |        |                                |        | 7,247  |                               |        |        | (19,241 | )      |         |         | 16,056 |       
|                                                            
|Provision (benefit) for income taxes                         |                         |                                                      | 295                      |        |                                |        | 2,392  |                               |        |        | (6,041  | )      |         |         | 5,299  |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Income (loss) from continuing operations                     |                         |                                                      | 599                      |        |                                |        | 4,855  |                               |        |        | (13,200 | )      |         |         | 10,757 |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Discontinued operations:                                     |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             |                         | Loss from discontinued operations, net of tax        |                          |        |                               |        |        |                               | (1,150 | )      |         |        |        |         |        |        | (3,169 | )      
|                                                             |                         | Gain on sale of IntelliFrame,
net of tax             |                          |        |                               |        |        |                               |       |        |         |        | 12,620  |         |        |        |       |        
|                                                             |                         | Gain
(loss) on sale of Propelis Software,
net of tax |                          |        | 1,799                          |        |        |                               |       |        |         |        | (4,398  | )       |        |        |       |        
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             |                         |                                                      | 1,799                    |        |                                |        | (1,150 | )                             |        |        | 8,222   |        |         |         | (3,169 | )     
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Net income (loss)       |                                                      | $                        | 2,398  |                                |        | $      | 3,705                         |        |        | $       | (4,978 | )       |         | $      | 7,588  |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Basic income (loss) per share:                               |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             | Continuing operations   |                                                      | $                        | .02    |                                |        | $      | .19                           |        |        | $       | (.44   | )       |         | $      | .44    |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Discontinued operations |                                                      | $                        | .06    |                                |        | $      | (.05                          | )      |        | $       | .28    |         |         | $      | (.13   | )     
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Net
income (loss)       |                                                      | $                        | .08    |                                |        | $      | .15                           |        |        | $       | (.17   | )       |         | $      | .31    |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Shares                  |                                                      |                          | 29,923 |                                |        |        | 25,248                        |        |        |         | 29,806 |         |         |        | 24,432 |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|Diluted income (loss) per share:                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |        |         |         |        |       
|                                                             | Continuing operations   |                                                      | $                        | .02    |                                |        | $      | .17                           |        |        | $       | (.44   | )       |         | $      | .40    |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Discontinued operations |                                                      | $                        | .06    |                                |        | $      | (.04                          | )      |        | $       | .28    |         |         | $      | (.12   | )     
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Net
income (loss)       |                                                      | $                        | .08    |                                |        | $      | .13                           |        |        | $       | (.17   | )       |         | $      | .28    |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       
|                                                             | Shares                  |                                                      |                          | 31,195 |                                |        |        | 27,858                        |        |        |         | 29,806 |         |         |        | 26,735 |       
|                                                             |                         |                                                      |                          |        |                                |        |        |                               |        |        |         |       



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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

|                                                           |                                                                                                                                           |                              |         |             |         |   |             |         |         |  
|---------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------- | ----------- | ------- | - | ----------- | ------- | ------- | -
|                                                           |                                                                                                                                           |                              |         | October 31, |         |   | January 31, |        
|                                                           |                                                                                                                                           |                              |         | 2001        |         |   | 2001        |        
|                                                           |                                                                                                                                           |                              |         |             |         |   |             |        
|ASSETS                                                     |                                                                                                                                           |                              |         |             |         |   |             |        
|Current assets:                                            |                                                                                                                                           |                              |         |             |         |   |             |        
|                                                           | Cash and cash equivalents                                                                                                                 |                              | $       | 33,923      |         |   | $           | 39,444  |        
|                                                           | Marketable securities                                                                                                                     |                              |         | 83,225      |         |   |             | 111,033 |        
|                                                           | Receivables, net                                                                                                                          |                              |         | 45,507      |         |   |             | 43,613  |        
|                                                           | Inventories                                                                                                                               |                              |         | 38,588      |         |   |             | 22,447  |        
|                                                           | Net current assets of discontinued operations                                                                                             |                              |         |            |         |   |             | 5,430   |        
|                                                           | Deferred tax asset                                                                                                                        |                              |         | 11,845      |         |   |             | 11,415  |        
|                                                           | Other current assets                                                                                                                      |                              |         | 1,901       |         |   |             | 2,226   |        
|                                                           |                                                                                                                                           |                              |         |             |         |  
|                                                           |                                                                                                                                           | Total current assets         |         |             | 214,989 |   |             |         | 235,608 |  
|                                                           |                                                                                                                                           |                              |         |             |         |  
|Property and equipment, net                                |                                                                                                                                           |                              | 23,296  |             |         |   | 25,215      |        
|Field support spares, net                                  |                                                                                                                                           |                              | 4,608   |             |         |   | 4,446       |        
|Deferred tax asset                                         |                                                                                                                                           |                              | 14,159  |             |         |   |            |        
|Goodwill and other intangibles, net                        |                                                                                                                                           |                              | 3,794   |             |         |   | 1,200       |        
|Other assets                                               |                                                                                                                                           |                              | 1,430   |             |         |   | 2,154       |        
|                                                           |                                                                                                                                           |                              |         |             |         |  
|                                                           |                                                                                                                                           | $                            | 262,276 |             |         | $ | 268,623     |        
|                                                           |                                                                                                                                           |                              |         |             |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                       |                                                                                                                                           |                              |         |             |         |   |             |        
|Current liabilities:                                       |                                                                                                                                           |                              |         |             |         |   |             |        
|                                                           | Accounts payable                                                                                                                          |                              | $       | 16,981      |         |   | $           | 20,293  |        
|                                                           | Accrued liabilities                                                                                                                       |                              |         | 20,764      |         |   |             | 15,780  |        
|                                                           | Deferred revenue                                                                                                                          |                              |         | 12,132      |         |   |             | 15,489  |        
|                                                           | Current installments of obligations under capital lease                                                                                   |                              |         | 1,405       |         |   |             | 1,421   |        
|                                                           |                                                                                                                                           |                              |         |             |         |  
|                                                           |                                                                                                                                           | Total current liabilities    |         |             | 51,282  |   |             |         | 52,983  |  
|                                                           |                                                                                                                                           |                              |         |             |         |  
|Deferred tax liability                                     |                                                                                                                                           |                              | 586     |             |         |   | 586         |        
|Obligations under capital lease, less current installments |                                                                                                                                           |                              | 800     |             |         |   | 1,952       |        
|                                                           |                                                                                                                                           |                              |         |             |         |  
|                                                           |                                                                                                                                           | Total liabilities            |         |             | 52,668  |   |             |         | 55,521  |  
|                                                           |                                                                                                                                           |                              |         |             |         |  
|Shareholders equity:                                      |                                                                                                                                           |                              |         |             |         |   |             |        
|                                                           | Undesignated preferred stock, authorized 965
shares; none issued and outstanding                                                          |                              |         |            |         |   |             |        |        
|                                                           | Series A Junior participating preferred stock,
authorized 40 shares; none issued & outstanding                                            |                              |         |            |         |   |             |        |        
|                                                           | Common stock, $.01 par value; authorized 100,000 shares, issued and
outstanding 29,922 at October 31, 2001 and
29,656 at January 31, 2001 |                              |         | 299         |         |   |             | 297     |        
|                                                           | Additional paid-in capital                                                                                                                |                              |         | 197,614     |         |   |             | 195,910 |        
|                                                           | Unearned compensation                                                                                                                     |                              |         | (1,369      | )       |   |             | (1,304  | )      
|                                                           | Retained earnings                                                                                                                         |                              |         | 14,187      |         |   |             | 19,165  |        
|                                                           | Accumulated other comprehensive income-                                                                                                  
|                                                           |                                                                                                                                           | Foreign currency translation |         |             | (1,123  | ) |             |         | (966    | )
|                                                           |                                                                                                                                           |                              |         |             |         |  
|                                                           |                                                                                                                                           | Total shareholders equity   |         |             | 209,608 |   |             |         | 213,102 |  
|                                                           |                                                                                                                                           |                              |         |             |         |  
|                                                           |                                                                                                                                           | $                            | 262,276 |             |         | $ | 268,623     |        
|                                                           |                                                                                                                                           |                              |         |             |         |  

See accompanying Notes to Consolidated Financial Statements.

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##### Table of Contents






COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                     |                                                         |                                                      |                                                 |         |                   |         |        |         |        |         |  
|---------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------------- | ------- | ----------------- | ------- | ------ | ------- | ------ | ------- | -
|                                                     |                                                         |                                                      |                                                 |         | Nine months ended |        
|                                                     |                                                         |                                                      |                                                 |         | October 31        |        
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|                                                     |                                                         |                                                      |                                                 |         | 2001              |         |        | 2000    |       
|                                                     |                                                         |                                                      |                                                 |         |                   |         |        |         |       
|Operating Activities:                                |                                                         |                                                      |                                                 |         |                   |         |        |        
|                                                     | Net income (loss)                                       |                                                      | $                                               | (4,978  | )                 |         | $      | 7,588   |       
|                                                     | Discontinued operations                                 |                                                      |                                                 | (8,222  | )                 |         |        | 3,169   |       
|                                                     | Depreciation and amortization                           |                                                      |                                                 | 11,636  |                   |         |        | 8,222   |       
|                                                     | Compensation expense                                    |                                                      |                                                 | 436     |                   |         |        | 242     |       
|                                                     | Loss on sale and write-down of webMethods stock         |                                                      |                                                 | 10,283  |                   |         |        |        |       
|                                                     | Changes in operating assets and liabilities:            |                                                      |                                                 |         |                   |         |        |         |       
|                                                     |                                                         | Receivables                                          |                                                 |         | 8,368             |         |        |         | (7,353 | )      
|                                                     |                                                         | Inventories                                          |                                                 |         | (11,695           | )       |        |         | 207    |        
|                                                     |                                                         | Other current assets                                 |                                                 |         | 662               |         |        |         | (95    | )      
|                                                     |                                                         | Accounts payable                                     |                                                 |         | (22,139           | )       |        |         | 6,028  |        
|                                                     |                                                         | Accrued liabilities                                  |                                                 |         | (6,814            | )       |        |         | 11,269 |        
|                                                     |                                                         | Deferred revenue                                     |                                                 |         | (3,424            | )       |        |         | 2,516  |        
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|                                                     |                                                         | Net cash provided by (used in) continuing
operations |                                                 |         | (25,887           | )       |        |         | 31,793 |        
|                                                     |                                                         | Net cash used in
discontinued operations             |                                                 |         | (8,830            | )       |        |         | (2,611 | )      
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|                                                     |                                                         |                                                      | Cash provided by (used in) operating
activities |         |                   | (34,717 | )      |         |        | 29,182  |  
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|Investing Activities:                                |                                                         |                                                      |                                                 |         |                   |         |        |        
|                                                     | Additions to property and equipment                     |                                                      |                                                 | (4,176  | )                 |         |        | (10,108 | )     
|                                                     | Additions to field support spares                       |                                                      |                                                 | (2,284  | )                 |         |        | (1,390  | )     
|                                                     | Acquisition of Articulent, net of cash acquired         |                                                      |                                                 | (10,891 | )                 |         |        |        |       
|                                                     | Net proceeds from the sale of IntelliFrame              |                                                      |                                                 | 5,800   |                   |         |        |        |       
|                                                     | Proceeds from the sale of Propelis Software, Inc.       |                                                      |                                                 | 6,000   |                   |         |        |        |       
|                                                     | Proceeds from the sale of webMethods stock              |                                                      |                                                 | 6,281   |                   |         |        |        |       
|                                                     | Net purchase and redemption of marketable
securities    |                                                      |                                                 | 27,808  |                   |         |        | (69,891 | )     
|                                                     | Other assets                                            |                                                      |                                                 | 779     |                   |         |        | (1,126  | )     
|                                                     | Discontinued operations  additions to
long-term assets |                                                      |                                                 |        |                   |         |        | (158    | )     
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|                                                     |                                                         |                                                      | Cash provided by (used in) investing
activities |         |                   | 29,317  |        |         |        | (82,673 | )
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|Financing Activities:                                |                                                         |                                                      |                                                 |         |                   |         |        |        
|                                                     | Proceeds from issuance of common stock                  |                                                      |                                                 | 1,782   |                   |         |        |        |       
|                                                     | Repayments of obligations under capital leases          |                                                      |                                                 | (1,168  | )                 |         |        | (858    | )     
|                                                     | Proceeds from issuance of common stock                  |                                                      |                                                 |        |                   |         |        | 114,119 |       
|                                                     | Repurchase of common stock                              |                                                      |                                                 | (687    | )                 |         |        |        |       
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|                                                     |                                                         |                                                      | Cash provided by (used in) financing
activities |         |                   | (73     | )      |         |        | 113,261 |  
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|Effects of exchange rate changes                     |                                                         |                                                      | (48                                             | )       |                   |         | (426   | )      
|                                                    
|Net increase (decrease) in cash and cash
equivalents |                                                         |                                                      | (5,521                                          | )       |                   |         | 59,344 |        
|Cash and cash equivalents  beginning of
period      |                                                         |                                                      | 39,444                                          |         |                   |         | 7,974  |        
|                                                     |                                                         |                                                      |                                                 |         |                   |        
|Cash and cash equivalents  end of
period            |                                                         | $                                                    | 33,923                                          |         |                   | $       | 67,318 |        
|                                                     |                                                         |                                                      |                                                 |         |                   |        

See accompanying Notes to Consolidated Financial
Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)

(1)  BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and do not include all of the
information and notes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included in the
Companys Annual Report on Form 10-K for the fiscal year ended January 31,
2001 as filed with the Securities and Exchange Commission.

(2)  DISCONTINUED OPERATIONS

Propelis Software, Inc., formerly known as the Enterprise Integration Solutions
Division developed and sold EAI software that automates the integration of computer
software applications, and business workflow processes. The Company previously
determined to divest Propelis Software Inc. and focus on its core storage networking
and storage solutions businesses. Accordingly, Propelis Software, Inc. has been
accounted for as discontinued operations in the accompanying financial statements.

During the first quarter of 2001, the Company completed the sale of IntelliFrame,
which was affiliated with Propelis Software, Inc, including the
technology underlying the Propelis BPmTM product,
to webMethods for $8.8 million in cash and 273,542 shares of webMethods stock. The sale resulted in an after tax
gain of $12.6 million in the first quarter of 2001.

In the first quarter of 2001, the Company accrued $9.3 million for the estimated future operating losses of
Propelis Software, Inc. through the potential date of divestiture, resulting in an after tax loss of $6.2 million.

On August 23, 2001 the Company sold substantially all of the remaining assets and liabilities of Propelis
Software, Inc. to Jacada LTD. for $6.0 million in cash, plus a warrant to purchase 350,000 ordinary shares of
Jacada LTD. stock at a price of $3.26 per share. The final sales price is subject to adjustment based on the
closing balance sheet of Propelis. The transaction resulted in an
after tax gain of $1.8 million in the third quarter
of 2001.

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(3)  MARKETABLE SECURITIES

During the first quarter of 2001, the Company sold 232,511 shares of webMethods stock received from the sale of
IntelliFrame for approximately $6.3 million, resulting in a pre-tax loss of approximately $8.7 million. The
Company also wrote-down the carrying value of the remaining 41,031 shares of webMethods stock that it still owns,
resulting in a pre-tax loss of approximately $1.5 million.

The Companys remaining investments in marketable securities primarily consist of bank certificates of deposit,
U.S. government and agency securities and commercial paper. Excluding the sale of webMethods stock noted above,
the Company did not realize any gains or losses from the sale of marketable securities during the nine months
ended October 31, 2001.

(4)  INVENTORIES

Inventories, stated at the lower of cost (first-in, first-out method) or market,
consist of:

|                             |  |             |        |  |             |   |        | 
|---------------------------- |  | ----------- | ------ |  | ----------- | - | ------ | 
|                             |  | October 31, |        |  | January 31, |  
|                             |  | 2001        |        |  | 2001        |  
|                             |  |             |        |  |             |  
|Components and subassemblies |  | $           | 26,623 |  |             | $ | 15,218 | 
|Work in process              |  |             | 3,907  |  |             |   | 2,813  | 
|Finished goods               |  |             | 8,058  |  |             |   | 4,416  | 
|                             |  |             |        |  |             |  
|                             |  | $           | 38,588 |  |             | $ | 22,447 | 
|                             |  |             |        |  |             |  

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(5)  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of the following:

|                                                                 |  |                               |        |   |      |   |       |  
|---------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---- | - | ----- | -
|                                                                 |  | Nine months ended October 31, |       
|                                                                 |  |                               |       
|                                                                 |  | 2001                          |        |   | 2000 |  
|                                                                 |  |                               |        |   |      |  
|Net income (loss)                                                |  | $                             | (4,978 | ) |      | $ | 7,588 |  
|Foreign currency translation adjustment, net of tax
effect of $0 |  |                               | (157   | ) |      |   | (825  | )
|                                                                 |  |                               |        |   |      |  
|Total comprehensive income (loss)                                |  | $                             | (5,135 | ) |      | $ | 6,763 |  
|                                                                 |  |                               |        |   |      |  

(6)  SEGMENT INCOME

The Company has two reportable segments consisting of its Networking Solutions business unit and
Storage Solutions business unit. The Networking Solutions business unit consists of our storage
and channel networking products and related services. The Storage Solutions business consists of
our SAN services and the storage management business we acquired from Articulent in April of
2001. The Companys two reportable segments are strategic business units that offer different
products and services. They are managed separately because each business requires different
market strategies. The Company evaluates performance based on operating profit or loss before
special charges and income taxes.

|                         |                      |   |                                |        |   |                               |        |        |      |   |         |        |   |   |         |         | 
|------------------------ | -------------------- | - | ------------------------------ | ------ | - | ----------------------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------- | 
|                         |                      |   | Three months ended October 31, |        |   | Nine months ended October 31, |       
|                         |                      |   |                                |        |   |                               |       
|                         |                      |   | 2001                           |        |   | 2000                          |        |        | 2001 |   |         | 2000   |  
|                         |                      |   |                                |        |   |                               |        |        |      |   |         |        |  
|Revenue:                 |                      |   |                                |        |   |                               |        |        |      |   |         |        |   |   |         |        
|                         | Networking Solutions |   | $                              | 38,884 |   |                               | $      | 42,188 |      |   | $       | 94,064 |   |   | $       | 119,697 | 
|                         | Storage Solutions    |   |                                | 16,478 |   |                               |        | 4,010  |      |   |         | 32,294 |   |   |         | 9,449   | 
|                         |                      |   |                                |        |   |                               |        |        |      |   |         |       
|                         |                      | $ | 55,362                         |        |   | $                             | 46,198 |        |      | $ | 126,358 |        |   | $ | 129,146 |        
|                         |                      |   |                                |        |   |                               |        |        |      |   |         |       
|Operating Profit (Loss): |                      |   |                                |        |   |                               |        |        |      |   |         |        |   |   |         |        
|                         | Networking Solutions |   | $                              | 1,009  |   |                               | $      | 5,912  |      |   | $       | (4,159 | ) |   | $       | 14,687  | 
|                         | Storage Solutions    |   |                                | (1,335 | ) |                               |        | 317    |      |   |         | (5,921 | ) |   |         | 130     | 
|                         | Special charges      |   |                                |       |   |                               |        | 287    |      |   |         | (3,321 | ) |   |         | 287     | 
|                         |                      |   |                                |        |   |                               |        |        |      |   |         |       
|                         |                      | $ | (326                           | )      |   | $                             | 6,516  |        |      | $ | (13,401 | )      |   | $ | 15,104  |        
|                         |                      |   |                                |        |   |                               |        |        |      |   |         |       

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(7)  ACQUISITION OF ARTICULENT

On April 3, 2001 the Company acquired all of the outstanding stock of Articulent Inc., a privately held, leading
provider of storage solutions and services for $12.4 million in cash, plus the assumption of approximately $24
million of liabilities and the acquisition of approximately $19.3 million of tangible assets. The agreement
includes a potential $10 million incentive payout based upon meeting certain revenue and earnings milestones over the
twelve months following the acquisition. The acquisition was accounted for as a purchase and the consolidated financial statements of the
Company include the results of Articulent since April 3, 2001. The purchase price was allocated to the fair
value of the assets and liabilities acquired as follows:

|                                                        |                              |  |   |         |  
|------------------------------------------------------- | ---------------------------- |  | - | ------- | -
|Purchase Price:                                         |                              |  |   |        
|                                                        | Cash paid                    |  | $ | 12,360  |  
|                                                        |                              |  |  
|Fair Values of Assets Acquired and
Liabilities Assumed: |                              |  |   |        
|                                                        | Cash                         |  | $ | 624     |  
|                                                        | Accounts receivable          |  |   | 10,287  |  
|                                                        | Inventory                    |  |   | 4,446   |  
|                                                        | Fixed assets                 |  |   | 3,393   |  
|                                                        | Goodwill                     |  |   | 14,314  |  
|                                                        | Deferred taxes               |  |   | 3,107   |  
|                                                        | Other assets                 |  |   | 583     |  
|                                                        | Accounts payable             |  |   | (18,302 | )
|                                                        | Accrued expenses             |  |   | (2,324  | )
|                                                        | Note payable                 |  |   | (3,768  | )
|                                                        |                              |  |  
|                                                        | Total Purchase Consideration |  | $ | 12,360  |  
|                                                        |                              |  |  

The following table presents the consolidated results of operations of the Company for the nine months ended
October 31, 2001 on an unaudited pro forma basis as if the acquisition of Articulent took place as the beginning
of the year:

|                   |  |   |         |   | 
|------------------ |  | - | ------- | - | 
|Total revenue      |  | $ | 134,075 |  
|Net loss           |  | $ | (7,044  | )
|Net loss per share |  | $ | (.24    | )

The unaudited pro-forma results are for comparative purposes only and do not necessarily reflect the results that
would have been recorded had the acquisition occurred at the beginning of the period presented or the results
which might occur in the future.

(8)  NEW ACCOUNTING PRONOUNCEMENT

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141 Business Combinations, and SFAS No. 142 Goodwill and Other Intangibles Assets,
which change the accounting for business combinations and goodwill. SFAS No. 141 requires that the purchase
method of accounting be used for business combinations initiated after June 30, 2001. Use of the
pooling-of-interests methods is prohibited. SFAS No. 142 changes the accounting of goodwill from an
amortization method to an impairment-only approach. Amortization for goodwill, including goodwill recorded in
past business combinations, will therefore cease upon adoption of SFAS No. 142.

The Company will adopt SFAS No. 142 on February 1, 2002. The Company is in the process of evaluating whether it
will have any transitional impairment losses which would be required to be recognized as a cumulative effect of
change in accounting principle. For the nine months ended October 31, 2001, the Company had goodwill
amortization of $423,000, which under SFAS No. 141 it would not have after February 1, 2002.

In August 2001, the Financial Accounting Standards
Board approved SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. However, this statement retains the fundamental
provisions of SFAS No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale.

SFAS No. 144 also supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions for the disposal of a segment of a
business. However, this Statement retains the requirement of APB No.
30 to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity
that either has been disposed of or is classified as held for sale.
This statement also amends ARB No. 51, Consolidated Financial
Statements to eliminate the exception to consolidation for a
temporarily controlled subsidiary. The Company is required and plans
to adopt the provisions of SFAS No. 144 in the first quarter of
fiscal 2002.

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

Overview

We are a leading provider of hardware and software products and related services in the rapidly growing
storage networking and solutions market. We focus primarily on helping our clients design, develop, deploy and
manage storage networks and solutions.

The current global economic slowdown makes it difficult to predict the
demand for our products as we cannot forecast the length, duration and impact
of the slowdown. Slower growth throughout the economy has caused our customers
to reevaluate their capital spending plans, and to defer previously planned
projects for information technology infrastructure. However, we believe the need
for storage networking solutions is significant and will continue to
increase. The effects of the September 11, 2001 terrorist attacks in
the United States have not had a material impact to date on our
operating results or financial position.

Due to the slowdown in customer spending for information technology
infrastructure, we took cost reduction actions that reduced our quarterly
expense run rate at the end of April 2001, including:



| |  |  | a 10 percent workforce reduction                 
| | - |  | -------------------------------------------------
|
| |  |  | a wage freeze for all employees                  
|
| |  |  | a 10 percent pay cut for executive management    
|
| |  |  | a 5 percent pay cut for other employees; and     
|
| |  |  | significant reductions in
discretionary spending.

The reduction in demand for our products and services also resulted in the following charges in the first
quarter of 2001:



| |  |  | $2.0 million to write-down slow moving inventory        
| | - |  | --------------------------------------------------------
|
| |  |  | $325,000 for the write-off of our Filespeed product; and
|
| |  |  | $996,000 for restructuring,
principally severance.      

Sale and Write-down of webMethods Stock

During the first quarter of 2001, the Company sold 232,511 shares of webMethods stock received from the sale
of Intelliframe for approximately $6.3 million, resulting in a pre-tax loss of approximately $8.7 million. The
Company also wrote-down the carrying value of the remaining 41,031 shares of webMethods stock that it still owns,
resulting in a pre-tax loss of approximately $1.5 million.

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Acquisition of Articulent

On April 3, 2001 we acquired all of the outstanding stock of Articulent Inc., a privately held, leading
provider of storage solutions and services for $12.4 million in cash, plus the assumption of approximately $24
million of liabilities and the acquisition of approximately $19.3 million of tangible assets. The agreement
includes a potential $10 million incentive payout based upon meeting certain revenue and earnings milestones over the twelve months following the acquisition. The acquisition further strengthens our storage services organization, which provides companies
with the expertise to manage information enterprise-wide.

Discontinued Operations  Divestiture of Propelis Software, Inc.

Propelis Software,
Inc., formerly known as the Enterprise Integration Solutions Division
developed and
sold EAI software that automates the integration of computer software applications, and business workflow
processes. The Company previously determined to divest Propelis Software Inc. and focus on its core storage
networking and storage solutions businesses. Accordingly, Propelis Software, Inc. has been accounted for as
discontinued operations in the accompanying financial statements,meaning that the divisions revenues, costs and
expenses are not shown and its net income (loss) for all periods are included under the Discontinued Operations
caption in our statement of operations.

During the first quarter of 2001, we completed the sale of IntelliFrame, which was affiliated with Propelis
Software, Inc, including the technology underlying
the Propelis BPmTM product, to webMethods for $8.8 million in cash and 273,542 shares of webMethods stock. The
sale resulted in an after tax gain of $12.6 million in the first quarter of 2001.

In the first quarter of 2001, we accrued $9.3 million for the estimated future operating losses of
Propelis Software, Inc. through the potential date of divestiture, resulting in an after tax loss of $6.2 million.

On August 23, 2001 the Company sold substantially all of the remaining assets and liabilities of Propelis
Software, Inc. to Jacada LTD. for $6.0 million in cash, plus a warrant to purchase 350,000 ordinary shares of
Jacada LTD. stock at a price of $3.26 per share. The final sales price is subject to adjustment based on the
closing balance sheet of Propelis. The transaction resulted in an after tax gain of $1.8 million in the third quarter
of 2001.

For additional information regarding Propelis Software, Inc., see note 2, Discontinued Operations to
the consolidated financial statements included in this Form 10-Q. Certain general and administrative, facility
and information technology infrastructure costs that had previously been allocated to and reported in the
operating results of Propelis Software, Inc. have been reallocated and reported in the results for continuing
operations.

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Results of Continuing Operations

The following table sets forth financial data for our continuing operations
for the periods indicated as a percentage of total revenue except for gross
profit, which is expressed as a percentage of the related revenue.

The segment operating information for the three and nine months ended October 31, 2001 and 2000 is for
illustrative purposes only and has been adjusted to eliminate the effects of special items and other charges
recognized during the first quarter of 2001, including a $2.0 million write-down of inventory, a $325,000
write-off of our Filespeed product and a $1.0 million restructuring charge. It also eliminates the effects of a
$287,000 accrual reversal for an abandoned facility in the third quarter of 2000.

|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  |  | 
|------------------ | ----- | - | ----------------- | ----- | - | ---- | ----------------- | ----- | ---- | ------------------ | ------------------- | ----- | ----------------- | -------- | ------------------- | ---- |  | ----- | ---- |  |  | ----- | - |  | ---- | ----- | -- |  |  | ----- | - |  |  | 
|Networking         |       |   |                   |       |   |      | Storage Solutions |      
|                   |       |   |                   |       |   |      |                   |      
|Three months ended |       |   | Nine months ended |       |   |      |                   |       |      | Three months ended |                     |       | Nine months ended |         
|October 31,        |       |   | October 31,       |       |   |      |                   |       |      | October 31,        |                     |       | October 31,       |         
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |         
|2001               |       |   | 2000              |       |   | 2001 |                   |       | 2000 |                    |                     |       |                   |          |                     | 2001 |  |       | 2000 |  |  | 2001  |   |  | 2000 |      
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |      
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   | Revenue: |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |      
|                   | 71.4  | % |                   | 74.8  | % |      |                   | 64.4  | %    |                    |                     | 74.5  | %                 |          | Product sales       |      |  | 76.6  | %    |  |  | 42.4  | % |  |      | 69.2  | %  |  |  | 25.2  | %
|                   | 28.6  |   |                   | 25.2  |   |      |                   | 35.6  |      |                    |                     | 25.5  |                   |          | Service fees        |      |  | 23.4  |      |  |  | 57.6  |   |  |      | 30.8  |    |  |  | 74.8  |  
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 
|                   | 100.0 |   |                   | 100.0 |   |      |                   | 100.0 |      |                    |                     | 100.0 |                   |          | Total revenue       |      |  | 100.0 |      |  |  | 100.0 |   |  |      | 100.0 |    |  |  | 100.0 |  
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 
|                   |       |   |                   |       |   |      |                   |       |      |                    | Gross profit:       |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |   
|                   | 53.3  |   |                   | 57.7  |   |      |                   | 54.9  |      |                    |                     | 58.2  |                   |          | Product sales       |      |  | 16.9  |      |  |  | 49.1  |   |  |      | 20.1  |    |  |  | 57.3  |  
|                   | 51.7  |   |                   | 45.1  |   |      |                   | 47.1  |      |                    |                     | 44.9  |                   |          | Service fees        |      |  | (16.6 | )    |  |  | 15.2  |   |  |      | (27.0 | )  |  |  | 19.8  |  
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 
|                   | 52.8  |   |                   | 54.6  |   |      |                   | 52.1  |      |                    |                     | 54.8  |                   |          | Total gross profit  |      |  | 9.0   |      |  |  | 29.6  |   |  |      | 7.4   |    |  |  | 32.0  |  
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 
|                   |       |   |                   |       |   |      |                   |       |      |                    | Operating expenses: |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |   
|                   | 30.4  |   |                   | 23.3  |   |      |                   | 33.3  |      |                    |                     | 23.3  |                   |          | Sales and marketing |      |  | 13.5  |      |  |  | 21.7  |   |  |      | 17.0  |    |  |  | 30.6  |  
|                   |       |   |                   |       |   |      |                   |       |      |                    | Engineering and     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |   
|                   | 14.5  |   |                   | 12.5  |   |      |                   | 18.1  |      |                    |                     | 14.0  |                   |          | development         |      |  | 2.2   |      |  |  | 0.0   |   |  |      | 1.1   |    |  |  | 0.0   |  
|                   |       |   |                   |       |   |      |                   |       |      |                    | General and         |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |   
|                   | 5.3   |   |                   | 4.8   |   |      |                   | 7.0   |      |                    |                     | 5.2   |                   |          | administrative      |      |  | 1.4   |      |  |  | 0.0   |   |  |      | 2.1   |    |  |  | 0.0   |  
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 
|                   |       |   |                   |       |   |      |                   |       |      |                    | Total operating     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |   
|                   | 50.2  |   |                   | 40.6  |   |      |                   | 58.4  |      |                    |                     | 42.5  |                   |          | expenses            |      |  | 17.1  |      |  |  | 21.7  |   |  |      | 20.2  |    |  |  | 30.6  |  
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 
|                   |       |   |                   |       |   |      |                   |       |      |                    | Income (loss)       |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |   
|                   | 2.6   | % |                   | 14.0  | % |      |                   | (6.3  | )%   |                    |                     | 12.3  | %                 |          | from operations     |      |  | (8.1  | )%   |  |  | 7.9   | % |  |      | (12.8 | )% |  |  | 1.4   | %
|                   |       |   |                   |       |   |      |                   |       |      |                    |                     |       |                   |          |                     |      |  |       |      |  |  |       |   |  |      |       |    |  |  |       |   |  | 

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Revenue

Networking Solutions:

Our networking solutions business generated revenues of $38.9 million and $94.1 million for the three and
nine months ended October 31, 2001, respectively, decreases of 8% and 21%, respectively, from $42.2 million and
$119.7 million for the three and nine months ended October 31, 2000. Storage networking product revenues for the
three and nine months ended October 31, 2001 totaled $21.3 million and $45.1 million, respectively, down 8% and
24%, respectively, from $23.2 million and $59.3 million for the three and nine months ended October 31, 2000.
Approximately $800,000 of storage networking product revenue for the three months ended October 31, 2001 resulted
from the sale of our new UltraNet Edge product. Channel networking product revenues for the three and nine
months ended October 31, 2001 totaled $6.5 million and $15.4 million, respectively, down 23% and 49%,
respectively, from $8.4 million and $30.0 million for the three and nine months ended October 31, 2000. The
decrease in revenue from sales of both storage and channel networking products resulted from the global slow down
in capital spending for information technology equipment by our customers.

Service revenues associated with our networking business for the three and nine months ended October 31, 2001
totaled $11.1 million and $33.5 million, respectively, increases of 4% and 10%, respectively, from $10.6 million
and $30.5 million for the three and nine months ended October 31, 2000. The increases in both periods are due to
the larger installed base of customers using our networking products.

Storage Solutions:

Our storage solutions business, consisting of our SAN services and the storage solutions and services
business we acquired from Articulent in April of 2001, generated revenue for the three and nine months ended
October 31, 2001 of $16.5 million and $32.3 million, respectively, increases of 311% and 242%, respectively, from
$4.0 million and $9.4 million for the three and nine months ended October 31, 2000. Articulent accounted for a
significant portion of the increase.

General:

Revenue generated from the sale of products and services outside the United
States for the three and nine months ended October 31, 2001 totaled $12.0 million and $32.0 million,
respectively, decreases of 26% and 19%, respectively, from the three and nine months ended October 31, 2000.
The reduction was attributable to the global slow down in capital spending for information technology equipment
by our customers.

No single customer accounted for more than 10% of our revenue
during the three and nine months ended October
31, 2001. Price discounting had a small impact on our product revenue during
these periods.

During the nine
months ended October 31, 2001, approximately 27%, 8%, and 17% of our product revenue was
derived from businesses in the financial services, telecommunications and information outsourcing industries,
respectively.

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We expect continued quarter-to-quarter fluctuations in revenue in both
domestic and international markets. The timing of sizable orders, because of
their relative impact on total quarterly sales, may contribute to such
fluctuations. The level of product sales reported by us in any given period will
continue to be affected by the receipt and fulfillment of sizable new orders in
both domestic and international markets.

Gross Profit Margin

Networking:

Excluding the $2.0 million write-down of slow moving inventory and the $325,000 write-off of our Filespeed
product in the first quarter of 2001, gross product margins from the sale of networking products for the three
and nine months ended October 31, 2001 were 53% and 55%, respectively, down from 58% for both the three and nine
months ended October 31, 2000. The decline in gross margin percentage was due to the continued movement in sales
mix toward our UltraNet products which carry a lower margin than our older Channelink products, and higher levels
of sales discounts.

Gross service margins for our networking business improved in the three and nine months ended October 31,
2001 to 52% and 47%, respectively, from 45% for both the three and nine months ended October 31, 2000. The
improvement was due to the steadily increasing base of customers contracting for services and the cost reduction
actions that were taken in April 2001.

Storage Solutions:

Gross product margins for our storage solutions business for the three and nine months ended October 31,
2001 was 17% and 20%, respectively, compared to 49% and 57%, respectively, for the three and nine months ended
October 31,2000. The decline in gross margin percentages was primarily due to the expansion in solution offerings
resulting from the acquisition of Articulent in April 2001. Historically, the product solutions offered by
Articulent have generated gross margins in the 15% to 25% range.

Gross service margins for our storage solutions business for the three and nine months ended October 31,
2001 were a negative 17% and 27%, respectively, compared to a positive 15% and 20%, respectively, for the three
and nine months ended October 31, 2000. The decline in gross margin percentage and negative gross margins in
2001 is due to the fixed cost structure of the services business and low levels of service revenue. The service
costs for the solutions business, mainly people, tend to be fixed in nature. We expect to generate a gross
profit in the future as business volumes pick up.

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Operating Expenses

Networking:

Sales and marketing expense for the three and nine months ended October 31, 2001 totaled $11.8 million and
$31.3 million, respectively, increases of 17% and 12%, respectively, from $9.8 million and $27.8 million for the
three and nine months ended October 31, 2000. Since the beginning of 2001, we have increased our sales force by
over 25% and have added additional sales management to increase revenue and grow our business.

Engineering and development expense for the three and nine months ended October 31, 2001 totaled $5.7 million
and $17.1 million, respectively, increases of 7% and 2%, respectively, from $5.3 million and $16.7 million for
the three and nine months ended October 31, 2000. The increases were primarily due to continued development of
our UltraNet® family of products, particularly the UltraNet Edge product, which generated $800,000 of revenue in
the three months ended October 31, 2001.

Storage Solutions:

Sales, marketing, engineering and development expense for the three and nine months ended October 31, 2001
totaled $2.6 million and $5.9 million, respectively, increases of 198% and 102%, respectively, from $869,000 and
$2.9 million for the three and nine months ended October 31, 2000. The increase in both periods was primarily
due to the incremental costs associated with the acquisition of Articulent in April 2001.

General and administrative:

General and administrative expenses for the three and nine months ended October 31, 2001 totaled $2.3
million and $7.3 million, respectively, up 13% and 14%, respectively, from $2.0 and $6.3 million for the three
and nine months ended October 31, 2000. The increase in expense for the three and nine months ended October 31,
2001 when compared to the same periods of 2000 was primarily due to the acquisition of Articulent, including
charges for goodwill amortization for the three and nine months ended October 31, 2001 of $157,000 and $423,000,
respectively.

Other:

Excluding the $10.3 million loss from the sale and write-down of webMethods stock in the first quarter of
2001, other income for the three and nine months ended October 31, 2001 totaled $1.2 million and $4.4 million,
respectively, up from $731,000 and $952,000 for the three and nine months ended October 31, 2001, respectively.
We raised $110 million from a common stock offering in October 2000, resulting in higher balances of cash and
marketable securities available for investment and more interest income for the three and nine months ended
October 31, 2001. Pending further use of the offering proceeds for general corporate purposes or complementary
acquisitions, the funds are invested in investment grade, interest-bearing securities.

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We recorded a provision for income taxes for the nine months ended October 31, 2001 at an effective income
tax rate of 31%, compared to 33% for the nine months ended October 31, 2000. The $10.3 million loss on the sale
and write-down of the webMethods stock in the first quarter of 2001 was taxed at an effective tax rate of 30%.
Excluding this item, our effective tax rate for the nine months ended October 31, 2001 would have been 33%. Our
effective tax rate for the three months ended October 31, 2001 and 2000 was 33%. Based on an assessment of our
taxable earnings history and prospective future taxable income, we have determined it to be more likely than not
that our net deferred tax asset will be realized in future periods. We may be required to provide a valuation
allowance for this asset in the future if we do not generate sufficient taxable income as planned.

Liquidity and Capital Resources

We have historically financed our operations through the public and private
sale of equity securities, bank borrowings under lines of credit, capital and
operating leases and cash generated by operations.

Cash, cash equivalents and marketable securities at October 31, 2001 totaled
$117.1 million, a decrease of $33.3 million since January 31, 2001. The decrease
in cash and cash equivalents is primarily due to the acquisition of Articulent,
payments to reduce Articulents outstanding liabilities at the
time of acquisition
and higher levels of inventory at October 31, 2001.

Expenditures for capital equipment and field support spares have been, and
will likely continue to be, a significant capital requirement. We believe that
our current balances of cash, cash equivalents and marketable securities, when
combined with anticipated cash flows from operations, will be adequate to fund
our operating plans and meet our current anticipated aggregate capital
requirements, at least through the next year.

We believe that inflation has not had a material impact on our operations or
liquidity to date.

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Market Risk

We have no derivative financial instruments in our cash and cash
equivalents. We mainly invest our cash and cash equivalents in investment grade,
highly liquid investments, consisting of money market instruments, bank
certificates of deposits, U.S. government and agency securities and commercial paper.

At October 31, 2001, our marketable securities included a $100,000 investment
in a Standard and Poors 500 stock price index fund and a $105,000 investment in
a NASDAQ 100 index tracking stock. These investments were purchased to directly
offset any investment gains or losses owed to participants under our executive
deferred compensation plan which has been established for selected key
employees.

We are exposed to market risks related to fluctuations in foreign exchange
rates because some sales transactions, and the assets and liabilities of our
foreign subsidiaries, are denominated in foreign currencies, primarily French
francs, the euro and British pounds sterling. As of October 31, 2001, we had open forward exchange contracts
totaling 1.3 million British pounds sterling that settle at various times through February of 2002.

Forward Looking Statements

This Form 10-Q and other documents we have filed with the Securities and
Exchange Commission contain forward-looking statements, which may include
statements about our:



| |  |  | anticipated receipt of orders and their impact on quarterly sales;                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | business strategy;                                                                                              
|
| |  |  | expectations regarding future revenue levels, gross margins, expenses,
operating margins and earnings per share;
|
| |  |  | timing of and plans for the introduction or phase-out of products or
services;                                  
|
| |  |  | enhancements of existing products or services;                                                                  
|
| |  |  | plans for hiring or reducing personnel;                                                                         
|
| |  |  | entering into strategic partnerships;                                                                           
|
| |  |  | ability to integrate Articulent, Inc. with our existing businesses;                                             
|
| |  |  | other plans, objectives, expectations and intentions contained in this
Form 10-Q that are not historical facts. 

When used in this Form 10-Q, the words may, should, expect, plan,
anticipate, believe, estimate, predict, intend, potential or
continue and similar expressions are generally intended to identify
forward-looking statements. These forward-looking statements involve
risks and uncertainties. Actual results could differ materially from those
expressed or implied by these forward-looking statements as a result of certain risk factors, including but not
limited to (i) competitive factors, including pricing pressures; ii) variability in quarterly sales; (iii)
economic trends generally and in various geographic markets; (iv) relationships with our strategic partners; (v)
technological change affecting our products; (vi) our ability to integrate Articulent Inc. with our existing
businesses, and, (vii) other events and other important factors, including those discussed under cautionary
statements in Exhibit 99 to our Form 10-K filing with the Securities and Exchange Commission for the year ended
January 31, 2001. We assume no obligation to update any forward-looking statements. These statements are only
predictions. Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. The forward looking statements speak as
of the date hereof. Unless otherwise required by applicable
securities laws, we disclaim any intention or obligation to update or
revise any forward looking statements, whether as a result of new
information, future events or otherwise.

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PART II. OTHER INFORMATION




Item 1-5. None




Item 6. Exhibits and Reports on Form 8-K



| |                             
| | ----------------------------
| | (a) Exhibits filed herewith.

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3A. |  | Second Restated Articles of Incorporation of the
Company. (Incorporated by reference to Exhibits 3 (i)-1
and 3(i)-2 to current report on Form 8-K dated May 25,
1999.)                                                                                                                                                                                                                            
|3B. |  | By-laws of the Company (Incorporated by reference to
Exhibit 3 (ii)-1 to current report on Form 8-K dated May
25, 1999.)                                                                                                                                                                                                                                                                          
|4.1 |  | Rights Agreement between the Company and Chase Mellon
Shareholder Services, L.L.C., as Rights Agent including
the form of Rights Certificate and the Summary of Rights
to Purchase Preferred Shares and First Amendment of
Rights Agreement dated November 21, 2000. (Incorporated
by reference to Exhibit 1 to Form 8-A dated July 29,
1998 and Exhibit 1 to Form 8-A/A dated November 27,
2000.)
|4.2 |  | Form of Common Stock Certificate. (Incorporated by
reference to Exhibit 4.2 to Form S-3 Registration
Statement No. 333-80841.)                                                                                                                                                                                                                                                                    
|11. |  | Statement Re: Computation of Net Income (Loss) per Basic and
Diluted Share.                                                                                                                                                                                                                                                                                                                       



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



| |                                                                             
| | ----------------------------------------------------------------------------
| | No reports on Form 8-K were filed during the quarter ended October 31, 2001.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers.

COMPUTER NETWORK TECHNOLOGY CORPORATION
(Registrant)

|                        |  |     |  |                                                                                                               
|----------------------- |  | --- |  | --------------------------------------------------------------------------------------------------------------
|Date: December 13, 2001 |  | By: |  | /s/ Gregory T. BarnumGregory T. Barnum
Chief Financial Officer
(Principal financial officer)                  
|                       
|                        |  | By: |  | /s/ Jeffrey A. BertelsenJeffrey A. Bertelsen
Corporate Controller and Treasurer
(Principal accounting officer)

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EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item |  | Description                                                                                                                                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|3A.  |  | Second Restated Articles of Incorporation of the Company. (Incorporated by
reference to Exhibit 3(i)-1 and 3(i)-2 to current report on Form 8-K dated
May 25, 1999.)                                                                                                                                                                                                                              
|3B.  |  | By-laws of the Company (Incorporated by reference to Exhibit 3(ii)-1 to
current report on Form 8-K dated May 25, 1999.)                                                                                                                                                                                                                                                                           
|4.1  |  | Rights Agreement between the Company and Chase Mellon Shareholder
Services, L.L.C., as Rights Agent including the form of Rights Certificate
and the Summary of Rights to Purchase Preferred Shares and First Amendment
of Rights Agreement dated November 21, 2000. (Incorporated by reference to
Exhibit 1 to Form 8-A dated July 29, 1998 and Exhibit 1 to Form 8-A/A
dated November 27, 2000.)
|4.2  |  | Form of Common Stock Certificate. (Incorporated by reference to Exhibit
4.2 Form S-3 Registration Statement No. 333-80841.)                                                                                                                                                                                                                                                                       
|11.  |  | Statement Re: Computation of Net Income (loss) per
Basic and Diluted
Share                    
                     
                         

Electronically Filed                                                                                                                                                                                                                              

20