##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION   (Mark One) x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 31,
2004
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
 COMMISSION FILE NUMBER: 0-13994 COMPUTER NETWORK TECHNOLOGY CORPORATION 
  Minnesota
(State of Incorporation)
    
    41-1356476
(I.R.S. Employer Identification No.)
 6000 Nathan Lane North, Minneapolis, Minnesota 55442 
  Telephone Number: (763) 268-6000 
  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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x  No o As of July 31, 2004, the registrant had 27,921,267 shares of $.01 par value
common stock issued and outstanding.




---



COMPUTER NETWORK TECHNOLOGY CORPORATION INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Consolidated Statements of Operations for the three and six months
ended July 31, 2004 and 2003
    
    
    3Consolidated Balance Sheets as of July 31, 2004
and January 31, 2004
    
    
    4Consolidated Statements of Cash Flows for the six months
ended July 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14Item 3. Market Risks
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    23Item 3. None
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. None
    
    
    24Item 6. Exhibits and Reports on Form 8-K
    
    
    25SIGNATURES
    
    
    26EXHIBIT INDEX
    
    
    27Form of Restricted Stock Unit AgreementForm of Restricted Stock Unit Deferred Stock Award ElectionForm of Deferred Stock Unit AgreementForm of Deferred Stock Unit Deferred Stock Award ElectionStatement Re: Computation of Net Income (loss)CEO Certifications Required by Rule 13a14(a)/15d14(a)CFO Certifications Required by Rule 13a14(a)/15d14(a)Certification of CEO & CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. COMPUTER NETWORK TECHNOLOGY CORPORATION 
 
 Three months ended
    
    Six months endedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Revenue:Product sales
    
    $
    44,564
    
    
    $
    63,489
    
    
    $
    108,239
    
    
    $
    97,893Service fees
    
    
    32,600
    
    
    
    31,390
    
    
    
    65,162
    
    
    
    49,316Total revenue
    
    
    77,164
    
    
    
    94,879
    
    
    
    173,401
    
    
    
    147,209Cost of revenue:Cost of product sales
    
    
    26,145
    
    
    
    39,244
    
    
    
    64,327
    
    
    
    60,878Cost of service fees
    
    
    19,063
    
    
    
    18,400
    
    
    
    39,818
    
    
    
    28,486Total cost of revenue
    
    
    45,208
    
    
    
    57,644
    
    
    
    104,145
    
    
    
    89,364Gross profit
    
    
    31,956
    
    
    
    37,235
    
    
    
    69,256
    
    
    
    57,845Operating expenses:Sales and marketing
    
    
    23,570
    
    
    
    24,616
    
    
    
    47,296
    
    
    
    38,822Engineering and development
    
    
    13,901
    
    
    
    12,025
    
    
    
    27,058
    
    
    
    17,945General and administrative
    
    
    4,593
    
    
    
    5,266
    
    
    
    8,095
    
    
    
    7,822In-process research and development charge
    
    
    
    
    
    
    19,706
    
    
    
    
    
    
    
    19,706Total operating expenses
    
    
    42,064
    
    
    
    61,613
    
    
    
    82,449
    
    
    
    84,295Loss from operations
    
    
    (10,108
    )
    
    
    (24,378
    )
    
    
    (13,193
    )
    
    
    (26,450
    )Other income (expense):Net gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747Interest expense
    
    
    (1,001
    )
    
    
    (1,094
    )
    
    
    (2,033
    )
    
    
    (2,220
    )Interest income and other, net
    
    
    253
    
    
    
    375
    
    
    
    463
    
    
    
    1,454Other income (expense), net
    
    
    (748
    )
    
    
    (719
    )
    
    
    (1,570
    )
    
    
    (19
    )Loss before income taxes
    
    
    (10,856
    )
    
    
    (25,097
    )
    
    
    (14,763
    )
    
    
    (26,469
    )Provision for income taxes
    
    
    913
    
    
    
    288
    
    
    
    1,188
    
    
    
    998Loss from continuing operations
    
    
    (11,769
    )
    
    
    (25,385
    )
    
    
    (15,951
    )
    
    
    (27,467
    )Discontinued operations, net of tax
    
    
    (370
    )
    
    
    (437
    )
    
    
    (714
    )
    
    
    (437
    )Net loss
    
    $
    (12,139
    )
    
    $
    (25,822
    )
    
    $
    (16,665
    )
    
    $
    (27,904
    )Basic & diluted loss per share:Continuing operations
    
    $
    (0.42
    )
    
    $
    (0.94
    )
    
    $
    (0.58
    )
    
    $
    (1.02
    )Discontinued operations
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )Net loss
    
    $
    (0.44
    )
    
    $
    (0.96
    )
    
    $
    (0.60
    )
    
    $
    (1.03
    )Shares
    
    
    27,768
    
    
    
    26,979
    
    
    
    27,685
    
    
    
    26,973
 See accompanying notes to Consolidated Financial Statements 3




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COMPUTER NETWORK TECHNOLOGY CORPORATION 
 
 July 31,2004
    
    January 31,(unaudited)
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    59,768
    
    
    $
    75,267Marketable securities
    
    
    11,730
    
    
    
    2,219Receivables, net
    
    
    75,086
    
    
    
    99,815Inventories
    
    
    45,785
    
    
    
    29,976Other current assets
    
    
    5,123
    
    
    
    4,400Total current assets
    
    
    197,492
    
    
    
    211,677Property and equipment, net
    
    
    43,738
    
    
    
    40,313Field support spares, net
    
    
    12,372
    
    
    
    11,951Goodwill
    
    
    105,086
    
    
    
    105,203Other intangibles, net
    
    
    29,743
    
    
    
    33,225Deferred tax asset
    
    
    285
    
    
    
    872Other assets
    
    
    14,105
    
    
    
    9,140$
    402,821
    
    
    $
    412,381Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    47,063
    
    
    $
    47,696Accrued liabilities
    
    
    35,986
    
    
    
    43,733Customer deposit
    
    
    13,662
    
    
    
    Deferred revenue
    
    
    44,532
    
    
    
    47,058Current installments of obligations under capital lease
    
    
    2,670
    
    
    
    1,619Total current liabilities
    
    
    143,913
    
    
    
    140,106Obligations under capital lease, less current installments
    
    
    6,439
    
    
    
    4,468Convertible subordinated debt
    
    
    125,000
    
    
    
    125,000Total liabilities
    
    
    275,352
    
    
    
    269,574Shareholders equity:Preferred stock
    
    
    
    
    
    
    Common stock, $.01 par value; authorized
100,000 shares, issued and outstanding
27,921 at July 31, 2004 and
27,501 at January 31, 2004
    
    
    279
    
    
    
    275Additional paid-in capital
    
    
    191,085
    
    
    
    187,652Unearned compensation
    
    
    (1,754
    )
    
    
    (319
    )Accumulated deficit
    
    
    (63,664
    )
    
    
    (46,999
    )Accumulated other comprehensive income
    
    
    1,523
    
    
    
    2,198Total shareholders equity
    
    
    127,469
    
    
    
    142,807$
    402,821
    
    
    $
    412,381
 See accompanying notes to Consolidated Financial Statements 4




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##### Table of Contents



COMPUTER NETWORK TECHNOLOGY CORPORATION 
 
 Six months endedJuly 31,2004
    
    2003Operating Activities:Net loss
    
    $
    (16,665
    )
    
    $
    (27,904
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Discontinued operations
    
    
    714
    
    
    
    437Depreciation and amortization
    
    
    14,896
    
    
    
    11,162In-process research and development charge
    
    
    
    
    
    
    19,706Non-cash compensation expense
    
    
    656
    
    
    
    280Net gain on sale of marketable securities
    
    
    
    
    
    
    (747
    )Changes in deferred taxes
    
    
    587
    
    
    
    7Changes in operating assets and liabilities:Receivables
    
    
    24,781
    
    
    
    (2,967
    )Inventories
    
    
    (15,384
    )
    
    
    10,970Other current assets
    
    
    (428
    )
    
    
    3,591Accounts payable
    
    
    (633
    )
    
    
    321Accrued liabilities
    
    
    (8,739
    )
    
    
    (7,672
    )Customer deposits
    
    
    13,662
    
    
    
    Deferred revenue
    
    
    (2,526
    )
    
    
    927Net cash provided by continuing operations
    
    
    10,921
    
    
    
    8,111Net cash used in discontinued operations
    
    
    (714
    )
    
    
    (437
    )Cash provided by operating activities
    
    
    10,207
    
    
    
    7,674Investing Activities:Additions to property and equipment
    
    
    (10,070
    )
    
    
    (4,434
    )Additions to field support spares
    
    
    (3,235
    )
    
    
    (739
    )Acquisition of Inrange Technologies, net of cash acquired
    
    
    
    
    
    
    (152,585
    )Net redemption (purchase) of marketable securities
    
    
    (9,511
    )
    
    
    102,500Other assets
    
    
    (3,224
    )
    
    
    392Cash used in investing activities
    
    
    (26,040
    )
    
    
    (54,866
    )Financing Activities:Proceeds from issuance of common stock
    
    
    1,346
    
    
    
    1,032Repayments of obligations under capital leases
    
    
    (519
    )
    
    
    (418
    )Cash provided by financing activities
    
    
    827
    
    
    
    614Effects of exchange rate changes
    
    
    (493
    )
    
    
    (218
    )Net decrease in cash and cash equivalents
    
    
    (15,499
    )
    
    
    (46,796
    )Cash and cash equivalents beginning of period
    
    
    75,267
    
    
    
    98,341Cash and cash equivalents end of period
    
    $
    59,768
    
    
    $
    51,545
 See accompanying notes to Consolidated Financial Statements 5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (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, 2004
as filed with the Securities and Exchange Commission. References to fiscal 2004
and 2003, represent the twelve months ended January 31, 2005 and 2004,
respectively. On May 5, 2003, the Company completed the acquisition of Inrange
Technologies (Inrange) for $190 million in cash. The acquisition was
accounted for as a purchase, and the Companys financial statements include the
results of Inrange since May 5, 2003. See footnote 4 Acquisition of Inrange for
further information regarding the effect of the Inrange acquisition on the
Companys balance sheet and results of operations. (2) MARKETABLE SECURITIES During the first quarter of fiscal 2003, the Company sold marketable
securities totaling $122 million, resulting in a net pre-tax gain of
approximately $747. No significant gains or losses from the sale of marketable
securities were recorded during the other periods presented. The Companys investments in marketable securities primarily consist of
U.S. government and agency securities, corporate debt securities and bank
certificates of deposit. The Company also holds trading securities consisting
of various mutual funds. The Company intends to use any gain or loss from
these investments to fund the investments gains and losses allocated to
participants under the Companys executive deferred compensation plan. (3) INVENTORIES Inventories, stated at the lower of cost (first-in, first-out method) or
market, consist of: July 31,
    
    January 31,2004
    
    2004Inventories:Components and subassemblies
    
    $
    19,042
    
    
    $
    14,311Work in process
    
    
    1,880
    
    
    
    4,015Finished goods
    
    
    24,863
    
    
    
    11,650$
    45,785
    
    
    $
    29,976
 6




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##### Table of Contents



(4) ACQUISITION OF INRANGE On April 6, 2003, the Company entered into an agreement whereby a wholly
owned subsidiary of the Company would acquire all of the shares of Inrange
Technologies Corporation (Inrange) that were owned by SPX Corporation. The
shares acquired constituted approximately 91% of the issued and outstanding
shares of Inrange for a purchase price of approximately $2.31 per share and
$173 million in the aggregate. On May 5, 2003 the Company completed the
acquisition of Inrange and pursuant to the agreement the subsidiary merged into
Inrange, and the remaining capital stock owned by the other Inrange
shareholders was converted into the right to receive approximately $2.31 per
share in cash, resulting in a total payment of $190 million for both the stock
purchase and merger. The Company acquired Inrange to significantly broaden its portfolio of
storage networking products and solutions, particularly in the area of Fibre
Channel and FICON switching, increase its global size and scope, and expand its
customer base. The acquisition was accounted for as a purchase and the consolidated
financial statements of the Company include the results of Inrange since May 5,
2003. The purchase price was allocated to the fair value of the assets and
liabilities acquired as follows: Purchase Price:Cash paid
    
    $
    190,526Value of stock option grants
    
    
    10,286Transaction costs
    
    
    3,347Total Purchase consideration paid
    
    $
    204,159Fair Value of Assets Acquired and Liabilities Assumed:Cash
    
    $
    41,088Accounts receivable
    
    
    34,542Inventory
    
    
    12,461Property and equipment
    
    
    22,538Field support spares
    
    
    7,757Developed technology
    
    
    20,248Customer list
    
    
    15,294Trademarks
    
    
    1,234In-process research and development charge
    
    
    19,706Goodwill
    
    
    86,899Deferred taxes
    
    
    75Other assets
    
    
    6,677Accounts payable
    
    
    (10,788
    )Accrued expenses
    
    
    (32,628
    )Deferred revenue
    
    
    (20,944
    )Total purchase consideration paid
    
    $
    204,159
 The following table presents the unaudited pro forma consolidated results
of operations of the Company for the three and six months ended July 31, 2004
and 2003 as if the acquisition of Inrange took place on February 1, 2003: Pro Forma
    
    Pro FormaThree months ended
    
    Six months endedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Total revenue
    
    $
    77,164
    
    
    $
    94,879
    
    
    $
    173,401
    
    
    $
    187,465Loss  continuing operations
    
    $
    (11,769
    )
    
    $
    (5,679
    )
    
    $
    (15,951
    )
    
    $
    (16,781
    )Loss per share  continuing
operations
    
    $
    (.42
    )
    
    $
    (.21
    )
    
    $
    (.58
    )
    
    $
    (.62
    )
 7




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The pro forma results include amortization of the customer list, developed
technology and trademarks presented above. The unaudited pro forma results do
not include the $19.7 million charge for in-process research and development
related to the Inrange acquisition. 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. As part of the Inrange acquisition, the Company assumed the 2000 Inrange
stock compensation plan which provides for the issuance of up to 3,782,993
shares of the Companys common stock. The plan provided for the conversion of
pre-existing Inrange stock options into company stock options. The options
granted under the 2000 Inrange stock compensation plan were valued at $10.3
million using the Black-Scholes option-pricing model. The amount was deemed to
be part of the Inrange purchase price and was recorded as additional paid-in
capital. The intangible assets acquired included developed technology, customer
list and trademarks valued at $20.2 million, $15.3 million and $1.2 million,
respectively. The developed technology, customer list and trademarks are
being amortized on a straight-line basis over periods of approximately five
years, seven years and five years, respectively. Goodwill resulting from the
acquisition of $86.9 million is deductible for income tax purposes. The Company has allocated $19.7 million of the Inrange purchase price to
acquired in-process research and development to reflect the value of new Fibre
Channel switching technology that was approximately 50% complete at the time of
acquisition. At the date of acquisition, the technological feasibility of the
new Fibre Channel switching technology had not been attained and the technology
had no alternative future use. The new Fibre Channel switching technology is
projected to have significantly greater functionality and port density when
compared to other Fibre Channel technology currently available in the
marketplace. The allocation to in-process research and development was based
on an independent third party appraisal that utilized the excess earnings
approach. Significant assumptions used in the third party appraisal include
the cost to complete the project, and the projected revenue and expense
generated over the estimated life cycle of the new Fibre Channel switching
technology. A significant part of our integration strategy related to the Inrange
acquisition, included the termination of duplicative employees across most
functional areas, and the closing of duplicative facilities to obtain cost
synergies. Integration planning was initiated prior to the closing of the
acquisition. Severance costs for terminated Inrange employees were treated as
an acquired liability, effectively increasing the purchase price. Severance
costs for terminated CNT employees were recorded as an expense in the statement
of operations. The integration plan resulted in the termination of 165
employees, including employees of both CNT and Inrange. The duplicative
facilities that were closed were part of the pre-acquisition Inrange business,
and the accrual for future rents associated with these facilities was treated
as an acquired liability, effectively increasing the purchase price. The
integration of product strategies for the new combined entity resulted in a
$1.6 million charge in fiscal 2003 for the write-down of inventory that CNT had
purchased prior to the acquisition. There have been no significant subsequent
sales of this inventory. A summary of severance and facility accrual activity follows: Obligation
    
    
    
    
    
    ObligationAs of
    
    
    
    
    
    As ofJanuary 31, 2004
    
    Utilization
    
    July 31, 2004Inrange severance
    
    $
    283
    
    
    $
    (118
    )
    
    $
    165CNT severance
    
    $
    50
    
    
    $
    (33
    )
    
    $
    17Duplicative facilities
    
    $
    5,574
    
    
    $
    (1,484
    )
    
    $
    4,090
 Amounts for
severance will be paid in 2004. Amounts for facilities will be paid through 2012. 8




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(5) GOODWILL AND INTANGIBLE ASSETS The change in the net carrying amount of goodwill for the six months of
2004 was as follows: TotalBalance February 1, 2004
    
    $
    105,203Acquisition of Inrange
    
    
    (117
    )Balance as of July 31, 2004
    
    $
    105,086
 The components of other amortizable intangible assets were as follows: July 31, 2004
    
    January 31, 2004Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationCustomer list
    
    $
    16,924
    
    
    $
    (3,079
    )
    
    $
    16,924
    
    
    $
    (1,883
    )Trademarks
    
    
    1,234
    
    
    
    (309
    )
    
    
    1,234
    
    
    
    (185
    )Developed technology
    
    
    20,248
    
    
    
    (5,275
    )
    
    
    20,248
    
    
    
    (3,165
    )Non-compete agreements
    
    
    250
    
    
    
    (250
    )
    
    
    250
    
    
    
    (198
    )Total
    
    $
    38,656
    
    
    $
    (8,913
    )
    
    $
    38,656
    
    
    $
    (5,431
    )Total other intangible
assets, net
    
    $
    29,743
    
    
    
    
    
    
    $
    33,225
 Amortization expense for intangible assets during the second quarter and
first six months of 2004 was $1.8 million and $3.5 million, respectively.
Amortization expense for the remainder of 2004 is estimated to be $3.4 million.
Amortization expense is estimated to be $6.8 million in 2005 and 2006, $6.2
million in 2007 and $3.2 million in 2008. (6) COMPREHENSIVE LOSS Comprehensive loss consists of the following: Six months endedJuly 31,2004
    
    2003Net loss
    
    $
    (16,665
    )
    
    $
    (27,904
    )Unrealized loss on marketable securities,
net of tax effect of $0 and $277
    
    
    
    
    
    
    (444
    )Realized gains on marketable securities included in
net loss, net of tax effect of $0 and $288
    
    
    
    
    
    
    (459
    )Foreign currency translation adjustment, net of
tax effect of $0
    
    
    (675
    )
    
    
    (61
    )Total comprehensive loss
    
    $
    (17,340
    )
    
    $
    (28,868
    )
 9




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##### Table of Contents



(7) CONVERTIBLE SUBORDINATED DEBT In February 2002, the Company sold $125 million of 3% convertible
subordinated notes due February 15, 2007, raising net proceeds of $121.6
million. The notes are convertible into the Companys common stock at a price
of $19.17 per share. The Company may redeem the notes upon payment of the
outstanding principal balance, accrued interest and a make whole payment if the
closing price of its common stock exceeds 175% of the conversion price for at
least 20 consecutive trading days within a period of 30 consecutive trading
days ending on the trading day prior to the date the redemption notice is
mailed. The make whole payment represents additional interest payments that
would be made if the notes were not redeemed prior to the due date. In January 2004, the Company entered into an interest-rate swap agreement
with a notional amount of $75 million that has the economic effect of modifying
that dollar portion of the fixed interest obligations associated with $75
million of its 3% convertible subordinated notes due February 2007, such that
the interest payable effectively becomes variable based on the three month
LIBOR plus 69.5 basis points. The payment dates of the swap are January 31st,
April 30th, July 31st and October 31st of each year, commencing April 30, 2004,
until maturity on February 15, 2007. The initial LIBOR setting for the swap was
1.15%, creating a combined effective rate of approximately 1.845%, which was
effective until April 30, 2004. The combined effective rate for the period from
August 1, 2004 through October 31, 2004 is approximately 2.375%, compared to
1.865% for the three month period ended July 31, 2004. The swap was designated
as a fair value hedge, and as such, the gain or loss on the swap, as well as
the offsetting gain or loss on the notes attributable to the hedged risk,
were recognized in earnings. As part of the agreement, the Company is also
required to post collateral based on changes in the fair value of the interest
rate swap. This collateral, in the form of restricted cash, was $3.2 million at
July 31, 2004. The Company could incur charges to terminate the swap in the
future prior to February 15, 2007 if interest rates rise, or upon certain
events such as a change in control or certain redemptions of convertible
subordinated notes. (8) STOCK-BASED COMPENSATION The estimated per share weighted average fair value of all stock options
granted during the six months ended July 31, 2004 and 2003 was $5.82 and $5.01,
respectively. The fair value of each option grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: Three months ended
    
    Six months endedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Risk free interest rate
    
    
    4.26
    %
    
    
    2.55
    %
    
    
    3.93
    %
    
    
    2.71
    %Expected life
    
    
    5.93
    
    
    
    6.68
    
    
    
    5.83
    
    
    
    6.68Expected volatility
    
    
    92.49
    %
    
    
    86.60
    %
    
    
    93.54
    %
    
    
    86.60
    %
 Had the Company recorded compensation cost for its stock options based on
the estimated fair value on the date of grant, as defined by SFAS 123, the
Companys pro forma net loss would have been as follows: Three months ended
    
    Six months endedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (12,139
    )
    
    $
    (25,822
    )
    
    $
    (16,665
    )
    
    $
    (27,904
    )Add: Total stock-based employee compensation
expense included in reported net loss, net of tax
    
    
    507
    
    
    
    148
    
    
    
    656
    
    
    
    280Deduct: Total stock-based employee
compensation expense under fair value
based method of all awards, net of tax
    
    
    (3,078
    )
    
    
    (2,931
    )
    
    
    (5,798
    )
    
    
    (5,572
    )Pro forma net loss
    
    $
    (14,710
    )
    
    $
    (28,605
    )
    
    $
    (21,807
    )
    
    $
    (33,196
    )Basic & diluted net loss per share:As reported
    
    $
    (0.44
    )
    
    $
    (.96
    )
    
    $
    (0.60
    )
    
    $
    (1.03
    )Pro forma
    
    $
    (0.53
    )
    
    $
    (1.06
    )
    
    $
    (0.79
    )
    
    $
    (1.23
    )
 10




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(9) WARRANTY The Company records a liability for warranty claims at the time of sale.
The amount of the liability is based on contract terms and historical warranty
costs, which is periodically adjusted for recent actual experience. Warranty
terms on the Companys equipment range from 90 days to 13 months. The changes
in warranty reserve balances for the six months ended July 31, 2004 and 2003
were as follows: July 31,2004
    
    2003Beginning balance
    
    $
    2,348
    
    
    $
    1,521Inrange acquisition
    
    
    
    
    
    
    1,709Charged to cost of product
    
    
    463
    
    
    
    636Cost of warranty
    
    
    (865
    )
    
    
    (1,299
    )Ending balance
    
    $
    1,946
    
    
    $
    2,567
 (10) DISCONTINUED OPERATIONS In connection with the acquisition of Inrange, the Company acquired a
non-complementary business focused on enterprise resource planning (ERP)
consulting services. In April 2004, substantially all of the business and its
net assets totaling approximately $2.0 million were sold for estimated cash
proceeds of $1.3 million, subject to adjustment based on the final agreed upon
net assets of the business, and installments payments having a discounted value
of approximately $1.2 million. The business was divested to allow the Company
to focus on its core storage networking solutions business. Revenue and expense
for the ERP business in the first half of 2004 totaled approximately $2.6
million and $3.3 million, respectively. The business has been accounted for as
a discontinued operation in the accompanying financial statements, meaning that
its revenues and expenses are not included in results from continuing
operations, and the net loss of the ERP business for the second quarter and
first half of 2004 totaling $370 and $714, respectively, was included under the
discontinued operations caption in the statement of operations. The pre-tax gain from the sale of $450 has been recorded as reduction in
goodwill from the Inrange acquisition during the first quarter of 2004. (11) ENTERPRISE-WIDE INFORMATION Summarized information regarding enterprise-wide revenue and gross margins
from external customers are as follows: Three months ended
    
    Six months endedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Revenue:Proprietary products
    
    $
    31,903
    
    
    $
    51,038
    
    
    $
    70,414
    
    
    $
    69,332Third party products
    
    
    12,661
    
    
    
    12,451
    
    
    
    37,825
    
    
    
    28,561Professional services
    
    
    10,389
    
    
    
    9,372
    
    
    
    21,993
    
    
    
    16,460Maintenance
    
    
    22,211
    
    
    
    22,018
    
    
    
    43,169
    
    
    
    32,856Total
    
    $
    77,164
    
    
    $
    94,879
    
    
    $
    173,401
    
    
    $
    147,209Gross margins:Proprietary products
    
    $
    16,704
    
    
    $
    22,655
    
    
    $
    38,069
    
    
    $
    32,635Third party products
    
    
    1,715
    
    
    
    1,590
    
    
    
    5,843
    
    
    
    4,380Professional services
    
    
    2,611
    
    
    
    2,349
    
    
    
    4,947
    
    
    
    4,753Maintenance
    
    
    10,926
    
    
    
    10,641
    
    
    
    20,397
    
    
    
    16,077Total
    
    $
    31,956
    
    
    $
    37,235
    
    
    $
    69,256
    
    
    $
    57,845
 11




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(12) LITIGATION Inrange Technologies Corporation, which is now a wholly owned subsidiary
of the Company, has been named as a defendant in the case SBC Technology
Resources, Inc. v. Inrange Technologies Corp., Eclipsys Corp. and Resource
Bancshares Mortgage Group, Inc., No. 303-CV-418-N, pending in the United States
District Court for the Northern District of Texas, Dallas Division. The action
was commenced on February 27, 2003. The complaint claims that Inrange is
infringing one SBC patent by manufacturing and selling storage area networking
equipment, including Fibre Channel directors and switches, for use in storage
networks that allegedly embody certain inventions claimed in a patent owned by
SBC. The complaint asks for judgment that SBCs patent is infringed by the
defendants in the case, an accounting for actual damages, attorneys fees, costs
of suit and other relief. Additionally, Eclipsys has demanded that Inrange
indemnify and defend Eclipsys pursuant to documentation under which it acquired
the product from Inrange. Hitachi Data Systems Corporation has informed Inrange
that it has also received a demand from Eclipsys that Hitachi indemnify and
defend Eclipsys for this action. Hitachi has put Inrange on notice that it will
tender any claim by Eclipsys for indemnification and defense of this action to
Inrange. Inrange has answered, denying SBCs allegations. The case is in the
discovery phase, and a claim construction of the asserted patent has not
occurred. Management is evaluating the litigation. At this point, it is too
early to form a definitive opinion concerning the ultimate outcome of this
matter. A shareholder class action was filed against Inrange and certain of its
officers on November 30, 2001, in the United States District Court for the
Southern District of New York, seeking recovery of damages caused by Inranges
alleged violation of securities laws, including section 11 of the Securities
Act of 1933 and section 10(b) of the Exchange Act of 1934. The complaint, which
was also filed against the various underwriters that participated in Inranges
initial public offering (IPO), is identical to hundreds of shareholder class
actions pending in this court in connection with other recent IPOs and is
generally referred to as In re Initial Public Offering Securities Litigation.
The complaint alleges, in essence, (a) that the underwriters combined and
conspired to increase their respective compensation in connection with the IPO
by (i) receiving excessive, undisclosed commissions in exchange for lucrative
allocations of IPO shares, and (ii) trading in Inranges stock after creating
artificially high prices for the stock post-IPO through tie-in or laddering
arrangements (whereby recipients of allocations of IPO shares agreed to
purchase shares in the aftermarket for more than the public offering price for
Inrange shares) and dissemination of misleading market analysis on Inranges
prospects; and (b) that Inrange violated federal securities laws by not
disclosing these underwriting arrangements in its prospectus. The defense has
been tendered to the carriers of Inranges director and officer liability
insurance, and a request for indemnification has been made to the various
underwriters in the IPO. At this point the insurers have issued a reservation
of rights letter and the underwriters have refused indemnification. The court
has granted Inranges motion to dismiss claims under section 10(b) of the
Securities Exchange Act of 1934 because of the absence of a pleading of intent
to defraud. The court granted plaintiffs leave to replead these claims, but no
further amended complaint has been filed. The court also denied Inranges
motion to dismiss claims under section 11 of the Securities Act of 1933. The
court has also dismissed Inranges individual officers without prejudice, after
they entered into a tolling agreement with the plaintiffs. On July 25, 2003,
the Companys board of directors conditionally approved a proposed partial
settlement with the plaintiffs in this matter. In June 2004, a stipulation of
settlement was submitted to the court for preliminary approval. The settlement
would provide, among other things, a release of Inrange and of the individual
defendants for the conduct alleged in the action to be wrongful in the
complaint. Inrange would agree to undertake other responsibilities under the
partial settlement, including agreeing to assign away, not assert, or release
certain potential claims Inrange may have against its underwriters. Any direct
financial impact of the proposed settlement is expected to be borne by
Inranges insurers. The settlement was approved subject to a number of
conditions, including the participation of a substantial number of other issuer
defendants in the proposed settlement, the consent of Inranges 12




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insurers to the settlement, and the completion of acceptable final
settlement documentation. Furthermore, the settlement is subject to a hearing
on fairness and approval by the court overseeing the IPO litigations. At this
point, it is too early to form a definitive opinion concerning the ultimate
outcome of this matter. From time-to-time the Company is a party to various other legal actions
and receives threats of litigation. At this time, management does not believe
any such litigation or threats will have a material impact on the Companys
consolidated financial position or results of operations. 13




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with our interim consolidated
financial statements and notes thereto which appear elsewhere in this Quarterly
Report and the MD&A contained in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 14, 2004. Overview We are a leading provider of todays most cost-effective and reliable
storage networking solutions. For over 20 years, businesses around the world
have depended on us to improve business efficiency, increase data availability
and manage their business-critical information. We apply our technology,
products and expertise in open storage networking architecture and business
continuity to help companies build end-to-end storage solutions, including
hardware and software products, analysis, planning and design, multi-vendor
integration, implementation and ongoing remote management. We focus primarily
on helping our customers design, develop, deploy and manage storage and data
networks, including storage area networks, or SANs, a high speed network within
a business existing computer system that allows the business to manage its
data storage needs with greater efficiency and less disruption to its overall
network. We design, manufacture, market and support a wide range of solutions
that provide fast and reliable connections among networks of computers and
related devices, allowing customers to manage and expand large, complex storage
networks efficiently, without geographic limitations, including applications
such as remote data replication, or the real-time backup of data to remotely
located disks, and remote tape vaulting, or the backup of data to remotely
archived tapes. We market our storage networking products and services
directly to customers through our sales force and worldwide distributors. We
also have strategic marketing and supply relationships with leading storage,
telecommunications and fibre switching companies, including Brocade, EMC,
Hewlett-Packard, Hitachi Data Systems, IBM, StorageTek, and Dell Computer
Corporation. On May 5, 2003, we completed the acquisition of Inrange for $190 million
in cash, issuance
of stock option grants to certain employees, plus transaction costs. Inrange designs, manufactures, markets and
supports switching and networking products for storage and data networks. In
July 2004, we announced a new storage networking infrastructure platform, the
UltraNet Multi-Service Director (UMD), the most scalable family of
new-generation, multi-service enterprise directors that form the foundation for
emerging IT infrastructure strategies, such as tiered storage, information
lifecycle management and utility computing, while simplifying infrastructure
and reducing costs. With ability for customers to upgrade and scale to 512
non-blocking ports at 4Gbps, we believe the UMD provides a platform from which
enterprises can build storage networks with unprecedented reliability,
availability and serviceability, while providing the customer with significant
upgrade flexibility and investment protection. The acquisition of Inrange
makes us one of the worlds largest providers of complete storage networking
products, solutions and services, it significantly broadens and strengthens our
portfolio of storage networking products and solutions, increases our global
size and scope, and expands our customer base. The markets in which we operate are characterized by rapidly changing
technology and evolving industry standards, resulting in rapid product
obsolescence and frequent product and feature introductions and improvements.
We compete with several companies that have greater engineering and development
resources, marketing resources, financial resources, manufacturing capability,
customer support resources and name recognition. As a result, our competitors
may have greater credibility with existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. While the Fibre Channel and FICON switching markets have yet to develop
fully, we believe that the market for our Fibre Channel and FICON switching
products, including our next generation UMD family of products and our FC/9000®
products are highly competitive, continually evolving and subject to rapid
technology change. Our competitors in Fibre Channel and FICON switching include
Brocade Communications Systems, McData Corporation, Cisco Systems, Inc., and
Qlogic Corporation, as well as storage system vendors who may re-sell the Fibre
Channel and FICON switching products manufactured by our competitors. We anticipate that the UMD and FC/9000® Fibre Channel and FICON switching
products, will account for a significant and growing portion of our proprietary
product revenue in future periods. IDC estimates that the revenue for Fibre
Channel hubs, switches and directors will grow from $938 million in 2003 to
$2.2 billion in 2007, reflecting a compound annual growth rate of 23%. We
anticipate that we will be able to capture a larger share of this growing
market by expanding our established relationships with leaders in the storage
networking market, including the major storage vendors, such as EMC, Hitachi
Data Systems and IBM. We believe our current and future strategic
relationships will facilitate the integration of our products, thereby
increasing our market share and reducing the length of our sales cycle. We
will also expand sales of our proprietary products, including our Fibre Channel
and FICON director 14




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##### Table of Contents



products, through our direct sales force. We believe that our ability to
provide the customer with complete professional consulting services, product
maintenance and advanced networking monitoring services gives us an advantage
over our competitors that will enable us to expand sales and grow market share. Our competitors for our wide area storage networking products, primarily
our UltraNet® Director and Edge products, include storage system vendors and
others including Akara, which is owned by Ciena, and Nishan Systems, which is
owned by McData. In addition, Cisco has acquired technology (Andiamo and
NuSpeed) with functionality similar to our product offerings. EMC has a WAN
capability for storage networking that competes with our products. Our
UltraNet® Director and Edge product revenue may be impacted as customers switch
to channels such as FICON with improved distance and price performance
capabilities or to less expensive IP based solutions. There are numerous
competitors for our third party product and solution sales. Our revenue can be significantly impacted by general economic trends in
the global economy and capital spending plans for information technology
equipment. Our revenue can also be impacted by the introduction or phase out
of products and services, either by us, or our competitors. The introductions
of new technologies by other companies, including the large storage vendors
with whom we do business, can also impact our quarterly revenue. 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. In fiscal 2003, we achieved cost synergies in most functional areas of our
business due to the Inrange acquisition. We consolidated our manufacturing
operations, including the in-house capability to add parts and components to
printed circuit boards. We anticipate that these cost synergies will continue
in fiscal 2004. The mix of products sold by us, (i.e. our proprietary products
or third party products), and the level of services we provide to customers has
a significant impact on our level of profitability in any given quarterly
period. Acquisition of Inrange On April 6, 2003, we entered into an agreement whereby a wholly owned
subsidiary would acquire all of the shares of Inrange that were owned by SPX
Corporation. The shares acquired constituted approximately 91% of the issued
and outstanding shares of Inrange for a purchase price of approximately $2.31
per share and $173 million in the aggregate. On May 5, 2003 we completed the
acquisition of Inrange and pursuant to the agreement the subsidiary merged into
Inrange, and the remaining capital stock owned by the other Inrange
shareholders was converted into the right to receive approximately $2.31 per
share in cash, resulting in a total payment of $190 million for both the stock
purchase and merger. During fiscal 2003 we incurred integration charges
related to the acquisition of $5.4 million, primarily for wages and severance
for terminated employees, and extra travel costs for integration activities.
We also recorded a $1.6 million charge for the write-down of inventory
resulting from the integration of the product strategies for the new combined
entity, and a $19.7 million charge for in-process research and development
related to the acquisition of Inrange. The integration of Inrange is now
complete and no further integration charges have been incurred in fiscal 2004.
Our consolidated financial statements include the results of Inrange from May
5, 2003. See footnote 4 per the accompanying financial statements for a
summary of the purchase price allocation and pro forma results of operations as
if the acquisition of Inrange took place on February 1, 2003. 15




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Discontinued Operations In connection with the acquisition of Inrange in May 2003, we acquired a
non-complementary business focused on enterprise resource planning (ERP)
consulting services. In April 2004, substantially all of the business and its
net assets totaling approximately $2.0 million were sold for estimated cash
proceeds of $1.3 million, subject to adjustment based on the final agreed upon
net assets of the business, and installments payments having a discounted value
of approximately $1.2 million. The business was divested to allow us to focus
on our core storage networking solutions business. Revenue and expense for the
ERP business in the first half of 2004 totaled approximately $2.6 million and
$3.3 million, respectively The business has been accounted for as a
discontinued operation in the accompanying financial statements, meaning that
its revenues and expenses are not included in results from continuing
operations, and the net loss of the ERP business for the second quarter and
first half of 2004 totaling $370,000 and $714,000, respectively, was included
under the discontinued operations caption in the statement of operations. The pre-tax gain from the sale of $450,000 during the first quarter of
2004 has been recorded as reduction in goodwill related to the Inrange
acquisition. Convertible Debt Offering In February 2002, we sold $125 million of 3% convertible subordinated
notes due February 2007, raising net proceeds of $121.6 million. The notes are
convertible into our common stock at a price of $19.17 per share. We may redeem
the notes upon payment of the outstanding principal balance, accrued interest
and a make whole premium if the closing price of our common stock exceeds 175%
of the conversion price for at least 20 consecutive trading days within a
period of 30 consecutive trading days ending on the trading day prior to the
date we mail the redemption notice. On August 15, 2002 a registration statement
for the resale of the notes and the 6.5 million shares of common stock issuable
upon conversion of the notes became effective. We intend to withdraw the
registration statement as applicable agreements do not require us to maintain
it any longer. Valuation Allowance for Deferred Tax Assets In the fourth quarter of fiscal 2002, we recorded a non-cash charge of
$23.6 million to provide a full valuation allowance for our United States
deferred tax assets. As we generate taxable income in future periods, we do not
expect to record significant income tax expense in the United States until it
becomes more likely than not that we will be able to utilize the deferred tax
assets, and we reduce the valuation allowance. The establishment of the
valuation allowance does not impair our ability to use the deferred tax assets
upon achieving profitability. Our federal net operating loss carry-forwards and
credits do not expire until 15 to 20 years from now. Restructuring and Potential Goodwill and Long-lived Asset Impairment During the second quarter of 2004 we experienced a continued slow-down in
the IT spending environment, competitive pressures and customers desire for
more flexibility in financing terms, particularly for large investments, such
as remote storage networking solutions. We also experienced a decline in
traditional large-scale ESCON projects, while FICON extension, the new
mainframe channel technology, has not grown as fast as anticipated. These
trends have negatively impacted our UltraNet® wide area extension business, and
we expect these trends to continue. As a result, we have adjusted our expense
levels to reflect the current outlook for our markets. In August of 2004 we
had a reduction of approximately 220 employees and consultants, along with a
reduction in other discretionary expenses. We anticipate these reductions will
result in approximately $7.5 million of quarterly expense savings. We also
anticipate that our third quarter results will include charges related to our
expense reduction actions of approximately $3.5 - $4.5 million, primarily for
severance and facilities closures. In August 2004, our market capitalization
fell substantially below our recorded net book value, indicating that our
goodwill and other long-lived assets may be impaired. We have engaged an
independent third party to appraise these assets. Depending on the outcome of
this appraisal, we may incur a charge in the third quarter of 2004 for
impairment of goodwill and other long-lived assets. 16




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##### Table of Contents



Results of Operations The following table sets forth financial data for our 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. Three months ended
    
    Six months endedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Revenue:Product sales
    
    
    57.8
    %
    
    
    66.9
    %
    
    
    62.4
    %
    
    
    66.5
    %Service fees
    
    
    42.2
    
    
    
    33.1
    
    
    
    37.6
    
    
    
    33.5Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Gross profit:Product sales
    
    
    41.3
    
    
    
    38.2
    
    
    
    40.6
    
    
    
    37.8Service fees
    
    
    41.5
    
    
    
    41.4
    
    
    
    38.9
    
    
    
    42.2Total gross profit
    
    
    41.4
    
    
    
    39.2
    
    
    
    39.9
    
    
    
    39.3Operating expenses:Sales and marketing
    
    
    30.5
    
    
    
    25.9
    
    
    
    27.3
    
    
    
    26.4Engineering and development
    
    
    18.0
    
    
    
    12.7
    
    
    
    15.6
    
    
    
    12.2General and administrative
    
    
    6.0
    
    
    
    5.5
    
    
    
    4.6
    
    
    
    5.3In-process research and development charge
    
    
    
    
    
    
    20.8
    
    
    
    
    
    
    
    13.4Total operating expenses
    
    
    54.5
    
    
    
    64.9
    
    
    
    47.5
    
    
    
    57.3Loss from operations
    
    
    (13.1
    )%
    
    
    (25.7
    )%
    
    
    (7.6
    )%
    
    
    (18.0
    )%
 Revenue Product revenue Sales of our proprietary products generated revenues of $31.9 million and $70.4
million in the second quarter and first half of 2004, respectively, compared to
$51.0 million and $69.3 million, respectively, for the second quarter and first
half of 2003. Sales of proprietary products for the second quarter of 2004
were down 37% or $19.1 million from the second quarter of 2003. During the
second quarter of 2004, we continued to experience a slow-down in the IT
spending environment, competitive pressures and customers desire for more
flexibility in financing terms, particularly for large investments, such as
remote storage networking solutions. There was also a decline in traditional
large-scale ESCON projects, while FICON extension, the new mainframe channel
technology, has not grown as fast as anticipated. These events impacted the
sale of our proprietary wide-area extension products during the second quarter
of 2004, when compared to the prior year. We currently anticipate that this
trend will continue for the foreseeable future. Sales of proprietary products
for the first half of 2004 were up 2% or $1.1 million when compared to the
first half of 2003, due to our acquisition of Inrange on May 5, 2003. Sales of our third party storage solution products generated revenues of $12.7
million and $37.8 million in the second quarter and first half of 2004,
respectively, increases of 2% and 32%, respectively, from $12.5 million and
$28.6 million for the second quarter and first half of 2003. During the first
three months of 2004, we received a large customer order which accounted for
the majority of the increase when comparing the first half of 2004 to the first
half of 2003. Our sales representatives have also become more proficient at
selling third party storage solutions, which also contributed to this growth. 17




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Service revenue Maintenance revenues from our proprietary products for the second quarter
and first half of 2004 totaled $22.2 million and $43.2 million, respectively,
increases of 1% and 31%, respectively, from $22.0 million and $32.9 million,
for the second quarter and first half of 2003. The increase in the first half
of 2004 compared to the first half of 2003 is primarily attributable to our
acquisition of Inrange, as maintenance related to the proprietary products
acquired from Inrange provided us with a recurring annual revenue stream of
approximately $40 million. Our consulting fee revenues for the second quarter and first half of 2004
totaled $10.4 million and $22.0 million, respectively, increases of 11% and
34%, respectively, from $9.4 million and $16.5 million in the second quarter
and first half of 2003. We now offer professional consulting services with
sales of the proprietary products we acquired from Inrange, and have trained
the Inrange sales force to sell these services, along with our proprietary and
third party products. Our sales force has also become more experienced and
proficient at selling our consulting services. A significant component of our
strategy includes having a direct sales force and professional consulting
organization capable of providing customers with complete end-to-end storage
networking solutions, thereby capturing more of the customers IT spending and
increasing our overall consulting fee and product revenue. General Revenue generated from the sale of products and services outside the
United States for the second quarter and first half of 2004 totaled $30.9
million and $62.3 million, respectively, compared to $37.7 million and $53.1
million, respectively, in the second quarter and first half of 2003. The
decline in international revenue in the second quarter of 2004 compared to the
prior year was due to the previously discussed slow-down in the IT spending
environment and our wide-area extension markets. The increase in international
revenue for the first half of 2004 compared to 2003 was due to our acquisition
of Inrange on May 5, 2003. We derived 40% and 36% of our revenue outside the
United States for the second quarter and first half of 2004, compared to 39%
and 36% for the same periods of 2003. The acquisition of Inrange has
expanded our presence outside the United States, primarily in Europe. IBM and its affiliates and MetLife accounted for 16% and 17%,
respectively, of our revenue during the first six months of 2004. No customer
accounted for more than 10% of our revenue during the first six months of 2003.
Price discounting had a small impact on our product revenue during these
periods. Gross Profit Margins Product margins Gross margins from the sale of our proprietary products for the second
quarter and first half of 2004 were 52% and 54%, respectively, compared to 44%
and 47%, respectively, for the second quarter and first half of 2003. Included
in product gross margins is amortization expense for developed technology
related to the Inrange acquisition for the second quarter and first half of
2004 of $1.1 million and $2.1 million, respectively, compared to $1.1 million
for both the second quarter and first half of 2003. Also included in the second
quarter and first half of 2003 is a $1.6 million write down of inventory and
$616,000 of severance costs, both related to the integration of Inrange.
Excluding these items, our gross margins for the second quarter and first half
of 2004 would have been 56% and 57%, respectively, compared to 51% and 52%,
respectively, for the second quarter and first half of 2003. The improvement
in gross margin percentage, excluding the amortization of developed technology
and integration charges, was due to the cost synergies resulting from the
Inrange acquisition. We obtained significant cost synergies by consolidating
our manufacturing operations following the acquisition of Inrange, resulting in
lower labor and overhead costs. A significant part of our product cost
includes the addition of parts and components to printed circuit boards.
Following the acquisition of Inrange, we were able to reduce our material costs
by bringing this activity in-house. We previously outsourced this activity to
various third party suppliers. Gross margins from the sale of third party storage solutions products for
the second quarter and first half of 2004 were 14% and 15%, respectively,
compared to 13% and 15%, respectively, in the second quarter and first half of
2003. We anticipate that product margins for third party products will
remain in the mid to high teens in future periods. 18




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##### Table of Contents



Service margins Gross margins from maintenance of our proprietary products in the second
quarter and first half of 2004 were 49% and 47%, respectively, compared to 48%
and 49%, respectively, in the second quarter and first half of 2003. We
presently anticipate that our gross margins from maintenance of our proprietary
products will remain at the 50% level, plus or minus a few percentage points,
for the foreseeable future. Gross profit
margins from our consulting fees in the second quarter and
first half of 2004 totaled 25% and 22%, respectively, compared to 25% and 29%,
respectively, in the second quarter and first half of 2003. Gross profit margins for the first half of 2004 were
slightly lower when compared to the first half of 2003 due to greater use
of third party contractors in the first quarter of 2004. Operating Expenses Sales and marketing Sales and marketing expenses for the second quarter and first half of 2004
totaled $23.6 million and $47.3 million, respectively, down 4% from $24.6
million in the second quarter of 2003, but up 22% from $38.8 million in the
first half of 2003. Included in sales and marketing expense is amortization
for customer list and trademarks related to our acquisition of Inrange of
$608,000 and $1.2 million, respectively, in the second quarter and first half
of 2004, compared to $608,000 for both the second quarter and first half of
2003. Also included in the second quarter and first half of 2004 is $331,000
of severance related to restructuring and non-cash stock compensation expense
of $36,000. During the second quarter and first half of 2003, we incurred an
integration charge relating to the acquisition of Inrange of $1.2 million,
primarily for wages and severances, and $158,000 related to the earn out
payable to the BI-Tech employees. Excluding these items, sales and marketing
expenses for the second quarter of 2004 and 2003 were comparable. During the
second quarter of 2004 we incurred additional marketing costs for product
certifications, customer evaluations and marketing programs when compared to
the second quarter of 2003. These increases offset lower sales compensation
costs due to the $18.9 million decline in product revenue, when comparing the
second quarter of 2004 to the prior year. Sales and marketing expenses for the
first half of 2004 were up $8.5 million compared to the first half of 2003 due
to our acquisition of Inrange in May of 2003. Engineering Engineering and development expense for the second quarter and first half
of 2004 totaled $13.9 million and $27.1 million, respectively, up 16% and 51%,
respectively, from $12.0 million and $17.9 million, respectively, in the second
quarter and first half of 2003. Included in the second quarter and first half
of 2004 is $72,000 of non-cash stock compensation expense. Included in the
second quarter and first half of 2003 is an integration charge of $343,000
related to our acquisition of Inrange. The increase in engineering and
development expense when comparing the second quarter of 2004 to the prior
year, is due to development of our new family of Fibre Channel and FICON
switching products, the UMD. The increase in engineering and development
expense when comparing the first half of 2004 to 2003 is due to our purchase of
Inrange on May 5, 2003. In future periods, we expect to continue to invest a
significant portion of our resources in the engineering and development of new
products, specifically our new family of Fibre Channel and FICON director
products, the UMD. General and administrative General and administrative expenses for the second quarter and first half
of 2004 totaled $4.6 million and $8.1 million, respectively, down 13% from $5.3
million in the second quarter of 2003 and up 3% from $7.8 million in the first
half of 2003. Included in the second quarter and first half of 2004 is
$342,000 of non-cash stock compensation expense. Included in the second
quarter and first half of 2003 is a $1.2 million integration charge related to
our acquisition of Inrange. Excluding these items, general and administrative
expenses for the second quarter of 2004 were comparable to the second quarter
of 2003. The increase when comparing the first half of 2004 to 2003 was
primarily due to our acquisition of Inrange in May of 2003. 19




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##### Table of Contents



Other Other expense for the second quarter and first half of 2004 totaled
$748,000 and $1.6 million, respectively, compared to other expense of $719,000
and $19,000, respectively, for the second quarter and first half of 2003. In
February 2002, we sold $125 million of 3% convertible subordinated notes due
February 2007, raising net proceeds of $121.6 million. Coupon interest on the
notes, plus amortization of debt issuance costs, and interest expense from our
capital lease obligations resulted in interest expense for the second quarter
and first half of 2004 totaling $1.0 million and $2.0 million, respectively,
compared to $1.1 million and $2.2 million, respectively, for the second quarter
and first half of 2003. In January 2004, we entered into an interest-rate swap
agreement with a notional amount of $75 million that has the economic effect of
modifying that dollar portion of the fixed interest obligations associated with
$75 million of our 3% convertible subordinated notes due February 2007, such
that the interest payable effectively becomes variable based on the three month
LIBOR plus 69.5 basis points. The initial LIBOR setting for the swap was 1.15%,
creating a combined effective rate of approximately 1.845%, which was effective
until April 30, 2004. The combined effective rate for the period from August 1,
2004 through October 31, 2004 is approximately 2.375%, compared to 1.865% for
the three month period ended July 31, 2004. Interest and other income totaled
$253,000 and $463,000 for the second quarter and first half of 2004, compared
to $375,000 and $1.5 million for the second quarter and first half of 2003.
During the first quarter of 2003, we sold substantially all of our investments
in marketable securities to finance our acquisition of Inrange on May 5, 2003.
The sale resulted in a net realized gain of $747,000, and was the primary
reason for the reduction in interest income when comparing the first half of
2004 and 2003. Liquidity and Capital Resources We have historically financed our operations through the public and
private sale of debt and equity securities, bank borrowings under lines of
credit, capital and operating leases and cash generated by operations. Cash, cash equivalents and marketable securities at July 31, 2004 totaled
$71.5 million, a decrease of $6.0 million since January 31, 2004. The decrease
is due to our net loss during the first half of 2004 totaling $16.7 million.
Also contributing to the decrease were higher levels of inventory totaling
$15.4 million and lower accrued liabilities totaling $8.7 million. Partially
offsetting these uses of cash in the first half of 2004 was a reduction in
accounts receivable of $25.5 million, and a customer deposit totaling $13.7
million. Other uses of cash during the first half of 2004 included capital
equipment and field support spares totaling $13.3 million. Expenditures for
capital equipment and field support spares have been, and will likely continue
to be, a significant capital requirement. At July 31, 2004, our available cash, cash equivalents and marketable
securities totaled $71.5 million. We believe that our available 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
for the next twelve months. This belief is based upon a number of assumptions
and estimates, including obtaining certain revenue levels and payments of
expenses in line with estimates by management. If these estimates and
assumptions do not turn out to be correct, or if we encounter unanticipated
difficulties or economic conditions, our liquidity could be impaired. We believe that inflation has not had a material impact on our operations
or liquidity to date. Our future minimum contractual cash obligations at July 31, 2004,
including open purchase orders incurred in the ordinary course of business, are
as follows (in millions): Less Than
    
    One to
    
    Four to Five
    
    AfterCash Obligation
    
    Total
    
    One year
    
    Three Years
    
    Years
    
    Five YearsCapital leases
    
    $
    9.3
    
    
    $
    3.0
    
    
    $
    6.1
    
    
    $
    .2
    
    
    
    NoneOperating leases
    
    $
    44.1
    
    
    $
    9.9
    
    
    $
    22.0
    
    
    $
    11.8
    
    
    $
    .4Purchase orders
    
    $
    59.8
    
    
    $
    39.8
    
    
    $
    20.0
    
    
    
    None
    
    
    
    NoneBI-Tech earn out
    
    $
    3.9
    
    
    $
    3.9
    
    
    
    None
    
    
    
    None
    
    
    
    NoneConvertible notes, plus interest
    
    $
    134.5
    
    
    $
    3.8
    
    
    $
    130.7
    
    
    
    None
    
    
    
    None
 20




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##### Table of Contents



ITEM 3. MARKET RISK Our exposure to market risk due to changes in the general level of U.S.
interest rates relates primarily to our cash, cash equivalents, and marketable
securities. The primary objective of our investment activities is the
preservation of principal while maximizing investment income and minimizing
risk. We mainly invest our cash, cash equivalents and marketable securities in
investment grade, highly liquid investments, consisting of U.S. government and
agency securities, corporate debt securities and bank certificates of deposits. At July 31, 2004, our marketable securities include $1.4 million of
various mutual funds. 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 the euro
and British pounds sterling. As of July 31, 2004, we had one open forward
exchange contract for 900,000 euro that is to be settled in August of 2004. In January 2004, we entered into an interest-rate swap agreement with a
notional amount of $75 million that has the economic effect of modifying that
dollar portion of the fixed interest obligations associated with $75 million of
our 3% convertible subordinated notes due February 2007, such that the interest
payable effectively becomes variable based on the three month LIBOR plus 69.5
basis points. The payment dates of the swap are January 31st, April 30th, July
31st and October 31st of each year, commencing April 30, 2004, until maturity
on February 15, 2007. The initial LIBOR setting for the swap was 1.15%,
creating a combined effective rate of approximately 1.845%, which was effective
until April 30, 2004. The combined effective rate for the period from August 1,
2004 through October 31, 2004 is approximately 2.375%, compared to 1.865% for
the three month period ended July 31, 2004. The swap was designated as a fair
value hedge, and as such, the gain or loss on the swap, as well as the
offsetting gain or loss on the notes attributable to the hedged risk, were
recognized in earnings. As part of the agreement, we are also required to post
collateral based on changes in the fair value of the interest rate swap. This
collateral, in the form of restricted cash, was $3.2 million at July 31, 2004.
We could incur charges to terminate the swap in the future prior to February
15, 2007 if interest rates rise, or upon certain events such as a change in
control or certain redemptions of convertible subordinated notes. A 25 basis
point increase in the LIBOR rate would increase our annual interest expense by
$187,500. On July 31, 2004, the reported trading price of our convertible
subordinated notes due 2007 was $84 per $100 in face amount of principal
indebtedness, resulting in an aggregate fair value of approximately $104.8
million. Our common stock is quoted on the Nasdaq National Market under the
symbol CMNT. On September 7, 2004, the last reported sale price of our common
stock on the Nasdaq Market was $3.06 per share. 
 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company reviewed and evaluated the effectiveness of its disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this
report the (Evaluation Date). This review and evaluation was done under the
supervision and with the participation of management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO). Based on their
review and evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate and effective to ensure that information required to
be disclosed by us in reports we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. It
should be noted that the design of any system of controls is based upon certain
assumptions about the likelihood of future events, and there can be assurance
that design will succeed in achieving its stated objective under all potential
future conditions, regardless of how remote. However, the CEO and CFO believe
the Companys disclosure controls and procedures provide reasonable assurance
that the disclosure controls and procedures are effective at the reasonable
assurance level. (b) Change in Internal Controls 21




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##### Table of Contents



There have been no changes in our internal controls over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. 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 liquidity, 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;
    
    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, although not all forward-looking statements contain
these identifying words. 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 and annual sales, (iii)
economic trends in various geographic markets, including changes in IT spending
levels; (iv) relationships with our strategic partners; (v) unanticipated risks
associated with introducing new products and features; (vi) technological
change affecting our products; (vii) adverse judgments in present and future
litigation; (viii) our ability to obtain market acceptance of our new products;
(ix) our ability to anticipate end user needs; (x) dependence on sole source
and limited source suppliers; (xi) our ability to retain and attract key
personnel; (xii) the existence of undetected errors in our products; (xiii) our
ability to protect our intellectual property and defend against infringement
claims; (xiv) variability in gross profit caused by sales mix and other
factors; (xv) receipt of anticipated orders; (xvi) actual expenses meeting
anticipated levels; (xvii) the timing or amount of any restructuring or
impairment charge, and (xviii) other events and other important factors
disclosed previously and from time to time in our filings with the U.S.
Securities and Exchange Commission, including our Form 10-K. 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. 22




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings The information set forth in Note 12 (Litigation) to the consolidated financial
statements included in Part I of this form 10-Q is hereby incorporated by
reference. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities (a) Issuance of securities in current quarter. On August 16, 2004, we issued 700,000 shares of our common stock to the former
owners of BI-Tech in connection with an earn-out payment. The issuance of the
securities satisfies a portion of the Companys obligation for the purchase of
BI-Tech. (b) Not applicable. (c) Not applicable. (d) Not applicable. (e) Repurchases of securities in current quarter. In April 2001, our board of directors authorized the repurchase of up to $50.0
million of our common stock. Subsequent to April 2001, our board changed the
authorization so that the remaining balance of the initial $50 million
authorization can be used for the repurchase of either debt or stock. As of
January 31, 2004, we had repurchased 4.1 million shares of our common stock for
$33.0 million under this authorization. No common stock or debt was repurchased
during the six months ended July 31, 2004. In August of 2004, we repurchased
$650,000 of our convertible bonds. 
 Item 3. None 23




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##### Table of Contents



Item 4. Submission of matters to a vote of security holders  (a)
    
    The annual meeting of shareholders was held on June 23, 2004(b)
    
    Election of directors of the company:
Thomas G. Hudson
Patrick W. Gross
Erwin A. Kelen
John A. Rollwagen
Lawrence A. McLernon
Katherine B. Earley
Bruce J. Ryan
Dr. Renato A. DiPentima(c)
    
    Matters voted upon Affirmative
    
    Negative
    
    Abstain
    
    BrokerVotes
    
    Votes
    
    Votes
    
    Non-Votes1.
    
    
    Election of DirectorsThomas G. Hudson
    
    
    23,806,433
    
    
    
    1,089,880
    
    
    
    
    
    
    
    Patrick W. Gross
    
    
    22,988,496
    
    
    
    1,907,817
    
    
    
    
    
    
    
    Erwin A. Kelen
    
    
    23,763,707
    
    
    
    1,132,606
    
    
    
    
    
    
    
    John A. Rollwagen
    
    
    22,814,651
    
    
    
    2,081,662
    
    
    
    
    
    
    
    Lawrence A. McLernon
    
    
    24,639,048
    
    
    
    257,265
    
    
    
    
    
    
    
    Katherine B. Earley
    
    
    23,826,384
    
    
    
    1,069,929
    
    
    
    
    
    
    
    Bruce J. Ryan
    
    
    24,435,682
    
    
    
    460,631
    
    
    
    
    
    
    
    Dr. Renato A. DiPentima
    
    
    24,538,059
    
    
    
    358,254
    
    
    
    
    
    
    
    2.
    
    
    Proposal to
ratify and approve the
appointment of KPMG LLP
as independent auditors
for the fiscal year ending
January 31, 2005.
    
    
    24,482,528
    
    
    
    296,592
    
    
    
    117,193
    
    
    
    
 
 Item 5. None 24




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed herewith. 3.1
    
    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).3.2
    
    Articles of Amendment of the Second Restated Articles of the Company.
(Incorporated by reference to Exhibit 3(i)-1 to current report on Form 8-K dated May 25, 1999.)3.3
    
    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.
(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
    
    First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1
to Form 8-A/A dated November 27, 2000.)4.3
    
    First Amendment of Certificate of Designations, Preferences and Right of Series A Junior Participating
Preferred Stock. ($.01 Par Value Per Share) of Computer Network Technology Corporation
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27, 2000.)4.4
    
    Interest Rate Swap agreement between the Company and Credit Suisse First Boston International
date January 6, 2004. (Incorporated by reference to Exhibit 4.4 dated June 6, 2004.)4.8
    
    Registration Rights Agreement dated as of July 12, 2004 between the Company, Greg Scorziello, Paul
John Foskett and Owen George Smith (Incorporated by reference to Exhibit 2.3 to Registration
Statement No. 333-117917)10.1(G)
    
    Form of Restricted Stock Unit Agreement (Director) to be used in conjunction with the Amended and
Restated 1992 Stock Award Plan (1)(2)10.1(H)
    
    Form of Restricted Stock Unit Deferred Stock Award Election (Director) to be used in conjunction with
the Amended and Restated 1992 Stock Award Plan (1)(2)10.1(I)
    
    Form of Deferred Stock Unit Agreement (Director) to be used in conjunction with the Amended and
Restated 1992 Stock Award Plan (1)(2)10.1(J)
    
    Form of Deferred Stock Unit Deferred Stock Award Election (Director) to be used in conjunction with
the Amended and Restated 1992 Stock Award Plan (1)(2)11.
    
    Statement Re: Computation of Net income (loss) per Basic and Diluted Share. (2)31.1
    
    CEO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (2)31.2
    
    CFO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (2)32.
    
    Computer Network Technology Corporation Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (2)
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (2)
   (1)
    
    Management contracts or compensatory plans or arrangements with the
Company.(2)
    
    Filed herewith. (b) Reports on Form 8-K A current report on Form 8-K was dated and furnished on May 5, 2004,
pursuant to Item 12 (Results of Operations and Financial Condition) to report
the press release regarding the Companys preliminary financial results for the
first quarter of 2004 and certain other information. A current report on Form
8-K was dated and furnished May 17, 2004, pursuant to Item 12 (Results of
Operations and Financial Condition) to report the press release announcing the
Companys financial results for the first quarter of 2004 and certain other
information. An additional current report on Form 8-K was dated and furnished
May 25, 2004, pursuant to Item 5 (Other Events and Required FD Disclosure) to
report the press release announcing the promotion of Ed J. Walsh to Worldwide
Sales, Marketing and Alliances and the departure of James A. Fanella as the
former head of sales for the company. 25




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##### Table of Contents



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: September 7, 2004 By:
    /s/ Gregory T. BarnumGregory T. BarnumChief Financial Officer
(Principal financial officer) By:
    /s/ Jeffrey A. BertelsenJeffrey A. BertelsenCorporate Controller
and Treasurer
(Principal accounting officer) 26




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##### Table of Contents



EXHIBIT INDEX 3.1
    
    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).3.2
    
    Articles of Amendment of the Second Restated Articles of the Company.
(Incorporated by reference to Exhibit 3(i)-1 to current report on Form 8-K dated May 25, 1999.)3.3
    
    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.
(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
    
    First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1
to Form 8-A/A dated November 27, 2000.)4.3
    
    First Amendment of Certificate of Designations, Preferences and Right of Series A Junior Participating
Preferred Stock. ($.01 Par Value Per Share) of Computer Network Technology Corporation
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27, 2000.)4.4
    
    Interest Rate Swap agreement between the Company and Credit Suisse First Boston International
date January 6, 2004. (Incorporated by reference to Exhibit 4.4 dated June 6, 2004.)4.8
    
    Registration Rights Agreement dated as of July 12, 2004 between the Company, Greg Scorziello, Paul
John Foskett and Owen George Smith (Incorporated by reference to Exhibit 2.3 to Registration
Statement No. 333-117917)10.1(G)
    
    Form of Restricted Stock Unit Agreement (Director) to be used in conjunction with the Amended and
Restated 1992 Stock Award Plan (1)(2)10.1(H)
    
    Form of Restricted Stock Unit Deferred Stock Award Election (Director) to be used in conjunction with
the Amended and Restated 1992 Stock Award Plan (1)(2)10.1(I)
    
    Form of Deferred Stock Unit Agreement (Director) to be used in conjunction with the Amended and
Restated 1992 Stock Award Plan (1)(2)10.1(J)
    
    Form of Deferred Stock Unit Deferred Stock Award Election (Director) to be used in conjunction with
the Amended and Restated 1992 Stock Award Plan (1)(2)11.
    
    Statement Re: Computation of Net income (loss) per Basic and Diluted Share. (2)31.1
    
    CEO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (2)31.2
    
    CFO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (2)32.
    
    Computer Network Technology Corporation Certification of Chief Executive Officer and Chief3.1
    
    Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (2)
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (2)
   (1)
    
    Management contracts or compensatory plans or arrangements with the
Company.(2)
    
    Filed herewith. 27