Back to GetFilings.com

Table of Contents

UNITED STATES

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended January 31, 2003

COMPUTER NETWORK TECHNOLOGY CORPORATION

(763) 268-6000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value

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

     Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  X  No            

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $146,001,470.

     As of April 1, 2003 Registrant had 26,970,165 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Computer Network Technology Corporation’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25, 2003 are incorporated by reference into Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

PART I

ii

Table of Contents

BUSINESS

Overview

      We are a leading provider of end-to-end storage solutions, including hardware and software products, related consulting and integration services, and managed services in the growing storage networking market. We focus primarily on helping our customers design, develop, deploy and manage storage 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 for critical storage networking 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 also supply storage systems, Fibre Channel switches, telecommunications capacity and storage application software. Our revenues were $211.5 million, $187.0 million and $176.1 million for the years ended January 31, 2003, 2002 and 2001, respectively.

      Our storage networking solutions enable businesses to cost-effectively design, implement, monitor and manage their storage requirements, connect geographically dispersed storage networks, provide continuous availability to greater amounts of data and protect increasing amounts of data more efficiently. 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, McDATA, StorageTek, Dell Computer Corporation and Veritas.

      We were the first to develop, and remain a leading provider of, the following storage networking solutions:

	•	Storage networking over WANs. Our solutions for storage networking over wide area networks, or WANs, enable businesses to manage and protect data across remote locations, in real time if necessary, through applications such as remote data replication and remote tape vaulting. WANs are networks dispersed over long distances that communicate by traditional copper or fiber optic third-party telecommunication lines.
	•	Fibre Channel-based storage networking over WANs. In October 1999, we introduced our first Fibre Channel-based storage networking over WAN product. Fibre Channel is a technology that dramatically improves the speed of data input and output, or I/ O, between existing storage devices and the ability to connect additional devices to storage networks. We believe our Fibre Channel-based storage networking over WAN products offer significant growth prospects. These products uniquely address constraints in distance, connectivity and data transmission speeds inherent in the Fibre Channel standard. We believe Fibre Channel technology combined with our products and services will enable businesses to efficiently consolidate, cluster and share data from multiple storage devices on storage networks.
	•	Storage networks over IP-based networks. In February 2000, we introduced the first products to allow storage networking applications, such as remote data replication, to be deployed over private networks that are based on Internet protocol, or IP, the standard method for data transmission over the Internet. In May 2001, we announced the first implementation of data mirroring that combined Fibre Channel over IP. Our products were the first to extend the Fibre Channel, SCSI and ESCON standards to IP-based networks. SCSI and ESCON are older, widely used standards for communicating between computers and IP refers to internet protocol. These products uniquely enable businesses that use virtual private IP-based networks, or VPNs, to build storage networking over WAN applications. In October 2002, we announced the first remote tape backup/recovery solution for open systems environments to operate over thousands of miles utilizing IP networks.

1

Table of Contents

      Following these technological firsts, we expanded our solutions offerings with the acquisition of Articulent Inc. in April 2001, a storage solutions provider in the Northeast United States, and the acquisition of Business Impact Technology Solutions Limited (BI-Tech) in June 2002, a storage solutions provider in the United Kingdom. Our expanded solutions offerings include consulting, integration, monitoring, and management services that allow our customers to rapidly design, implement and manage complex storage environments. As a result, we are able to capture more of our customers’ spending dollars on storage solutions.

      Our storage networking solutions operate across most business computing environments, including open systems and mainframes. Open systems are server-based systems that are easy to scale, or expand, and use hardware and software standards not proprietary to any vendor. Mainframes are computer systems with high processing power that have historically been used by large businesses for storing and processing large amounts of data. Compared to available alternatives, we believe our storage networking products offer greater ability to connect various applications and heterogeneous environments using different interfaces, protocols and standards, and to connect and link devices in storage networks transparently, meaning with little or no alteration of other vendors’ hardware or software products.

      We believe our solutions that enable storage networking applications over IP-based networks will benefit existing customers and attract new customers, including mid-sized businesses. These solutions extend the “bandwidth on demand” advantages of IP-based networks to storage applications and allow customers to access telecommunications capacity only as needed through a virtual private network, or VPN, connection, as opposed to leasing expensive dedicated lines. By deploying storage networks over IP-based networks, companies can leverage their existing bandwidth, and can rely on their existing IP network knowledge. We believe that these cost savings, along with the generally expected decreasing costs of telecommunications capacity, will create high-growth opportunities for us in remote data replication, remote tape vaulting and other storage networking applications we enable.

      Our storage networking products consist primarily of our UltraNet® family of products, that connect storage devices. We also market our established channel networking products, which enable mainframe computers to transmit data over unlimited distances and provide our support services. Our storage solutions sales, which includes the business we acquired from Articulent in April 2001 and BI-Tech in June 2002, helps our customers design, deploy and manage enterprise storage solutions by supplying products and expertise for implementing storage applications. The storage solutions sale includes consulting and integration services for disaster recovery, business continuance, storage infrastructure and network performance. We also offer integration services for data replication, enterprise back-up and restore, SAN implementation and network performance monitoring.

Our Market Opportunities

      We believe several forces will continue to drive the demand for our storage networking products and services:

	•	The volume of enterprise data is expected to increase significantly due to the proliferation of Web-based content, digital media, e-mail, supply chain management, customer relations management and other data- driven business applications. As a result, the demand for storage capacity continues to grow.
	•	Actual and expected declines in telecommunications costs and the introduction of cost-effective technologies such as Fibre Channel switching and fiber optic transmission capabilities will make remote data replication and remote tape backup applications more financially attractive for our customers. The decrease in telecommunications costs, coupled with an overall increase in the cost of ownership, contributes to a trend of consolidating and connecting storage across many servers and many locations, which drives demand for our products and services.

2

Table of Contents

	•	Storage networking applications over IP-based networks will further expand the type and amount of data our customers will backup and replicate to remote locations. This will also make these applications more affordable for customers with fewer storage requirements.
	•	The increased complexities of storage applications, such as interoperability, storage effectiveness, and business efficiency issues, results in customers requiring storage integration and implementation expertise. We believe our services permit customers to effectively solve these issues, driving demand for our products and services and increasing our revenues.
	•	Customers require that their business critical applications have effective disaster recovery solutions. The events of September 11, 2001 demonstrate the need for and functionality of our products and services. Our customers had 40 systems located in lower Manhattan that were significantly impacted. Because our products were routing data to remote facilities on behalf of customers located in and around the World Trade Center, we believe all products worked as designed, resulting in no material loss of data by any customer.

      As a result of the foregoing and other factors, International Data Corporation, or IDC, estimates that the worldwide revenue for SAN-attached disk storage systems will grow from $5.9 billion in 2002 to $9.1 billion in 2006, a compound annual growth rate of 12%. Another indication of demand for our storage networking solutions is the growth of the Fibre Channel industry. IDC estimates the revenue for Fibre Channel hubs, switches and directors will grow from $1.5 billion in 2002 to $2.4 billion in 2007, which reflects a compound annual growth rate of 10%. IDC estimates the demand for storage consulting and support services will grow from $1.6 billion in 2002 to $2.1 billion in 2006, a compound annual growth rate of 6%. IDC estimates that North America revenue for storage services will grow from $12.6 billion in 2002 to $17.1 billion in 2006, a compound annual growth rate of 7%. It is notable however, that we are in the midst of a current economic slowdown affecting most technology sectors and communications in particular. During 2002, IDC estimates worldwide industry sales of disk storage systems declined $4.1 billion from $17.4 billion in 2001 to $13.3 billion in 2002. We are uncertain of the depth and duration of this slowdown. However, we believe the need for storage networking solutions is significant and will continue to increase over the long term. For example, Terabytes installed grew 35% in 2002, even though the pricing declined from 2001 to 2002.

Selected Recent Developments

      On April 6, 2003, we entered into an agreement where our wholly owned subsidiary will acquire all of the shares of Inrange Technologies Corporation that are owned by SPX Corporation. The shares acquired will constitute approximately 91% of the issued and outstanding shares of Inrange for a purchase price of $2.3132 per share and $173 million in the aggregate. Pursuant to the agreement, immediately following the acquisition, the subsidiary will be merged into Inrange, and the remaining capital stock owned by other Inrange shareholders will be converted into the right to receive $2.3132 per share in cash, resulting in a total payment of approximately $190 million for both the stock purchase and the merger. Consummation of these transactions is subject to significant conditions, including filing and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Although we believe we have adequate resources there may be certain circumstances resulting from the completion of this transaction, which could impair our liquidity. In addition, if this transaction is completed, we will be subject to increased competition and other risks. See “Liquidity and Capital Resources” on page 29, “Competition” on page 10 and risk factors within Exhibit 99.1 for further discussion regarding the Inrange transaction.

      Upon completion of the acquisition, we will be one of the world’s largest providers of complete storage networking products, solutions and services, with 2002 pro forma annual revenues of approximately $435 million and global leadership positions in Fibre Channel and wide area network switching, and operations worldwide. The acquisition significantly broadens and strengthens our portfolio of storage and networking products and solutions, expands our customer base, and provides us with significant scale and cost reduction opportunities.

3

Table of Contents

      On January 30, 2003, we announced a number of actions to streamline our business, enhance customer service, and improve future profitability. We completed the integration of our networking and solutions sales, support and service functions. The integration allows us to execute our strategy for continued growth and enhanced customer service. Over the last several years, our products have been designed and built to be extremely reliable and easy to service, resulting in improved efficiencies within our service organization, and a reduction in the number of employees needed to provide world-class support. We continue to see excellent acceptance of our Fibre Channel IP product, the UltraNet® Edge. The UltraNet® Edge provides enterprise wide access to information and helps companies manage their storage infrastructure for maximum performance and efficiency. Because of the Edge product, the need for future upgrades to our legacy products is reduced. We expect to extend our competitive lead in fiscal 2003 via the introduction of new products within the UltraNet® family, and several new joint development arrangements with other leaders in the storage networking industry. These actions allowed us to reduce our worldwide workforce by 80 people or about 10%. While difficult, the reduction in workforce was necessary to improve future efficiency and profitability.

      In June 2002, we acquired all of the outstanding stock of BI-Tech, a leading provider of storage management solutions and services, for $12 million in cash, plus the assumption of approximately $3.6 million of liabilities and the acquisition of approximately $8.7 million of tangible assets. The accompanying financial statements include the results of BI-Tech since June 24, 2002. The purchase agreement requires that we pay at our option, in the form of a note payable or in our stock to the former stockholders, and in cash to the BI-Tech employees, additional consideration based on achievement of certain earnings for each of the next two years starting July 1, 2002. The portion payable to the former stockholders will be recorded as goodwill. The portion payable to BI-Tech employees will be recorded as compensation expense. Through January 31, 2003, additional consideration of $3.6 million and $744,000 was added to goodwill and compensation expense, respectively, and a corresponding liability was recorded.

      In February 2002, we sold $125 million of 3% convertible subordinated notes due February 2007, raising net proceeds of $121 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 payment, 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. The make whole payment represents additional interest payments that would be made if the notes were not redeemed prior to the due date. 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.

Storage Networking Overview

Storage Networking Industry Background

     Growth in Enterprise Data

      The volume of enterprise data is increasing due to the proliferation of Web-based content, digital media, e-mail, supply chain management, customer relations management and other data-driven business applications.

     Limitations of Traditional Storage Products

      The growth of the size and amount of data stored has presented organizations with significant data management challenges and increased storage related costs. As the volume of data stored, and the number of users that require access to the data continue to increase, storage systems and servers are burdened by an increased number of input/output, or I/ O, transactions they must perform. However, traditional storage

4

Table of Contents

	•	bandwidth, or the data transmission rate, is generally fixed at 15, 40 or 80 megabytes per second;
	•	distance between devices is limited to 12 to 150 meters;
	•	connectivity is limited to 15 storage devices;
	•	lack of data management capability in SCSI devices places the burden for management tasks on servers, thereby degrading network performance;
	•	if the server to which the data storage device is connected fails, the data cannot be accessed; and
	•	local area network, or LAN performance can be significantly degraded while the LAN is being used for storage backup applications.

     Advent of Storage Networking Services

      Storage networking is necessary for the effective use of large data-intensive applications such as enterprise resource planning, customer relationship management, and digital media. Our current and potential customers have a growing need to access and protect the business critical data created by these types of applications. As a result, we expect increased demand for the purchase and installation of storage networks, which will drive demand for our products and demand for our consulting, integration, and managed services for end-to-end storage solutions. As a result of the installation of these solutions, we expect there will also be increased demand for support services.

      Complexity and interoperability issues associated with storage networks, coupled with budgetary constraints, cause customers to struggle with the effective implementation of storage networking environments. We believe this will cause many potential customers to look outside their organization for help. Thorough knowledge across a wide variety of proprietary technologies and standards, combining storage expertise and networking knowledge, is not easily found in the marketplace. We anticipate companies such as ours, with comprehensive expertise and skill sets in disaster recovery, business continuity, storage resource management, database, tuning, troubleshooting, switches, networking and storage arrays, will be able to fill in the void for these customers with consulting and integration services. We believe customers may also look to contract out the management of these storage networks as a result of outsourcing the design and implementation of these solutions.

Our Storage Networking Solutions

      Our storage networking solutions, consist of products and services that address the limitations of traditional storage architecture in the following ways:

	•	Storage networks over unlimited distance — Our products and services enable organizations to create secure storage networks without any distance limitations. This allows the creation of storage networking over WAN environments in such critical applications as remote data replication, enterprise backup and recovery and remote tape vaulting.
	•	Any-to-any connectivity — Our products are protocol independent — they can connect devices that use Fibre Channel, SCSI, ESCON, and bus and tag protocols. These devices can be connected and extended over telecommunications links including T1/E1, T3/E3 and ATM (OC3, OC12), packet over sonet, or WAN protocols like IP, Fibre Channel and fiber optics. We believe our products connect with substantially all storage vendors.
	•	Infrastructure options — Our products enable the use of IP, ATM, Fibre Channel and fiber optics for expanded use of a storage network infrastructure. This supports the growing amounts of storage created by applications like e-mail and increases due to user demands to access applications in a continuous mode.

5

Table of Contents

	•	IP-based networking solutions — We enable remote data replication over IP-based networks using software provided by EMC, IBM, Hitachi and Hewlett-Packard. Our solutions allow our customers to capitalize on inexpensive “bandwidth on demand” capabilities of IP-based networks and use existing IP capacity, especially at low traffic times of the day, and rely on existing IP network knowledge. We anticipate expanding storage networking application support with products from other vendors.
	•	Consulting and integration services — Our consulting and integration services help customers evaluate, analyze, design, install and manage storage networks. We strengthened our consulting, integration and managed services capacity with the acquisition of Articulent in 2001 and BI-Tech in June 2002. We believe these value-added services assist customers in designing, integrating, implementing, and managing storage networks more effectively than they could on their own. Our integration services help customers deal with the complexity of implementing a storage network that is scalable and compatible with customer resources. These services bolster sales of our high margin UltraNet® products and allow us to capture more of our customers’ spending. We offer bundled telecommunications access with our products and services to provide customers a complete end-to-end operating solution.
	•	Managed services — We offer outsourced storage management services that complement our current storage networking products on a 24x7x365 basis. Our network management service helps our customers monitor their UltraNet® products, third party manufactured products, and third-party telecommunication lines and allows them to quickly respond to and resolve storage network issues. Our data migration services help our customers migrate large amounts of data from one data center or storage facility to another during consolidation or expansion of data centers. This is a turnkey service including personnel, equipment, software and support. We anticipate adding other outsourced services to monitor and manage complete end-to-end storage solutions for our customers and help drive demand for our storage networking products.

      Our storage networking solutions are used for immediate, or real-time, backup and recovery, and support a technology known as remote data replication. Data replication avoids the serious threat to businesses posed by the loss of data between data system backups by simultaneously creating up-to-the-minute images of business-critical data on multiple backup storage disks. Tape back-up over long distances, or tape pipelining, using our UltraNet® Edge Storage Router dramatically improves the performance of remote tape backup, making it a viable solution for business continuity and disaster recovery. Our remote data replication technology permits the backups to be transmitted to a separate geographic location, thereby reducing the risk of natural and site-wide disasters. This technique also permits rapid recovery of data when needed.

      We also enhance continuous business operations. Traditional LAN-based storage management requires manual handling and transportation of storage to an off-site location. While this ensures a physically-separated copy of valuable corporate data, it requires additional time and expense for handling and transportation. By bridging the storage network over the WAN, backups can be instantly made to remote locations on disk media, including by data replication, or on tape, known as electronic tape vaulting. This allows for more secure archiving and timely retrieval of the correct business critical data.

Our Storage Networking Strategy

      We intend to build upon our position as a leading provider of storage networking solutions. Key elements of this strategy are as follows:

     Extend Storage Networking Technology Leadership

      We intend to extend our storage networking technology leadership by continuing to broaden our product and service offerings and by expanding our storage networking solutions into new markets. An example of this strategy is our recent introduction of our IP over Fibre Channel, IP over ATM WANs and IP tape pipelining. Currently, our IP-based network solutions enable remote data replication, in

6

Table of Contents

     Expand Our Consulting and Integration Services

      Our consulting and integration services help customers evaluate, analyze, design, install and manage storage networks. We strengthened our consulting, integration and managed services capability with the acquisition of Articulent in April 2001 and BI-Tech in June 2002. We believe these value-added services assist customers in designing, integrating, implementing, and managing storage networks more effectively than they could on their own. Our integration services eliminate the complexity of implementing a storage network that is scalable and compatible with customer resources. These services bolster sales of our high margin UltraNet® products and allow us to capture more of our customers’ spending. We offer bundled telecommunications access with our products and services to provide customers a complete end-to-end operating solution.

     Grow Managed Services

      We anticipate adding other outsourced services to monitor and manage complete end-to-end storage solutions for our customers and help drive demand for our storage networking products. An example of this is the recent introduction of our network management service that helps our customers monitor their UltraNet® products, third party manufactured products, and third-party telecommunication lines and allows them to quickly respond to and resolve storage network issues. We plan to add management of additional storage resources to the services for problem resolution on the complete storage network.

      We have established relationships with leaders in the storage networking market, including storage vendors, telecommunications providers, storage management software providers and Fibre Channel switch manufacturers. The parties with whom we have strategic relationships include companies such as Brocade, EMC, Hewlett-Packard, Hitachi Data Systems, IBM, McDATA, StorageTek, Dell Computer Corporation and Veritas. We intend to strengthen our existing relationships and develop new relationships that enable us to offer complementary products and services. 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.

Our Storage Networking Products

      Our storage networking products include the UltraNet® family of storage products, and our channel networking product known as Channelink®.

      UltraNet® Storage Director is a high performance switching product that operates at the center of the storage network. It enables storage networks to establish a direct connection between storage elements and servers and share data among diverse servers and storage systems, and networks that are local and geographically dispersed. The switch provides connectivity among SCSI, ESCON, bus and tag, Fibre Channel and WANs.

      UltraNet® Edge Storage Router complements the UltraNet® Storage Director by meeting the needs of a broader market. It provides a new price and performance entry point for our core solutions, which do not require high port-density and mixed platform support offered by the UltraNet® Storage Director. The UltraNet® Edge Storage Router is designed to reduce the total cost of ownership of enterprise-wide storage networking solutions by leveraging the lower-cost bandwidth offered by IP networks and the performance improvements provided by Fibre Channel.

7

Table of Contents

      Channelink® offers connectivity over unlimited distances for mainframes. Applications include remote printing and imaging and data center load balancing, which permits the operation of two or more data centers from one site.

      Third party manufactured storage networking products supplied by us that are designed and manufactured by others, include the following:

	•	storage systems;
	•	Fibre Channel switches;
	•	telecommunications capacity;
	•	fiber optical multiplexers;
	•	software; and
	•	servers.

Our Storage Networking Services

      Our storage networking services help our clients design, deploy, monitor and manage end-to-end storage solutions. We believe these solutions allow our customers to better manage risk and reduce the cost of storage solutions in the enterprise. The acquisitions of Articulent and BI-Tech strengthened our service offerings, and provided us access to a family of integrated storage services, including consulting, integration and managed services.

Consulting Services

      Our consulting services analyze a company’s storage needs, determine a storage networking solution to meet those needs, and assist in the development of a business case to justify the storage networking solution. With our consulting, we assist our customers in making their existing networks more flexible and easier to manage. Our consulting expertise is focused on business continuation, disaster recovery, storage infrastructure and network performance to assist information technology managers and corporate executives responsible for planning and funding resources in making sound data management and storage decisions.

Integration Services

      Our integration services help companies implement storage networking solutions. These services include project planning, analyzing, designing and documenting a detailed network, installing storage components, integrating storage components, and testing the functionality of the implemented storage solution. Our storage networking products are at the core of our storage architecture implementations, and our long-standing relationships with well-known and successful storage equipment and software manufacturers place us at the forefront of storage management solutions. Our integration services focus on data replication, enterprise back-up and restore, SAN implementation and network management.

Managed Services and Telecommunications

      Our managed services include a network management service. We monitor our customers’ UltraNet® products, third party manufactured products and telecommunications networks 24x7x365. We believe this service allows our customers to optimize network performance, decreases the chance of downtime and reduces recovery time after failures. Our data migration services help our customers migrate large amounts of data from one data center or storage facility to another during consolidation or expansion of data centers. We also offer telecommunications services to our customers.

Support Services

      We offer standard maintenance contracts for our proprietary storage networking products. The contracts generally have a one-year term and provide for advance payment. Our products generally include a one-year limited warranty. Customers purchasing our UltraNet® Director product generally purchase maintenance contracts to supplement their one-year limited warranty. Customers are offered a variety of

8

Table of Contents

Strategic Storage Networking Relationships

      Offering customers effective storage networking solutions requires integrating diverse components, including disk and tape storage devices, storage management software, network management products and Fibre Channel products. Our storage networking relationships include those with key storage vendors, storage management software providers and manufacturers of Fibre Channel and optical networking products. We market our storage networking products directly and through worldwide distributors. We have strategic marketing and supplier relationships with leading storage, telecommunications and fibre switching companies, including Brocade, EMC, Hewlett-Packard, Hitachi Data Systems, IBM, McDATA, StorageTek, Dell Computer Corporation and Veritas. These relationships allow us to provide complete end-to-end storage solutions for our customers. Approximately 34% of our revenues during fiscal year ended January 31, 2003 were represented by products that we supplied on behalf of the parties with whom we have strategic relationships.

Sales and Marketing

      We market storage networking products and services in the United States through a direct sales force. We have established representative offices in Canada, the United Kingdom, France, Germany, Australia, Japan, and the Netherlands. We also market these products and services in the United States and throughout the world through systems integrators and independent distributors. We use an exclusive independent consultant to market telecommunications services.

      We maintain our own marketing staff and direct sales force. As of January 31, 2003, we had approximately 213 persons in our marketing and sales organization.

Customers

      Our customers include:

      IBM and its affiliates accounted for 10% of our revenue for fiscal 2002.

Research and Development

      The markets in which we operate are characterized by rapidly changing technology, new standards and changing customer requirements. Our long term success in these markets depends upon our continuing ability to develop advanced network hardware and software technologies.

9

Table of Contents

      To meet the future demands of our customers, we expect to:

	•	increase the compatibility of our products with the products made by others;
	•	emphasize the flexible and modular architecture of our products to permit the introduction of new and improved products within existing systems;
	•	continue to focus on providing sophisticated diagnostic support tools to help deliver high network availability and, in the event of failure, rapid return to service; and
	•	develop new products based on customer feedback and market trends.

      Research and development expenses were 13% of total revenue each year during the three-year period ended January 31, 2003. We intend to continue to apply a significant portion of our resources to product enhancements and new product development for the foreseeable future. We cannot assure you that our research and development activities will be successful.

Manufacturing and Suppliers

      In-house manufacturing activities for our products primarily involve quality assurance testing of subassemblies and final system assembly, integration and quality assurance testing. We became ISO 9002 certified in 1993. In fiscal 2002, we achieved certification under the ISO 2000 standard.

      We manufacture our products based on forecasted orders. Forecasting orders is difficult as most shipments occur at the end of each quarter. Our customers generally place orders for immediate delivery, not in advance of need. Customers may generally cancel or reschedule orders without penalties. At January 31, 2003 we had a backlog of $13.7 million. We believe approximately $8.7 million of our backlog will be recognized as revenue during the next 12 months in fiscal 2003. At January 31, 2002 backlog was not meaningful.

      We manufacture our UltraNet® and Channelink® products from subassemblies, parts and components, such as integrated circuits, printed circuit boards, power supplies and metal parts, manufactured by others. Some items manufactured by suppliers are made to our specific design criteria.

      At January 31, 2003, we held $1.4 million of net inventory for parts that our vendors no longer manufacture. Products in which those parts are included accounted for $68.6 million in revenue during the year ended January 31, 2003. We expect that this inventory will be used in the ordinary course of our business over the next five years. Relevant parts will have to be redesigned after the inventory is used.

      We believe that we currently have adequate supply channels. Components and subassemblies used in our products and systems are generally available from a number of different suppliers. However, certain components in our other products are purchased from a limited number of sources. We do not anticipate any difficulty in obtaining an adequate supply of such products and required components. An interruption in our existing supplier relationships or delays by some suppliers, however, could result in production delays and harm our results of operations.

Competition

      Computer storage is a very large, multi billion dollar, multi-faceted, industry that has spawned the need for a diverse set of products, services and management solutions to address the needs of the large enterprise.

      This market has a diverse set of needs, often dictated by the total cost of ownership, that include high availability, archive, large scale, high volume growth, flexibility, heterogeneous and interoperability requirements for a spectrum of solutions for the enterprise. Data movement and replication (mirroring)are two key applications that every customer must use a spectrum of products and services to get the job done. Customers have varying degrees of needs based upon: the peculiar requirements for various vendor and technology platforms; capacity; performance; access; back up and recovery time for the application user, for auditors and regulators; and risk and cost management for the entire enterprise. These needs have a

10

Table of Contents

      Finally, customers often use existing technologies (including multi-generations of products) and methods that must be compared and integrated for total enterprise storage management. These data movement solutions would include: manual truck and archive storage, server based software for data movement and replication, LAN, SAN, MAN and WAN fabric switching products and technologies, wave division multiplexing, or WDM, products and technologies, and services across an array of providers both in house and outsourced to the customer.

      CNT believes it has positioned itself to be a leading competitor of storage networking products and services, particularly in providing customers and service providers a wide range of integrated storage networking solutions, from us and others, that address high performance, guaranteed data reliability, large scale storage handling that addresses the above requirements for the global 2000 customers. Our key assets include not only our patents, engineering technologies and products, but our 7x24 services, our professional consulting and our 20 years of diverse implementations experience in networking our clients most mission critical information.

      Our products are sold in markets where other market participants have significantly greater revenues and internationally known brand names. Many of those market participants do not currently sell products identical to ours today, but address customer needs from one vantage point or another, usually evolving as they and general customer requirements mature. However, such market participants may do so in the future, and new products we develop may compete with products sold by well-known market participants. Our competitors in channel networking and storage networking include storage system vendors and others including Akara, Inrange, Nishan Systems, SAN Valley, Sanera, Maxxan and SANcastle. In addition, Cisco has acquired technology (Andiamo and NuSpeed) with functionality similar to our product offerings. Also, EMC and Network Appliance recently announced a WAN capability for storage networking that may compete with our products. IBM and others continue to push the distance, performance and price performance capabilities of channels using FICON and GDPS technologies. In addition, other fiber channel switch and director companies are all stating that they will be providing similar long distance IP based connectivity features with an integrated card. Software vendors, Veritas, Legato and Tivoli/ IBM offer data movement and replication capabilities today at lower speeds and/or shorter distances. New software start ups, such as CommVault and others offer means for storage management. Our storage solutions services have numerous competitors, including consulting and integration services offered by storage vendors, telephone companies, dense wave division multiplexor technology providers and service providers. Specialist firms have begun with large amounts of invested capital to assist large enterprises in the challenge of large scale storage management for the enterprise, including Storage Networks, Inc, Giant Loop and MSI. In addition, nearly every major storage vendor, including EMC, IBM, HP, Sun, Hitachi, provide various capabilities in full service offerings for the design, implementation and operation of storage infrastructures.

      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. These competitive pressures may materially harm our business.

11

Table of Contents

      The competitive environments of markets in which our storage networking solutions are sold are continuing to develop rapidly. We are not in a position to prepare long-range plans in response to unknown competitive pressures. As these markets grow, we anticipate other companies will enter with competing products. In addition, our customers and business relationships may develop and introduce competing products. We anticipate the markets will be highly competitive.

      The declining sales of channel networking products present unique competitive pressures. We anticipate pricing pressures may increase in these markets. Consolidation of competing vendors of these products could also have negative consequences.

      The principal competitive factors affecting our products include total cost of ownership, customer service, flexibility, price, performance, reliability, ease of use, bundling of features and capabilities and functionality. In many situations, the potential customer has an installed base of a competitor’s products, which can be difficult to dislodge. IBM, Cisco, Nortel, Lucent Microsoft and others can significantly influence customers and control technology in our markets. However, we believe our direct sales force, storage networking expert consultants and support services personnel offer us a substantial advantage over new competitors, because these newer competitors do not have the knowledge of storage networking design and support and any-to-any connectivity necessary to sell competing products and services.

      On April 6, 2003 we entered into an agreement to acquire Inrange for $190 million in cash. We believe Inrange’s flagship product, the FC/9000, is the most scalable SAN based director class Fibre Channel director switch available for storage area networking. The FC/9000 provides a platform from which enterprises can build storage networks that can be used in systems where reliability and continuous availability are critical,with an ability for customers to upgrade and scale to 256 ports without disrupting existing systems. While the Fibre Channel switching market has yet to develop fully, we believe that the market for the products manufactured by us upon closing of the Inrange transaction will be highly competitive, continually evolving and subject to rapid technology change. Upon consummation of the transaction, we will compete against Brocade Communications Systems, McData Corporation, Cisco Systems, Inc., and Qlogic Corporation with respect to Fibre Channel switches. As the market for storage area network products grows, the products we acquire in the Inrange transaction may face competition from traditional networking companies and other manufacturers of networking equipment who may enter the storage area network market with their own switching products as well as several privately funded start-up companies who have products currently under development.

Intellectual Property Rights

      We rely on a combination of trade secret, copyright, patent and trademark laws, nondisclosure agreements and technical measures to establish and protect our intellectual property rights. That protection may not preclude competitors from developing products with features similar to our products.

      We currently own 3 patents and have 10 patent applications filed or in the process of being filed in the United States with respect to our continuing operations. Our pending patent applications, however, may not be issued. We have not applied for patent protection in any foreign countries. Not all of our unique products and technology are patented. Our issued patents may not adequately protect our technology from infringement or prevent others from claiming that our technology infringes that of third parties. Failure to protect our intellectual property could materially harm our business. We believe that patent and copyright protection are less significant to our competitive position because of the rapid pace of technological change in the markets in which our products are sold and because of the effectiveness and quality of our support services, the knowledge, experience and ability of our employees and the frequency of our enhancements.

      We rely upon a patent license agreement to manufacture our Channelink® and UltraNet® products that use ESCON. This license expires on December 31, 2004.

      We have from time to time received, and may in the future receive, communications from third parties asserting that our products infringe on their patents. We believe that we possess or license all

12

Table of Contents

      The existence of a large number of patents in the markets in which our products are sold, the rapid rate of issuance of new patents and short product development cycles means it is not economically practical to determine in advance whether a product infringes patent rights of others. We believe that, based upon industry practice, any necessary license or rights under such patents may be obtained on terms that would not materially harm our consolidated financial position or results of operations. However, there can be no assurance in this regard.

Employees

      As of January 31, 2003, we had 692 full-time employees. We consider our ability to attract and retain qualified employees and to motivate such employees to be essential to our future success. Competition for highly skilled personnel is particularly intense in the computer and data communications industry, and we cannot assure that we will continue to attract and retain qualified employees.

Discontinued Operations

      Our discontinued operations, which we have historically referred to as our Enterprise Integration Solutions Division, developed and sold our enterprise application integration, or EAI, software that automated the integration of computer software applications and business workflow processes, as well as our traditional server gateways and tools, which enable multiple desktop computers and mainframe terminals to communicate with one another. We changed the name of our Enterprise Integration Solutions Division to Propelis Software, Inc. During fiscal 2001, we sold substantially all of the assets of our discontinued operations in a series of transactions. These transactions included the sale of our IntelliFrame subsidiary to webMethods, and the sale of other assets of our Propelis subsidiary to Jacada Ltd. All outstanding options to purchase stock of Propelis Software, Inc. have been cancelled or have lapsed. The transactions allow us to focus all of our resources on our storage networking products and services.

Website Access to Reports

      The company’s website is located at www.cnt.com. The “Financial” link at this website provides, free of charge, access to the company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all related amendments as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

Special Note Regarding Forward-Looking Statements

      This Form 10-K contains “forward-looking statements” within the meaning of the securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements other than statements of historical facts included or incorporated by reference in this Form 10-K, including the statements under “Business” and elsewhere in this Form 10-K regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used herein, the words “will,” “believe,” “anticipate,” “plan,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Form 10-K are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. Actual results may differ materially from those stated in these forward-looking statements due to a variety of factors, including those described in Exhibit 99.1 to this Form 10-K and from time to time in our filings with the U.S. SEC. All forward-

13

Table of Contents

      Our principal administrative, manufacturing, engineering and development functions are located in leased facilities in the Minneapolis, Minnesota suburb of Plymouth. In addition, we lease office space in England, France, Germany, Japan, and the Netherlands. We also lease space for sales offices for our direct sales staff and systems consultants in a number of locations throughout the United States and Canada. We believe our facilities are adequate to meet our current needs.

      From time-to-time we are a party to various legal actions and receive threats of litigation. At this time, management does not believe any such litigation or threats will have a material impact on our financial position.

      None.

      Our executive officers are as follows:

      Thomas G. Hudson has served as our President and as our Chief Executive Officer since June 1996, as a director since August 1996 and as our Chairman of the Board since May 1999. From 1993 to June 1996, Mr. Hudson served as Senior Vice President of McGraw Hill Companies, a leading information services provider, serving also as General Manager of its F.W. Dodge Division, and as Senior Vice President, Corporate Development. From 1968 to 1993, Mr. Hudson served in a number of management positions at IBM Corporation, most recently as Vice President Services Sector Division. Mr. Hudson’s IBM career included varied product development, marketing and strategic responsibilities for IBM’s financial services customers and extensive international and large systems experience. Mr. Hudson is a graduate of the University of Notre Dame and New York University. Mr. Hudson attended the Harvard Advanced Management Program in 1990. Mr. Hudson also serves on the board of directors of Ciprico, Inc., Lawson Software, Inc., and PLATO Learning, Inc., all of which are public companies.

      Gregory T. Barnum was appointed Vice President of Finance, Chief Financial Officer and Corporate Secretary in July 1997. From September 1992 to July 1997, Mr. Barnum served as Senior Vice President of Finance and Administration, Chief Financial Officer and Corporate Secretary at Tricord Systems, Inc., a manufacturer of enterprise servers. From May 1988 to September 1992, Mr. Barnum served as the

14

Table of Contents

      Jeffrey A. Bertelsen was appointed Corporate Controller and Treasurer in December 1996. Mr. Bertelsen served as our Controller from March 1995 to December 1996. From 1985 to March 1995, Mr. Bertelsen was employed by KPMG LLP, a public accounting firm, most recently as a Senior Audit Manager. Mr. Bertelsen is a graduate of the University of Minnesota.

      William C. Collette was appointed Chief Technology Officer in December 1998 and Vice President of Advanced Technology in October 1999. Mr. Collette served as our Vice President of Engineering from December 1995 to October 1999, and as our Director of Future Software Development and as a Software Development Manager from June 1993 to December 1995. From 1990 to 1993, Mr. Collette was employed by SuperComputer Systems, Inc. as a Senior Software Engineer, where he worked with Steve Chen to design the networking for the SS1 Supercomputer. Mr. Collette holds a bachelors degree in business management from Metro State University.

      James A. Fanella was appointed Executive Vice-President Worldwide Sales and Services in February 2003. From August 2001 to November 2002, Mr. Fanella served as Senior Vice President, Yahoo! Enterprise Solutions (YES). From September 2000 to July 2001, Mr. Fanella served as Vice President, Global Services for Commerce One, a business to business e-commerce company. From November 1999 to September 2000, Mr. Fanella served as Group President and General Manager of AppNet, Inc., an e-commerce company acquired by Commerce One in September 2000. From August 1994 to October 1999, Mr. Fanella held various positions with Unisys Corporation, a large systems integration company, as Managing Principal/ Partner from September 1998 to October 1999, and Senior Principal/ Partner from August 1994 to September 1998. Mr. Fanella holds a bachelors degree in business from Western Illinois University. Mr. Fanella also serves on the board of directors of Avatech, Inc., a public company.

      Mark R. Knittel was appointed Group Vice President of Worldwide Product Operations in October 1999. From May 1997 to October 1999, Mr. Knittel served as our Vice President of Marketing, and also as our Vice President of Architecture and Business Development from March 1997 to May 1997. From July 1977 to March 1997, Mr. Knittel was employed with IBM where he held several executive development positions for both hardware and software networking products, as well as multiple strategy positions. Most recently, Mr. Knittel held the position of Director of Campus Product Marketing within the Network Hardware Division of IBM. Mr. Knittel has a masters degree in philosophy from the University of Chicago.

15

Table of Contents

      Our common stock is traded on the Nasdaq National Market under the symbol “CMNT.” The following table sets forth for the indicated periods the range of high and low per share sales prices for our common stock as reported on the Nasdaq National Market:

      As of April 1, 2003, there were approximately 1,000 shareholders of record. The Company estimates that approximately an additional 10,500 shareholders own stock held for their accounts at brokerage firms and financial institutions.

      We have not paid any cash dividends since our inception, and we do not intend to pay any cash dividends in the future.

16

Table of Contents

Item 6. Selected Consolidated Financial Data

17

Table of Contents

(1)	On January 12, 2000, we changed our fiscal year to end on January 31st, rather than December 31st.
(2)	Includes special charges in the fourth quarter of fiscal 1999 of $1.4 million for the write-off of non-SAN-related products and $1.3 million for an abandoned facility.
(3)	Includes a reversal of the unused balance of a fiscal 1999 fourth quarter accrual for an abandoned facility of $287,000.
(4)	Includes special charges and other items recognized in the first quarter of fiscal 2001, including a $2.0 million write-down of inventory, a $325,000 write-off of a product, a $996,000 restructuring charge and a $10.3 million loss on the sale and write-down of webMethods common stock acquired from the disposition of a portion of our discontinued operations.
(5)	Includes special charges in the fourth quarter of fiscal 2002 of $1.7 million for severance and professional fees related to canceled acquisition activity. It also includes an earn-out payable to the employees of BI-Tech of $744,000, of which $195,000 was recorded as cost of service, and $549,000 as operating expense. Other income for fiscal 2002 was reduced by a $1.0 million investment write-down. Income tax expense for fiscal 2002 includes a non-cash charge of $23.6 million for a valuation allowance related to our United States deferred tax assets.
(6)	In connection with the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, we recorded a $10.1 million non-cash charge for impairment of goodwill associated with the acquisition of Articulent in April 2001.
(7)	For fiscal years 2002 and 2001, earnings were inadequate to cover fixed charges by $12.0 million and $17.2 million, respectively. These ratios are calculated by dividing (a) income from continuing operations before income taxes and fixed charges by (b) fixed charges. Fixed charges include interest expense plus a portion of rental expense attributable to interest.
(8)	See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “The Consolidated Financial Statements” included herein for a discussion of accounting changes, business combinations and dispositions of businesses affecting the comparability of the information reflected in the selected financial data.

18

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following section should be read in conjunction with Item 1: Business; Item 6: Selected Consolidated Financial Data; and Item 8: Consolidated Financial Statements and Supplementary Data.

Overview

      We are a leading provider of end-to-end storage solutions, including hardware and software products, related consulting and integration services, and managed services in the growing storage networking market. We focus primarily on helping our customers design, develop, deploy and manage storage 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 for critical storage networking 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 also supply storage systems, Fibre Channel switches, telecommunications capacity and storage application software.

      Our storage networking solutions enable businesses to cost-effectively design, implement, monitor and manage their storage requirements, connect geographically dispersed storage networks, provide continuous availability to greater amounts of data and protect increasing amounts of data more efficiently. We market out 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, McDATA, StorageTek, Dell Computer Corporation and Veritas.

Integration of Networking and Storage Solutions Team

      During fiscal 2002, we integrated our networking and storage solutions sales, support and service functions into a single unit. The integration allows us to execute our strategy for continued growth and enhanced customer service, while achieving improved efficiency and profitability. Our customers will now have a single point of contact for their networking and storage solutions requirements. As a result, it is no longer possible to allocate costs and prepare separate meaningful statements for what had been our networking and storage solutions segments. Our management now reviews and makes decisions utilizing financial information for the consolidated business.

      Over the last several years, our products have been designed and built to be extremely reliable and easy to service, resulting in improved efficiencies within our service organization, and a reduction in the number of employees needed to provide world-class support. We continue to see excellent acceptance of our Fibre Channel IP product, the UltraNet® Edge. The UltraNet® Edge provides enterprise-wide access to information and helps companies manage their storage infrastructure for maximum performance and efficiency. Because of the Edge product, the need for future upgrades to our legacy products is reduced. We expect to extend our competitive lead in fiscal 2003 via the introduction of new products within the UltraNet® family, and several new joint development arrangements with other leaders in the storage networking industry. These actions, along with the integration of our Networking and Storage Solutions sales, support and service functions, allowed us to reduce our worldwide workforce by 80 people or about 10%. While difficult, the reduction in workforce was necessary to improve future efficiency and profitability. In the fourth quarter of fiscal 2002, we recorded a $1.7 million restructuring charge for severance resulting from the reduction in workforce and professional fees related to canceled acquisition activity. Of this amount $1.3 million was paid prior to January 31, 2003, with the balance to be paid prior to April 30, 2003. We anticipate the annual operating cost savings related to these reductions will be approximately $6.4 million, offset by any incremental costs added during fiscal 2003.

19

Table of Contents

Acquisition of Inrange Corporation

      On April 6, 2003, we entered into an agreement where our wholly owned subsidiary will acquire all of the shares of Inrange Technologies Corporation that are owned by SPX Corporation. The shares acquired will constitute approximately 91% of the issued and outstanding shares of Inrange for a purchase price of $2.3132 per share and $173 million in the aggregate. Pursuant to the agreement, immediately following the acquisition, the subsidiary will be merged into Inrange, and the remaining capital stock owned by other Inrange shareholders will be converted into the right to receive $2.3132 per share in cash, resulting in a total payment of approximately $190 million for both the stock purchase and the merger. Consummation of these transactions is subject to significant conditions, including filing and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

      Upon completion of the acquisition, we will be one of the world’s largest providers of complete storage networking products, solutions and services, with 2002 pro forma annual revenues of approximately $435 million and global leadership positions in Fibre Channel and wide area network switching, and operations worldwide. The acquisition would significantly broaden and strengthen our portfolio of storage and networking products and solutions, expand our customer base, and provide us with significant scale and cost reduction opportunities.

Acquisition of BI-Tech Solutions, Inc.

      In June 2002, we acquired all of the outstanding stock of BI-Tech, a leading provider of storage management solutions and services, for $12 million in cash, plus the assumption of approximately $3.6 million of liabilities and the acquisition of approximately $8.7 million of tangible assets. The accompanying financial statements include the results of BI-Tech since June 24, 2002. The purchase agreement requires that we pay at our option, in the form of a note payable or our stock to the former stockholders, and in cash to the BI-Tech employees, additional consideration based on achievement of certain earnings for each of the next two years starting July 1, 2002. The portion payable to the former stockholders will be recorded as goodwill. The portion payable to BI-Tech employees will be recorded as compensation expense. Through January 31, 2003, additional consideration of $3.6 million and $744,000 was recorded as goodwill and compensation expense, respectively, and a corresponding liability was recorded.

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 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 likely 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 for the next 15-20 years.

Convertible Subordinated Debt Offering

      In February 2002, we sold $125 million of 3% convertible subordinated notes due February 2007, raising net proceeds of $121 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 payment 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. The make whole payment represents additional interest payments that would be made if the notes were not redeemed prior to their due date. 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.

20

Table of Contents

Special Charges in Fiscal Year 2001

      Economic conditions in early 2001 caused our customers to reevaluate their capital spending plans, and to defer previously planned projects for information technology infrastructure. The reduction in demand for our products and services resulted in the following charges in the first quarter of fiscal 2001:

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

Sale and Write-down of webMethods Stock

      During the first quarter of fiscal 2001, we sold 232,511 shares of webMethods stock received from the sale of IntelliFrame for approximately $6.2 million, resulting in a pre-tax loss of approximately $8.7 million. We also wrote-down the carrying value of the remaining 41,031 shares of webMethods stock that we still own, resulting in a pre-tax loss of approximately $1.5 million.

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 $24.4 million of liabilities and the acquisition of approximately $19.3 million of tangible assets.

Cumulative Effect of Change in Accounting Principle — Impairment Charge

      Effective February 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets.” In connection with the adoption of SFAS No. 142, we engaged a third party appraisal firm to determine the fair value of one of the reporting units within our former storage solutions segment. This valuation indicated that the goodwill associated with our acquisition of Articulent in April of 2001 was impaired, resulting in a $10.1 million non-cash charge. This non-cash charge was recognized as a cumulative effect of change in accounting principle in our first quarter ended April 30, 2002.

Discontinued Operations — Divestiture of Propelis Software, Inc.

      Propelis Software, Inc., formerly known as our Enterprise Integration Solutions Division, developed and sold our enterprise application integration, or EAI, software that automates the integration of computer software applications and business workflow processes. In August 2000, we determined to divest Propelis Software, Inc. and focus on our core storage networking business. As a result, Propelis Software, Inc. has been accounted for as discontinued operations in the accompanying financial statements, meaning that the division’s revenues 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 2001, we sold substantially all of the assets of our discontinued operations in a series of transactions. These included the sale of our IntelliFrame subsidiary to webMethods and the sale of other assets to Jacada Ltd. All outstanding options to purchase stock of Propelis Software have been cancelled or have lapsed.

      On February 2, 2001 we sold all of the outstanding stock of IntelliFrame Corporation, including the technology underlying our Propelis BPm^TM product, to webMethods, Inc. for $8.8 million in cash and 273,542 shares of webMethods common stock. The stock received from webMethods, Inc. was valued at $17.1 million, which reflects a discount from its publicly reported trading price due to the initial restrictions placed on our ability to freely sell the stock. In connection with this transaction, we paid $3.0 million to two employees, who were former shareholders of IntelliFrame, to satisfy all obligations to make further bonus payments under their employment agreements. The sale resulted in an after tax gain of $12.6 million in the first quarter of fiscal 2001.

      In the first quarter of fiscal 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, we 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

21

Table of Contents

      In the third quarter of fiscal 2002, we received $207,000 of royalty income, net of tax, related to the discontinued operations sold in fiscal 2001.

Change in Fiscal Year End

      On January 12, 2000, we changed our fiscal year end to January 31st, from December 31st. References in this Form 10-K to fiscal 2002, 2001 and 2000 represent the twelve months ended January 31, 2003, 2002 and 2001, respectively.

Critical Accounting Policies

      In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgment based on its understanding and analysis of the relevant circumstances. Reported results may differ from these estimates if different assumptions or conditions were to be made. Our most critical accounting estimates include valuation of accounts receivable, which impacts bad debt expense; valuation of inventory, which impacts gross margin; recognition and measurement of current and deferred income tax assets and liabilities, which impact our tax provision; and valuation of long-lived intangible assets and goodwill, which will impact operating expense. These critical accounting estimates and other critical accounting policies are discussed further below.

Revenue Recognition

      Revenue is recognized upon shipment for product sales with standard configurations and product sales with other than standard configurations, which have demonstrated performance in accordance with its customer’s specifications prior to shipment provided that (a) evidence of an arrangement exists, (b) delivery has occurred, (c) the price to the customer is fixed and determinable, and (d) collectibility is assured. All other product sales are recognized when customer acceptance is received, or the passage of the customer acceptance period. We accrue for warranty costs and sales returns at the time of shipment based on experience. In transactions that include multiple products and/or services, we allocate the sales value to each of the deliverables, based on their relative fair values.

      Service fees are recognized as revenue when earned, which is generally on a straight-line basis over the contracted service period or as the services are rendered. Deferred revenue primarily consists of the unearned portion of service agreements billed in advance to customers.

Valuation of Accounts Receivable

      We review accounts receivable to determine which are doubtful of collection. In addition, we also make estimates of potential future product returns. In making the determination of the appropriate allowance for doubtful accounts and product returns, we consider specific accounts, changes in customer payment terms, historical write-offs and returns, changes in customer demand and relationships, concentrations of credit risk and customer credit worthiness. Changes in the credit worthiness of customers, general economic conditions and other factors may impact the level of future write-offs and product returns.

Valuation of Inventory

      We review obsolescence to determine that inventory items deemed obsolete are appropriately reserved. In making the determination we consider our history of inventory write-offs, future sales of related products, and quantity of inventory at the balance sheet date assessed against our past usage rates and future expected usage rates. Changes in factors such as technology, customers demand, competitor product introductions and other matters could affect the level of inventory obsolescence in the future.

22

Table of Contents

Valuation of Deferred Taxes

      Significant management judgment is required in determining the provision for incomes taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We are required to estimate our income taxes in each jurisdiction where we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the depreciable life of fixed assets for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe recovery is unlikely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase the valuation allowance in a given period, we must increase tax expense within our statement of operations.

      In the fourth quarter of fiscal 2002, we recognized a non-cash charge of $23.6 million to provide a valuation allowance for our United States deferred tax assets. Our cumulative valuation allowance recorded against our deferred tax assets at January 31, 2003 was $24.8 million. 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 likely 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 for the next 15-20 years.

Valuation of Long-Lived and Intangible Assets and Goodwill

      We assess the impairment of long-lived and intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include significant under performance relative to expected operating results, changes in the manner of use of the acquired assets or the strategy of our overall business, negative industry or economic trends, significant decline in our stock price for a sustained period, and our market capitalization relative to our net book value.

      When we determine that the carrying value of long-lived and intangibles assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on the projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model. We may also obtain an independent third party appraisal of the asset to help us identify and quantify any possible impairment. Net long-lived and intangible assets, and goodwill amounted to $44.4 million at January 31, 2003, and no asset impairments were identified as of that date.

      Effective February 1, 2002, we adopted SFAS No. 142 which eliminates amortization of goodwill, but instead follows an impairment approach for goodwill valuation. In fiscal 2001, we recorded goodwill amortization expense of $624,000, which was not required in fiscal 2002. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in fiscal 2002, and an annual impairment review thereafter. SFAS No. 142 provides a six-month transitional period from the effective date of adoption to perform an assessment of whether there is an indication of goodwill impairment. We tested our reporting units for impairment by comparing fair value to carrying value. Fair value was determined using a discounted cash flow and cost methodology. We engaged a third-party appraisal firm to determine the fair value of a reporting unit within our former Storage Solutions segment. This valuation indicated that the goodwill associated with our acquisition of Articulent in April of 2001 was impaired. The performance of this business has not met management’s original expectations, primarily due to the unexpected global slow down in capital spending for information technology equipment. Accordingly, a non-cash impairment charge of $10.1 million from the adoption of SFAS No. 142 was recognized as a cumulative effect of change in accounting principle in our first quarter ended April 30, 2002. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as an operating expense.

23

Table of Contents

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.

Revenue

Years Ended January 31, 2003 and 2002

     Product revenue

      Sales of our networking products generated revenue of $94.6 million in fiscal 2002, an increase of $2.6 million or 3%, from $92.0 million in fiscal 2001. Storage networking related product revenue increased 16% in fiscal 2002 to $80.9 million from $69.8 million in fiscal 2001. Sales of our new UltraNet® Edge product were up over 300%, or $10 million, in fiscal 2002 to $13.2 million, from $3.2 million in fiscal 2001. Sales of channel extension product applications decreased 38% in fiscal 2002 to $13.7 million from $22.2 million in fiscal 2001. Our older channel extension products continue to be a profitable part of our business and a key application for many of our storage networking customers. We expect that revenue from our storage networking products will account for a substantial portion of our total networking product sales for the foreseeable future. Further we do not expect revenue for our channel networking products to increase significantly and it may decline in the future.

      Sales of our third party storage solutions products generated revenues of $50.8 million in fiscal 2002, an increase of 36%, from $37.2 million in fiscal 2001. Our acquisition of Articulent in April 2001 and BI-Tech in June 2002 significantly expanded our third party solutions offerings, and accounted for most of the increase in third party product revenue when comparing fiscal 2002 to earlier years. Our acquisition of BI-Tech in June 2002 contributed $12.1 million of product revenue in fiscal 2002.

     Service revenue

      Service revenue from maintenance of our networking products decreased 3% in fiscal 2002 to $43.3 million from $44.8 million in fiscal 2001. The decrease can be attributed to cancellation of maintenance related to our Channelink® products and migration of customers to our UltraNet® products.

24

Table of Contents

      Our storage consulting fee revenues increased 77% in fiscal 2002 to $22.8 million from $12.9 million in fiscal 2001. The growth in solutions consulting fees revenue in fiscal 2002 was due to increased customer acceptance of our service offerings. In addition, our sales team has become more experienced and proficient at selling solutions that include our service offerings. During fiscal 2002, BI-Tech contributed $3.0 million of storage consulting fee revenue.

Years Ended January 31, 2002 and 2001

     Product revenue

      Sales of our networking products generated revenue of $92.0 million in fiscal 2001, a decrease of 24%, from $121.1 million in fiscal 2000. Storage networking related product revenue decreased 16% in fiscal 2001 to $69.8 million from $83.5 million in fiscal 2000. Approximately $3.2 million of storage networking product revenue in fiscal 2001 resulted from the sale of our new UltraNet® Edge product, which started to ship in our third quarter ended October 31, 2001. Sales of channel extension product applications decreased 41% in fiscal 2001 to $22.2 million from $37.7 million in fiscal 2000.

      During fiscal 2000, partner relationships with STK and Compaq generated significant product revenue. Sales of the DXE product to STK contributed $9.3 million of product revenue in fiscal 2000, compared to $1.5 million of product revenue in fiscal 2001. We discontinued the DXE/RDE product line in March 2001, and are transitioning the customer base to our UltraNet® products. An OEM agreement with Compaq contributed $5.7 million of product revenue in fiscal 2000. No revenue was generated from this OEM agreement in fiscal 2001.

      Sales of our third party storage solutions products generated revenues of $37.2 million in fiscal 2001, up significantly from $4.3 million in fiscal 2000. Our acquisition of Articulent in April 2001 significantly expanded our third party solution offerings and accounted for most of the increase when comparing fiscal 2001 to fiscal 2000.

     Service revenue

      Service revenue from maintenance of our networking products increased 6% in fiscal 2001 to $44.8 million from $42.3 million in fiscal 2000. The increase in revenue was due to the growing installed base of customers using our networking products.

      Our storage consulting fee revenues increased 55% in fiscal 2001 to $12.9 million, from $8.3 million in fiscal 2000. The increase primarily relates to our acquisition of Articulent in April 2001. During fiscal 2001, Articulent contributed $2.9 million of service revenue.

General

      Revenue from the sale of products and services outside the United States increased by $13.1 million or 29% in fiscal 2002 when compared to fiscal 2001, and decreased by 12% or $6.0 million in fiscal 2001 when compared to fiscal 2000. We derived 27%, 25% and 30% of our revenue outside the United States in fiscal 2002, 2001 and 2000, respectively. The increase in revenue generated outside the United States in fiscal 2002 is primarily attributable to the BI-Tech acquisition in June of 2002. BI-Tech increased our international sales in fiscal 2002 by $15.1 million. BI-Tech is based in the United Kingdom, and we expect that, it will further increase our international sales in future periods.

      One customer accounted for 10% of our revenue in fiscal 2002. No single customer accounted for more than 10% of our revenue in fiscal 2001 or 2000. Price discounting for our networking products had a small impact on revenue in fiscal 2002 and 2001.

      In fiscal 2002, approximately 36%, 5% and 14% of our product revenue was derived from businesses in the financial services, telecommunications and information outsourcing industries, respectively.

      We primarily sell our networking and third party storage solutions products directly to end-user customers in connection with joint marketing activities with our business partners. For a new customer, the

25

Table of Contents

      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

Years Ended January 31, 2003 and January 31, 2002

      Gross margins from the sale of networking products were 49% in fiscal 2002, compared to 51% in fiscal 2001. Excluding the $2.0 million write-down of slow moving inventory and the $325,000 write-off of a product in the first quarter of fiscal 2001, gross profit margins from the sale of networking products were 53% in fiscal 2001. The decline in gross margin percentage was due to the continued movement in sales mix toward our UltraNet® Director products, which carry a lower margin than our older Channelink® products, and higher levels of sales discounts. We believe that margins for our networking products will trend upward as volumes increase, particularly for our new higher margin UltraNet® Edge product.

      Gross margins from the sale of third party storage solutions products were 20% in fiscal 2002, compared to 17% in fiscal 2001. The increase in gross margin percentage was primarily due to a change in product mix, as certain third party storage solutions products carry higher gross margins. Historically, the third party storage solutions products offered by Articulent, BI-Tech and CNT have generated gross margins in the 15% to 25% range.

     Service margins

      Gross service margins for our networking maintenance business decreased slightly in fiscal 2002 to 48% from 49% in fiscal 2001. The slight decrease was due to the 3% decline in maintenance revenue, resulting from the cancellation of maintenance for our older Channelink® products, and migration of customers to our newer UltraNet® products. Cost of service associated with our networking maintenance business decreased slightly in fiscal 2002 to $22.7 million from $22.9 million in fiscal 2001.

      Gross service margins for our storage consulting fees were 32% in fiscal 2002, or 33%, excluding a $195,000 earn-out payable to the service employees of BI-Tech. The gross service margins for our storage consulting fees were a negative 12% in fiscal 2001. The improvement in gross service margin percentage in fiscal 2002 compared to fiscal 2001 was due to higher utilization of our employee consultants. Our storage consulting fees revenue increased to $22.8 million in fiscal 2002 from $12.9 million in fiscal 2001, an increase of 77%. Costs associated with our storage consulting fees were $15.5 million or $15.3 million, excluding the BI-Tech earn-out, up from $14.4 million in fiscal 2001.

Years Ended January 31, 2002 and January 31, 2001

      Gross margins from the sale of our networking products were 51% in fiscal 2001. Excluding the $2.0 million write-down of slow moving inventory and the $325,000 write-off of a product in the first quarter of fiscal 2001, gross profit margins from the sale of networking products were 53% in fiscal 2001 compared to 58% in fiscal 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 profit margins from the sale of storage solutions products were 17% in fiscal 2001 compared to 53% in fiscal 2000. The decline in gross margin percentage was primarily due to an increase in the sale of

26

Table of Contents

     Service margins

      Gross service margins for our networking maintenance business improved to 49% in fiscal 2001 from 46% in fiscal 2000. The improvement was due to the steadily increasing base of customers contracting for maintenance services, actions taken in April 2001 to reduce employee costs, including a workforce reduction and wage freeze, and a change in third party maintenance and logistic suppliers that also reduced costs in fiscal 2001.

      Gross profit margins from storage consulting fees were a negative 12% in fiscal 2001 compared to a positive 13% in fiscal 2000. The decline in gross margin percentage and negative gross margin in fiscal 2001 is due to the fixed cost structure of the services business and low levels of service revenue in fiscal 2001. The service costs for the solutions business, mainly people, tend to be fixed in nature. Gross profit margins for storage consulting fees improve as the volume of storage consulting fees revenue increases.

Operating Expenses

Years Ended January 31, 2003 and 2002

      Sales and marketing expense increased 11% or $5.6 million in fiscal 2002 to $57.8 million from $52.2 million in fiscal 2001. The June 2002 acquisition of BI-Tech added $1.7 million to sales and marketing expense in fiscal 2002. The remainder of the increase in sales and marketing expense was due to increases in expense for employee wages, fringe benefits, commissions, and travel, partially offset by a $1.3 million reduction in employee recruitment in fiscal 2002 compared to fiscal 2001. Recruitment costs were higher in fiscal 2001 due to a 25% increase in our sales force, and an increase in sales management.

     Engineering and development

      Engineering and development expense increased 15% or $3.4 million in fiscal 2002 to $26.9 million from $23.5 million in fiscal 2001. The increase in engineering and development expense for fiscal 2002 was primarily due to continued development of our UltraNet® family of products, particularly the UltraNet® Edge product, which generated $13.2 million of revenue in fiscal 2002.

     General and administrative

      General and administrative expense increased $1.4 million or 15% in fiscal 2002 to $10.7 million from $9.3 million in fiscal 2001. The June 2002 acquisition of BI-Tech added $776,000 to general and administrative expense in fiscal 2002. The remaining increase in expense for fiscal 2002 was due to higher costs for employee wages, fringe benefits, insurance, professional fees and legal fees associated with canceled acquisition activity, partially offset by a $624,000 reduction in goodwill amortization expense. Amortization of goodwill ceased effective February 1, 2002 with our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”.

Years Ended January 31, 2002 and 2001

      Sales and marketing expense increased $11.1 million or 27% in fiscal 2001 to $52.2 million from $41.0 million in fiscal 2000. The acquisition of Articulent in April 2001 added $6.0 million to sales and marketing expense in fiscal 2001, including wages for approximately 26 new employees, and related costs such as travel, training and facilities. The remaining increase in sales and marketing expense was due to a planned expansion of our sales force. During fiscal 2001, we increased our sales force by over 25%, and

27

Table of Contents

     Engineering and development

      Engineering and development expense increased 4% in fiscal 2001 to $23.5 million from $22.6 million in fiscal 2000. The increase was primarily due to continued development of our UltraNet® family of products, particularly the UltraNet® Edge product, which generated over $3.0 million of revenue since its introduction in the third quarter of fiscal 2001. This increase was partially offset by cost reduction actions taken in April 2001, including a workforce reduction, wage cuts and reductions in discretionary spending.

     General and Administrative

      General and administrative expenses increased $614,000 or 7% in fiscal 2001 to $9.3 million from $8.7 million in fiscal 2000. The increase in expense is primarily due to the acquisition of Articulent in April 2001, including $594,000 of additional expense for goodwill amortization. Total goodwill amortization expense in fiscal 2001 was $624,000, including the goodwill amortization expense associated with the acquisition of Articulent.

Other

Years Ending January 31, 2003 and 2002

      Interest and other income in fiscal 2002 totaled $5.2 million, including a $1.0 write-down of an equity investment. Excluding the equity investment write-down, interest and other income totaled $6.2 million in fiscal 2002, a $400,000 increase from $5.8 million in fiscal 2001. Higher balances of cash and marketable securities available for investment in fiscal 2002 were partially offset by lower investment yields. We also had foreign exchange gains of $63,000 in fiscal 2002, compared to a foreign exchange loss of $106,000 in fiscal 2001. Interest expense increased $4.0 million in fiscal 2002 to $4.3 million from $285,000 in fiscal 2001. In February 2002, we sold $125 million of 3% convertible subordinated notes due February 2007, raising net proceeds of $121 million. Pending use of our cash and marketable securities for general corporate purposes or complementary acquisitions, the funds have been invested in investment grade, interest-bearing securities.

Years Ending January 31, 2002 and 2001

      Other income was an expense of $4.7 million in fiscal 2001. Excluding the $10.3 million loss from the sale and write-down of webMethods stock, other income increased by $2.4 million to $5.5 million in fiscal 2001 from $3.2 million in fiscal 2000. Interest income increased by $2.4 million in fiscal 2001. Proceeds from an October 2000 offering of common stock increased the balances of cash and marketable securities available for investment.

Income Taxes

      Given our losses in fiscal 2002 and 2001, and our cautious outlook for information technology spending, we concluded that it was necessary to provide a valuation allowance for our United States deferred tax assets, resulting in a non-cash charge of $23.6 million in our fourth quarter ending January 31, 2003. 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 likely 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 for the next 15-20 years.

      We recorded a provision for income taxes at an effective tax rate of 31% in fiscal 2001, and at an effective tax rate of 33% in fiscal 2000. The fluctuations in our effective tax rate were primarily due to the large special charges recorded in fiscal 2001, including the $10.3 million loss on the sale of webMethods

28

Table of Contents

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 equipment leases and cash generated by operations.

      Cash, cash equivalents and marketable securities at January 31, 2003 totaled $209.5 million, an increase of $91.5 million since January 31, 2002. In February 2002, we sold $125 million of 3% convertible subordinated notes due February 2007, raising net proceeds of $121.6 million. Operations generated $17.5 million of cash in fiscal 2002, including $7.4 million from reduced inventories due to better inventory management, $1.7 million from lower accounts receivable, a $2.1 million increase in accounts payable, and $5.9 million from deferred revenue, resulting from receipt of cash in advance of revenue recognition. Proceeds from the exercise of stock options, and purchases of stock through our employee stock purchase plan provided cash in fiscal 2002 of $3.0 million. Uses of cash in fiscal 2002 included $7.7 million for the purchase of BI-Tech, $1.5 million for repayment of capital lease obligations, and purchases of property and equipment and field support spares totaling $12.4 million. We also used $32.2 million of cash in fiscal 2002 to repurchase 4.0 million shares of our common stock.

      Expenditures for capital equipment and field support spares have been, and will likely continue to be, a significant capital requirement. On April 6, 2003, we entered into an agreement to acquire all of the outstanding common stock of Inrange Technologies Corporation for $190 million in cash. Upon closing of the transaction, Inrange will become our wholly owned subsidiary. We anticipate that our available cash after closing for the combined entity will be approximately $50-$60 million before transaction costs. We believe that our available cash after closing, when combined with our anticipated cash flows from the combined operations of the two companies, including cash flow improvements resulting from increased scale and cost synergies, will be adequate to fund our operating plans and meet our current anticipated aggregate capital requirements, at least through fiscal 2003.

      In April 2001, our board of directors authorized the repurchase of up to $50.0 million of our common stock. As of January 31, 2003, we had repurchased 4.1 million shares of our common stock for $33.0 million. The board recently changed the authorization, so that the remaining balance of the $50.0 million authorized can be used for the repurchase of either debt or common stock.

      In fiscal 2002, our board of directors adopted amendments to our 1999 Non-Qualified Stock Award Plan increasing the number of shares authorized for issuance from 3,230,000 to 4,730,000. In fiscal 2002, our board and shareholders also approved our 2002 Stock Award Plan providing for the issuance of 1,000,000 shares of our common stock. In February 2003, our board of directors adopted an amendment to our 1999 Non-Qualified Stock Award Plan increasing the number of shares authorized for issuance by 250,000 to 4,980,000, in connection with the hiring of our new Executive Vice President of Worldwide Sales & Services.

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

      Our future contractual cash obligations at January 31, 2003, including open purchase orders incurred in the ordinary course of business, are as follows (in millions):

29

Table of Contents

      On December 3, 2002 we entered into a product development agreement that requires us to purchase $10.0 million of product prior to March 15, 2005. The commitment expires if the product is not generally available by March 31, 2004. This purchase commitment has been reflected in the above table under the “Purchase Order” caption.

      Our acquisition of BI-Tech requires that we pay to the former stockholders and the BI-Tech employees additional consideration based on achievement of certain earnings for each of the next two years starting July 1, 2002. The additional consideration of $4.4 million at January 31, 2003 is not reflected in the above table because terms of payment have not yet been elected. Payment may be in the form of a note payable or stock at our option, or in the case of the employees, cash.

      On February 20, 2002, we sold $125 million in aggregate principal amount of 3% convertible subordinated notes due February 2007. Holders of the notes may, in whole or part, convert the notes into shares of our common stock at a conversion price of approximately $19.17 per share (aggregate of approximately 6.5 million shares) at any time prior to maturity on February 15, 2007. We may redeem the notes in whole or part at any time if the closing price of our common stock has exceeded 175% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day prior to the date we mail the redemption notice. We are required to pay interest on February 15 and August 15 of each year while the notes are outstanding. Debt issuance costs of $3.2 million are being amortized over a five-year term using the straight-line method, which approximates the effective interest rate method. The amortization of these debt issuance costs will accelerate upon early redemption of the notes. The net proceeds remain available for general working capital purposes and potential acquisitions. Cash obligations related to this debt include annual interest payments of $3.8 million for the next five fiscal years starting 2002 and a principal payment of $125 million due February 2007. Payment of the notes will also accelerate upon certain events of default. In addition, upon certain events which constitute a change in control of the company, we must make an offer to purchase the notes at 100% of the principal amount plus accrued interest.

      Our convertible subordinated debt is subject to a fixed interest rate, and the notes are based on a fixed conversion ratio into common stock. Therefore, we are not exposed to changes in interest rates related to our long-term debt instruments. On January 31, 2003, the reported trading price of our convertible subordinated notes due 2007 was 75.50 per $100 in face amount of principal indebtedness, resulting in an aggregate fair value of approximately $94.4 million. Our common stock is quoted on the Nasdaq National Market under the symbol “CMNT”. On January 31, 2003, the last reported sale price of our common stock on the Nasdaq Market was $7.49 per share.

Related Party Transactions

      During fiscal 2002 and 2001, we purchased $374,000 and $491,000, respectively, of bandwidth from Dynegy Connect, an entity wholly owned by Dynegy Global Communications. At January 31, 2003 we have commitments to purchase $933,000 of additional bandwidth from Dynegy Connect through fiscal 2006. All of the bandwidth purchases were for re-sale at a profit. The bandwidth was purchased from Dynegy Connect because they offered us the best pricing. We have purchased bandwidth from competitors of Dynegy Connect when their pricing has been more attractive. Our board member, Lawrence McLernon was formerly chief executive officer of Dynegy Global Communications.

      On May 3, 2002 our board of directors granted Mr. Kelen, a board member, an option to purchase 50,000 shares of our common stock at a price of $8.77 per share in consideration of his special participation on our board, and in consideration of such services to be performed in the future.

      Thomas G. Hudson’s son-in-law is employed by us as a regional sales manager. In fiscal 2002, he was paid $128,688 in compensation, commissions and bonuses. Erwin A. Kelen’s son is employed by us as an area business development manager. In fiscal 2002, he was paid $146,896 in compensation, commissions and bonuses.

30

Table of Contents

New Accounting Pronouncements

      In July 2002, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and must be applied beginning January 1, 2003. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when the exit or disposal plan is approved. The adoption of SFAS 146 did not have an effect on our consolidated financial statements.

      In December 2002, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables”. This Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This Issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This Issue does not change otherwise applicable revenue recognition criteria. The guidance in this Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not expect the adoption of EITF 00-21 will have a material effect on our financial statements.

      In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment to FASB Statement 123”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation”, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation, and the effect of the method used on reported results. We adopted the disclosure provisions of SFAS 148 effective January 31, 2003.

      In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Guarantees in existence at December 31, 2002 are grandfathered for the purposes of recognition and would only need to be disclosed. We do not expect that the adoption of FIN No. 45 will have an effect on our consolidated financial statements. We will adopt the initial recognition and measurement provisions of FIN No. 45 for guarantees issued or modified after December 31, 2002.

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

      At January 31, 2003, our marketable securities include a $149,000 investment in a Standard & Poors 500 stock price index fund and a $259,000 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 the euro and British pounds sterling. As of January 31, 2003, we had no open forward exchange contracts.

31

Table of Contents

COMPUTER NETWORK TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements

32

Table of Contents

COMPUTER NETWORK TECHNOLOGY CORPORATION