COMPUTER NETWORK TECHNOLOGY CORP - 10-Q Quarterly Report

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

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

As of December 1, 2003, the registrant had 27,230,026 shares of $.01 par value common stock issued and outstanding.


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PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Statements of Operations for the three and nine months ended October 31, 2003 and 2002		3
	Consolidated Balance Sheets as of October 31, 2003 and January 31, 2003		4
	Consolidated Statements of Cash Flows for the nine months ended October 31, 2003 and 2002		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Market Risk		20
Item 4.	Controls and Procedures		20
PART II	OTHER INFORMATION		21
Item 1.	Legal Proceedings		21
Items 2-4.	None		22
Item 5.	Other Information		22
Item 6.	Exhibits and Reports on Form 8-K		23
SIGNATURES			24
EXHIBIT INDEX			25
CERTIFICATIONS

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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


			Three months ended						Nine months ended
			October 31,						October 31,

			2003			2002			2003			2002

Revenue:
	Product sales		$	65,871		$	39,009		$	163,764		$	101,891
	Service fees			33,745			16,894			84,895			48,090

		Total revenue		99,616			55,903			248,659			149,981

Cost of revenue:
	Cost of product sales			37,023			24,842			97,901			61,822
	Cost of service fees			20,845			9,511			51,351			28,579

		Total cost of revenue		57,868			34,353			149,252			90,401

Gross profit				41,748			21,550			99,407			59,580

Operating expenses:
	Sales and marketing			24,353			13,614			63,426			43,399
	Engineering and development			12,229			7,063			30,174			20,322
	General and administrative			4,182			2,696			12,004			7,903
	In-process research and development charge			—			—			19,706			—

		Total operating expenses		40,764			23,373			125,310			71,624

Income (loss) from operations				984			(1,823	)		(25,903	)		(12,044	)

Other income (expense):
	Net gain on sale of marketable securities			—			—			747			—
	Interest expense			(1,116	)		(1,146	)		(3,336	)		(3,190	)
	Interest income and other, net			272			1,344			1,726			4,817

Other income (expense), net				(844	)		198			(863	)		1,627

Income (loss) before income taxes				140			(1,625	)		(26,766	)		(10,417	)
Provision (benefit) for income taxes				(97	)		(554	)		901			(3,543	)
Net income (loss) before discontinued operations and cumulative effect of change in accounting principle				237			(1,071	)		(27,667	)		(6,874	)
Discontinued operations				—			207			—			207

Cumulative effect of change in accounting principle				—			—			—			(10,068	)

Net income (loss)			$	237		$	(864	)	$	(27,667	)	$	(16,735	)

Basic income (loss) per share:
	Net income (loss) before discontinued operations and cumulative effect of change in accounting principle		$	.01		$	(.04	)	$	(1.02	)	$	(.24	)

	Discontinued operations		$	—		$	.01		$	—		$	.01

	Cumulative effect of change in accounting principle		$	—		$	—		$	—		$	(.35	)

	Net income (loss)		$	.01		$	(.03	)	$	(1.02	)	$	(.59	)

	Shares			27,193			26,896			27,047			28,574

Diluted income (loss) per share:
	Net income (loss) before discontinued operations and cumulative effect of change in accounting principle		$	.01		$	(.04	)	$	(1.02	)	$	(.24	)

	Discontinued operations		$	—		$	.01		$	—		$	.01

	Cumulative effect of change in accounting principle		$	—		$	—		$	—		$	(.35	)

	Net income (loss)		$	.01		$	(.03	)	$	(1.02	)	$	(.59	)

	Shares			28,750			26,896			27,047			28,574

COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)


				October 31,			January 31,
				2003			2003

				(unaudited)
Assets
Current assets:
	Cash and cash equivalents			$	62,614		$	98,341
	Marketable securities				3,882			111,143
	Receivables, net				94,799			56,040
	Inventories				23,374			24,091
	Other current assets				5,019			2,118

			Total current assets		189,688			291,733

Property and equipment, net					40,458			22,566
Field support spares, net					11,269			6,009
Goodwill, net					107,612			14,113
Other intangibles, net					34,903			1,669
Other assets					6,164			3,079

				$	390,094		$	339,169

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable			$	39,850		$	16,889
	Accrued liabilities				48,022			25,060
	Deferred revenue				39,630			19,340
	Current installments of capital lease				462			708

		Total current liabilities			127,964			61,997

Obligations under capital lease, less current installments					727			—
Convertible subordinated debt					125,000			125,000
Deferred tax liability					462			541

			Total liabilities		254,153			187,538

Shareholders equity:
	Preferred stock				—			—
	Common stock, $.01 par value; authorized 100,000 shares, issued and outstanding 27,320 at October 31, 2003 and 26,921 at January 31, 2003				272			269
	Additional paid-in capital				185,819			173,955
	Unearned compensation				(436	)		(675	)
	Accumulated deficit				(50,613	)		(22,946	)
	Accumulated other comprehensive income (loss)				899			1,028

			Total shareholders’ equity		135,941			151,631

				$	390,094		$	339,169

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


					Nine months ended
					October 31,

					2003			2002

Operating Activities:
	Net loss				$	(27,667	)	$	(16,735	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Cumulative effect of change in accounting principle				—			10,068
		Discontinued operations				—			(207	)
		Depreciation and amortization				18,065			11,889
		In-process research and development charge				19,706			—
		Non-cash compensation expense				331			436
		Net gain on sale of marketable securities				(747	)		—
		Changes in deferred taxes				(4	)		(5,447	)
		Changes in operating assets and liabilities, net of acquisition:
			Receivables			(5,431	)		6,774
			Inventories			12,139			1,157
			Other current assets			2,703			1,257
			Accounts payable			13,299			360
			Accrued liabilities			(8,930	)		(2,275	)
			Deferred revenue			(654	)		2,526

				Net cash provided by continuing operations		22,810			9,803
				Net cash provided by discontinued operations		—			207

				Cash provided by operating activities		22,810			10,010

Investing Activities:
	Additions to property and equipment					(5,893	)		(4,738	)
	Additions to field support spares					(1,770	)		(4,448	)
	Acquisition of Inrange Technologies, net of cash acquired					(152,585	)		—
	Acquisition of BI-Tech, net of cash acquired					(3,868	)		(7,723	)
	Net redemption (purchase) of marketable securities					107,262			(18,939	)
	Other assets					(2,466	)		390

				Cash used in investing activities		(59,320	)		(35,458	)

Financing Activities:
	Net proceeds from issuance of convertible subordinated debt					—			121,706
	Proceeds from issuance of common stock					1,352			2,119
	Payments for repurchases of common stock					—			(31,975	)
	Repayments of obligations under capital leases					(961	)		(1,179	)

				Cash provided by financing activities		391			90,671

Effects of exchange rate changes						392			701

Net increase (decrease) in cash and cash equivalents						(35,727	)		65,924
Cash and cash equivalents — beginning of period						98,341			34,402

Cash and cash equivalents — end of period					$	62,614		$	100,326

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

The accompanying consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003 as filed with the Securities and Exchange Commission. References to fiscal 2003 and 2002, represent the twelve months ended January 31, 2004 and 2003, respectively.

On May 5, 2003, the Company completed the acquisition of Inrange Technologies for $190 million in cash. The acquisition was accounted for as a purchase, and the Company’s financial statements include the results of Inrange since May 5, 2003. See footnote 4 “Acquisitions” for further information regarding the effect of the Inrange acquisition on the Company’s balance sheet and results of operations.

During the first quarter of fiscal 2003, the Company sold marketable securities totaling $122 million, resulting in a net pre-tax gain of approximately $747. No significant gains or losses from the sale of marketable securities were recorded during the other periods presented.

The Company’s investments in marketable securities primarily consist of U.S. government and agency securities, corporate debt securities and bank certificates of deposit.

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

On April 6, 2003, the Company entered into an agreement whereby a wholly owned subsidiary of the Company would acquire all of the shares of Inrange Technologies Corporation (Inrange) that were owned by SPX Corporation. The shares acquired constituted approximately 91% of the issued and outstanding shares of Inrange for a purchase price of approximately $2.31 per share and $173 million in the aggregate. On May 5, 2003 the Company completed the acquisition of Inrange and pursuant to the agreement the subsidiary merged into Inrange, and the remaining capital stock owned by the other Inrange shareholders was converted into the right to receive approximately $2.31 per share in cash, resulting in a total payment of $190 million for both the stock purchase and merger. The acquisition was accounted for as a purchase and the consolidated financial statements of the Company include the results of Inrange since May 5, 2003. The purchase price was allocated to the fair value of the assets and liabilities acquired as follows:


Purchase Price:
	Cash paid	$	190,526
	Value of stock option grants		10,286
	Transaction costs		3,347

Total Purchase consideration paid		$	204,159

Fair Value of Assets Acquired and Liabilities Assumed:
	Cash	$	41,088
	Accounts receivable		33,087
	Inventory		11,422
	Property and equipment		21,614
	Field support spares		6,826
	Developed technology		20,248
	Customer list		15,294
	Trademarks		1,234
	In-process research and development charge		19,706
	Goodwill		89,297
	Deferred taxes		75
	Other assets		6,227
	Accounts payable		(9,687	)
	Accrued expenses		(31,328	)
	Deferred revenue		(20,944	)

Total purchase consideration paid		$	204,159

The following table presents the unaudited pro forma consolidated results of operations of the Company for the three and nine months ended October 31, 2003 and 2002 as if the acquisition of Inrange took place on February 1, 2003 and 2002, respectively:

The pro forma results include amortization of the customer list, developed technology and trademarks presented above. The unaudited pro forma results do not include the $19.7 million charge for in-process research and development related to the Inrange acquisition. The unaudited pro forma results are for comparative purposes only and do not necessarily reflect the results that would have been recorded had the acquisition occurred at the beginning of the period presented or the results which might occur in the future. The Inrange purchase price allocation is preliminary and subject to change pending completion of the purchase price allocation analysis.

On June 24, 2002, the Company acquired all the outstanding stock of Business Impact Technology Solutions Limited (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 Company allocated $6.5 million, $1.1 million and $250 of the purchase price to goodwill, customer list and non-compete agreements, respectively. The customer list and non-compete agreements are amortized over periods of ten and two years, respectively. The accompanying financial statements include the results of BI-Tech since June 24, 2002.

The original purchase agreement required payments of additional consideration to the former stockholders and the BI-Tech employees based on achievement of certain earnings for each of the two years beginning July 1, 2002. A modification to the purchase agreement was made during the second quarter of fiscal 2003, whereby the first earn out period ended April 30, 2003. It also guarantees the former stockholders a minimum payment for the second earn out period, which ends June 30, 2004, of at least $3.9 million. The portion payable to the former stockholders is recorded as goodwill. The portion payable to the BI-Tech employees is recorded as compensation expense. During the third quarter and first nine months of 2003, $0 and $4.2 million, respectively, was added to goodwill compared to $2.6 million and $3.1 million, respectively, for the same periods of 2002. The Company also recorded compensation expense under the earn out arrangement of $0 and $1.1 million during the third quarter and first nine months of 2003, respectively, compared to $537,000 and $626,000, respectively, for the same periods of 2002.

The change in the net carrying amount of goodwill for the first nine months of 2003 was as follows:

Amortization expense for intangible assets during the third quarter and first nine months of 2003 was $1.7 million and $3.5 million, respectively. Amortization expense for the remainder of 2003 is estimated to be $1.7 million. Amortization expense is estimated to be $6.8 million in 2004 through 2006, $6.2 million in 2007 and $3.2 million in 2008.

In February 2002, the Company sold $125 million of 3% convertible subordinated notes due February 2007, raising net proceeds of $121 million. The notes are convertible into the Company’s common stock at a price of $19.17 per share. The Company may redeem the notes upon payment of the outstanding principal balance, accrued interest and a make whole premium if the closing price of its common stock exceeds 175% of the conversion price for at least 20 consecutive trading days within a period of 30 consecutive trading days ending on the trading day prior to the date the redemption notice is mailed. The make whole payment represents additional interest payments that would be made if the notes were not redeemed prior to the due date.

The estimated per share weighted average fair value of all stock options granted during the nine months ended October 31, 2003 and 2002 was $4.74 and $6.21 respectively. The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

Had the Company recorded compensation cost based on the estimated fair value on the date of grant, as defined by SFAS 123, the Company’s pro forma net loss would have been as follows:


		Three months ended						Nine months ended
		October 31,						October 31,

		2003			2002			2003			2002

Net income (loss), as reported		$	237		$	(864	)	$	(27,667	)	$	(16,735	)
Stock-based employee compensation expense determined under fair value based method for all awards			(3,008	)		(2,100	)		(8,300	)		(5,783	)

Pro forma net loss		$	(2,771	)	$	(2,964	)	$	(35,967	)	$	(22,518	)

Basic net income (loss) per share:
	As reported	$	.01		$	(.03	)	$	(1.02	)	$	(.59	)
	Pro forma	$	(.10	)	$	(.11	)	$	(1.33	)	$	(.79	)
Diluted net income (loss) per share:
	As reported	$	.01		$	(.03	)	$	(1.02	)	$	(.59	)
	Pro forma	$	(.10	)	$	(.11	)	$	(1.33	)	$	(.79	)

The Company records a liability for warranty claims at the time of sale. The amount of the liability is based on contract terms and historical warranty loss expenses, which is periodically adjusted for recent actual experience. Warranty terms on the Company’s equipment range from 90 days to 13 months. The changes in warranty reserve balances for the nine months ended October 31, 2003 and 2002 were as follows:

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 was effective for revenue arrangements entered into by the Company after July 31, 2003. The adoption of EITF 00-21 did not have a material effect on our financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging, which amends and clarifies financial accounting and reporting for derivative instruments. The adoption of SFAS 149 in June of 2003 did not have an effect on the Company’s consolidated financial statements.

On May 15, 2003, the Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 effective August 1, 2003 did not have an effect on the Company’s consolidated financial statements.

Inrange Technologies Corporation, which is now a wholly owned subsidiary of the Company, has been named as a defendant in the case SBC Technology Resources, Inc. v. Inrange Technologies Corp., Eclipsys Corp. and Resource Bancshares Mortgage Group, Inc., No. 303-CV-418-N, pending in the United States District Court for the Northern District of Texas, Dallas Division. The action was commenced on February 27, 2003. The complaint claims Inrange is infringing one SBC patent by manufacturing and selling storage area networking equipment, including Fibre Channel directors and switches, for use in storage networks that allegedly embody certain inventions claimed in a patent owned by SBC. The complaint asks for judgment that SBC’s patent is infringed by the defendants in the case, an accounting for actual damages, attorneys fees, costs of suit and other relief. Additionally, Eclipsys has demanded that Inrange indemnify and defend Eclipsys pursuant to documentation under which it acquired the product from Inrange. Hitachi Data Systems Corporation has informed Inrange that it has also received a demand from Eclipsys that Hitachi indemnify and defend Eclipsys for this action. Hitachi has put Inrange on notice that it will tender any claim by Eclipsys for indemnification and defense of this action to Inrange. Inrange has answered, denying SBC’s allegations. The case is in its preliminary stages and management is evaluating the litigation.

Inrange has also been named as a defendant in the case Onex, Inc., Joseph P. Huffine, and Sally Huffine Breen v. Inrange Technologies Corporation, No. CV-0593LJM-WTL, pending in the United States District Court, Southern District of Indiana. The action was commenced on April 23, 2003. The complaint alleges breach of the contract pursuant to which Inrange acquired certain assets of Onex, Inc. The contract includes a provision for additional payments of purchase price based on the performance of the business acquired over a two year period. The contract requires the payments be made at the end of each year in such two year period. Specifically, the complaint alleges, among other things, that Inrange did not conduct the business in a commercially reasonable manner and the pay out for the first year should have been $6 million and that the payment for the second year will be substantially smaller. The complaint also alleges the plaintiffs were harmed by the failure to provide accurate data with respect to the business acquired and Inrange’s failure to pay certain liabilities harmed the plaintiffs. The case is in its preliminary stages and management is evaluating the litigation.

A shareholder class action was filed against Inrange and certain of its officers on November 30, 2001, in the United States District Court for the Southern District of New York, seeking recovery of damages caused by Inrange’s alleged violation of securities laws, including section 11 of the Securities Act of 1933 and section 10(b) of the Exchange Act of 1934. The complaint, which was also filed against the various underwriters that participated in Inrange’s initial public offering (IPO), is identical to hundreds of shareholder class actions pending in this Court in connection with other recent IPOs and is generally referred to as In re Initial Public Offering Securities Litigation. The complaint alleges, in essence, (a) that the underwriters combined and conspired to increase their respective compensation in connection with the IPO by (i) receiving excessive, undisclosed commissions in exchange for lucrative allocations of IPO shares, and (ii) trading in Inrange’s stock after creating artificially high prices for the stock post-IPO through “tie-in” or “laddering” arrangements (whereby recipients of allocations of IPO shares agreed to purchase shares in the aftermarket for more than the public offering price for Inrange shares) and dissemination of misleading market analysis on our prospects; and (b) that Inrange violated federal securities laws by not disclosing these underwriting arrangements in its prospectus. The defense has been tendered to the carriers of Inrange’s director and officer liability insurance, and a request for indemnification has been made to the various underwriters in the IPO. At this point the insurers have issued a reservation of rights letter and the underwriters have refused indemnification. The court has granted Inrange’s motion to dismiss claims under Section 10(b) of the Securities Exchange Act of 1934 because of the absence of a pleading of intent to defraud. The court granted plaintiffs leave to replead these claims, but no further amended complaint has been filed. The court also denied Inrange’s motion to dismiss claims under Section 11 of the Securities Act of 1933. The court has also dismissed Inrange’s individual officers without prejudice, after they entered into a tolling agreement with the plaintiffs. On July 25, 2003, the Company’s Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Inrange and of the individual defendants for the conduct alleged in the action to be wrongful in the complaint. Inrange would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims Inrange may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by Inrange’s insurers. The settlement was approved subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of Inrange’s insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the IPO Litigations. At this point, it is too early to form a definitive opinion concerning the ultimate outcome.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually using a two-step impairment test.

Effective February 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142 provides a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication of goodwill impairment. The Company tested its reporting units for impairment by comparing fair value to carrying value. Fair value was determined using a discounted cash flow and cost methodology. The valuation of the Company’s former Storage Solutions segment indicated that the goodwill associated with the acquisition of Articulent in April of 2001 was impaired. The performance of this business had 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 the first quarter ended April 30, 2002.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our interim consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report and the MD&A contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 30, 2003.

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 a wide range of solutions for critical 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.

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 and telecommunications companies, including EMC, Hewlett-Packard, Hitachi Data Systems, IBM, StorageTek, Dell Computer Corporation and Veritas.

Our wholly owned subsidiary, Inrange Technologies Corporation (Inrange), which we acquired on May 5, 2003, also designs, manufactures, markets and services networking and switching products for storage and data networks. These products provide fast and reliable connections among networks of computers and related devices, allowing customers to manage and expand large, complex, storage networks efficiently, without geographic limitations.

The flagship product of Inrange, the FC/9000, is the storage area networks most scalable storage networking director-class Fibre Channel switch available for SANs. With an ability for customers to upgrade and scale to 256 ports without disrupting existing systems, the FC/9000 provides a platform from which an enterprise can build storage networks that can be used in systems where reliability and continuous availability are critical. These products are designed to be compatible with various vendors’ products and multiple communication standards and protocols. Inrange distributes and supports these products through a combination of direct sales and service operations and indirect channels.

We also supply storage systems, telecommunications capacity, storage application software and other products and services manufactured or provided by others.

On April 6, 2003, we entered into an agreement whereby our wholly owned subsidiary would acquire all of the shares of Inrange that were owned by SPX Corporation. The shares acquired constituted approximately 91% of the issued and outstanding shares of Inrange for a purchase price of approximately $2.31 per share and $173 million in the aggregate. On May 5, 2003 we completed the acquisition of Inrange and pursuant to the agreement the subsidiary merged into Inrange, and the remaining capital stock owned by the other Inrange shareholders was converted into the right to receive approximately $2.31 per share in cash, resulting in a total payment of $190 million for both the stock purchase and merger. During the third quarter and first nine months of 2003 we incurred integration charges related to the acquisition of Inrange of $1.3 million and $4.7 million, respectively, primarily for wages and severance for terminated employees, and extra travel costs for integration activities. During the first nine months of 2003, we also recorded a $1.6 million charge for the write-down of inventory resulting from the integration of the product strategies for the new combined entity, and a $19.7 million charge for in-process research and development related to the acquisition of Inrange. The acquisition will also increase our quarterly amortization charges for developed technology, and other intangible assets by $1.7 million. During the fourth quarter we expect to record an additional integration charge of approximately $500,000 primarily for wages and severance. See caption “Impact of Inrange Integration” on page 13 for further discussion regarding the impact of the integration on quarterly results.

Completion of this acquisition makes us one of the world’s largest providers of complete storage networking products, solutions and services, with combined 2002 pro forma annual revenues of approximately $435 million. We have global leadership positions in our markets. The acquisition significantly broadens and strengthens our portfolio of storage and networking products and solutions, increases our global size and scope, expands our customer base, and provide us with significant scale and cost reduction opportunities.

During the third quarter and first nine months of 2003, we incurred integration charges related to the Inrange acquisition of $1.3 million and $4.7 million, respectively, for wages and severance related to terminated employees, and extra travel costs for integration activities. We also incurred a $1.6 million charge to write-down inventory related to the integration of product strategies for the new combined entity. The following table sets forth the impact of the integration charge on our expense data for the three and nine months ended October 31, 2003:


	As reported		Impact of			Three months ended		As reported		Impact of			Nine months ended
	under GAAP		Integration			October 31, 2003		under GAAP		Integration			October 31, 2003

Cost of product	$	37,023	$	—		$	37,023	$	97,901	$	(2,223	)	$	95,678
Cost of service		20,845		(266	)		20,579		51,351		(390	)		50,961
Sales and marketing		24,353		(558	)		23,795		63,426		(1,759	)		61,667
Engineering and development		12,229		(92	)		12,137		30,174		(435	)		29,739
General and administrative		4,182		(336	)		3,846		12,004		(1,481	)		10,523

Cost of product for the three and nine months ended October 31, 2003 includes $1.1 million and $2.1 million, respectively, of amortization for developed technology related to the Inrange acquisition. Sales and marketing expense includes $607,000 and $1.2 million, respectively, of amortization for trademarks and customer list also related to the Inrange acquisition.

In June 2002, we acquired all of the outstanding stock of Business Impact Technology Solutions Limited (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 original purchase agreement required payments of additional consideration to the former stockholders and the BI-Tech employees based on achievement of certain earnings for each of the two years beginning July 1, 2002. A modification to the purchase agreement was made during the second quarter of fiscal 2003, whereby the first earn out period ended April 30, 2003. It also guarantees the former stockholders a minimum payment for the second earn out period, which ends June 30, 2004, of at least $3.9 million. The portion payable to the former stockholders is recorded as goodwill. The portion payable to BI-Tech employees is recorded as compensation expense. During the third quarter and first nine months of 2003, $0 and $4.2 million, respectively, was added to goodwill compared to $2.6 million and $3.1 million, respectively, for the same periods of 2002. We also recorded compensation expense under the earn out arrangement of $0 and $1.1 million during the third quarter and first nine months of 2003, respectively, compared to $537,000 and $626,000, respectively, for the same periods of 2002.

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 premium if the closing price of our common stock exceeds 175% of the conversion price for at least 20 consecutive trading days within a period of 30 consecutive trading days ending on the trading day prior to the date we mail the redemption notice. On August 15, 2002 a registration statement for the resale of the notes and the 6.5 million shares of common stock issuable upon conversion of the notes became effective.

In the fourth quarter of fiscal 2002, we recorded a non-cash charge of $23.6 million to provide a full valuation allowance for our United States deferred tax assets. As we generate taxable income in future periods, we do not expect to record significant income tax expense in the United States until it becomes more likely than not that we will be able to utilize the deferred tax assets, and we reduce the valuation allowance. The establishment of the valuation allowance does not impair our ability to use the deferred tax assets upon achieving profitability. Our federal net operating loss carry-forwards and credits do not expire until 15-20 years from now.

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.

The following table sets forth financial data for our operations for the periods indicated as a percentage of total revenue except for gross profit, which is expressed as a percentage of the related revenue. The financial data has also been presented to show the impact of the $1.3 million and $4.7 million of Inrange integration expenses recognized during the three and nine months of 2003. Also, the $1.6 million inventory write-down on the Company’s financial statements recognized during the nine months of 2003.


			Three months ended												Nine months ended
			October 31,												October 31,

			As												As
			reported			Impact of									reported			Impact of
			under GAAP			integration			2003			2002			under GAAP			Integration			2003			2002

Revenue:
	Product sales			65.6	%		—	%		65.6	%		69.8	%		65.7	%		—	%		65.7	%		68.0	%
	Service fees			34.4			—			34.4			30.2			34.3			—			34.3			32.0

		Total revenue		100.0			—			100.0			100.0			100.0			—			100.0			100.0

Gross profit:
	Product sales			43.8			—			43.8			36.3			40.2			(1.4	)		41.6			39.3
	Service fees			38.2			(.8	)		39.0			43.7			39.5			(.5	)		40.0			40.6

		Total gross profit		41.9			(.3	)		42.2			38.6			40.0			(1.0	)		41.0			39.7

Operating expenses:
	Sales and marketing			24.4			(.5	)		23.9			24.4			25.5			(.7	)		24.8			28.9
	Engineering and development			12.3			(.1	)		12.2			12.6			12.1			(.1	)		12.0			13.6
	General and administrative			4.2			(.3	)		3.9			4.8			4.8			(.6	)		4.2			5.3
	In process research and development charge			—			—			—			—			7.9			—			7.9			—

		Total operating expenses		40.9			(.9	)		40.0			41.8			50.3			(1.4	)		48.9			47.8

Income (loss) from operations				1.0	%		(1.2	)%		2.2	%		(3.2	)%		(10.3	)%		(2.4	)%		(7.9	)%		(8.1	)%

Cost of product as reported and excluding the impact of the Inrange integration for the three and nine months ended October 31, 2003 includes $1.1 million and $2.1 million, respectively, of amortization for developed technology related to the Inrange acquisition. Sales and marketing expense as reported and excluding the impact of the Inrange integration includes $607,000 and $1.2 million, respectively, of amortization for trademarks and customer list related to the Inrange acquisition. We also incurred a $19.7 million charge related to the Inrange acquisition for purchased in-process research and development.

Sales of our proprietary CNT products generated revenues of $52.7 million and $122.0 million in the third quarter and first nine months of 2003, respectively, increases of 147% and 81%, respectively, from $21.4 million and $67.3 million for the third quarter and first nine months of 2002. A substantial amount of the increase in our proprietary CNT product sales during the third quarter and first nine months of 2003 relates to the acquisition of Inrange. We anticipate that the proprietary products acquired in the Inrange acquisition, including the Inrange Fibre Channel director products, will account for a significant portion of our proprietary CNT product revenue in future periods. During the six months since the acquisition of Inrange, we have worked to fully integrate the Inrange products into our existing proprietary product offerings, and now offer our customers one complete and fully integrated line of proprietary storage networking products.

Sales of our third party storage solutions products generated revenues of $13.2 million and $41.7 million in the third quarter and first nine months of 2003, respectively, a decrease of 25% and an increase 21%, respectively, from $17.6 million and $34.6 million for the third quarter and first nine months of 2002. The decrease in third party storage solutions products revenue during the third quarter of 2003 compared to the third quarter of 2002 was due to the deferral of several large third party product orders to future periods, and our focus on the integration of Inrange. We anticipate that third party storage solutions products revenue will increase in future periods once the sales representatives we acquired with the Inrange acquisition become more experienced and proficient at selling third party products. Our acquisition of BI-Tech in June 2002 significantly expanded our ability to deliver third party solution offerings in Europe, and accounted for the majority of the increase in third party storage solutions products revenue when comparing the first nine months of 2003 to 2002.

Service revenues from our proprietary CNT products for the third quarter and first nine months of 2003 totaled $20.5 million and $53.4 million, respectively, increases of 91% and 63%, respectively, from $10.8 million and $32.7 million for the third quarter and first nine months of 2002. The increase is primarily attributable to our acquisition of Inrange, as maintenance related to the proprietary products acquired from Inrange provide us with a recurring annual revenue stream in excess of $40 million.

Our consulting fee revenues increased 116% and 104% in the third quarter and first nine months of 2003 to $13.2 million and $31.5 million, respectively, up from $6.1 million and $15.4 million for the third quarter and first nine months of 2002. A large portion of the growth in consulting fee revenue relates to our acquisition of Inrange. In addition, our sales force has become more experienced and proficient at selling our consulting services.

Revenue generated from the sale of products and services outside the United States for the third quarter and first nine months of 2003 totaled $34.5 million and $85.0 million, respectively, increases of 80% and 106%, respectively, from $19.1 million and $41.3 million for the third quarter and first nine months of 2002. The increase in revenue generated outside the United States is primarily attributable to the acquisition of Inrange in May of 2003 and the BI-Tech acquisition in June of 2002. During calendar year 2002, international sales accounted for 40% or $89.3 million of Inrange’s total revenue. We continue to expect our volume of international sales to increase significantly in future periods, when compared to the same period last year, due to the acquisition of Inrange.

One customer accounted for 17% of our revenue during first nine months of fiscal 2003. No customer accounted for more than 10% of our revenue during the first nine months of 2002. Price discounting had a small impact on our product revenue during these periods.

We primarily sell our proprietary CNT products directly to end-user customers in connection with joint marketing activities with our business partners. For a new customer, the initial sales and design cycle, from first contact through shipment, can vary from 90 days to 12 months or more. We expect this cycle will continue.

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 margins from the sale of proprietary CNT products for the third quarter and first nine months of 2003 were 50% and 48%, respectively, compared to 49%, in both the third quarter and first nine months of 2002. Excluding the $1.6 million write-down of inventory resulting from the integration of product strategies related to the Inrange acquisition, $616,000 of integration expenses, and amortization expense for developed technology related to the Inrange acquisition for the third quarter and first nine months of 2003 of $1.1 million and $2.1 million, respectively, gross product margins from the sale of proprietary CNT products for the third quarter and first nine months of 2003 would have been 52%. The increase in gross margin percentage, excluding the inventory write-down, integration expenses and amortization of developed technology, was due to a change in mix of products sold, as the acquisition of Inrange substantially increased our portfolio of proprietary products. We also have taken actions that have resulted in the reduction of the manufactured cost of our UltraNet® Director products.

Gross margins from the sale of third party storage solutions products for the third quarter and first nine months of 2003 were 19% and 18%, respectively, compared to 21% and 20%, respectively, in the third quarter and first nine months of 2002. The slight decrease in gross margin percentage was primarily due to product mix. We anticipate that product margins for third party products will remain in the high teens in future periods.

Gross service margins for our proprietary CNT products in the third quarter and first nine months of 2003 were 48%, compared to 50% and 48%, respectively, for the third quarter and first nine months of 2002. Excluding integration costs of $266,000 and $390,000 in the third quarter and first nine months of 2003, respectively, gross service margins for our proprietary CNT products in the third quarter and first nine months of 2003 were 49%. We anticipate that gross service margins for our proprietary CNT products, excluding any potential integration expenses in the fourth quarter of 2003, will continue to be in the 45%-50% range for the foreseeable future.

Gross profit margins from our consulting fees were 26%, respectively, for the third quarter and first nine months of 2003, compared to 37% and 26%, respectively, for the third quarter and first nine months of 2002. Excluding costs related to the BI-Tech earn-out of $0 and $131,000 for the third quarter and first nine months of 2003, respectively, gross profit margins for our consulting fees in the third quarter and first nine months of 2003 would have been 26%. Excluding the impact of the BI-Tech earn-out in 2002, gross profit margins for our consulting fees in the third quarter and first nine months of 2002 would have been 39% and 27%, respectively. Gross profit margins for the third quarter and first nine months of 2003, excluding the impact of the BI-Tech earn-out, were down compared to 2002. Improvements in employee utilization prior to the acquisition of Inrange were offset by lower utilization of employees in the newly acquired Inrange consulting business.

Sales and marketing expense for the third quarter and first nine months of 2003 totaled $24.4 million and $63.4 million, respectively, up 79% and 46%, respectively, from $13.6 million and $43.4 million in the third quarter and first nine months of 2002. Excluding integration expenses and amortization for customer list and trademarks relating to our acquisition of Inrange for the third quarter and first nine months of 2003 of $1.2 million and $3.0 million, respectively, our sales and marketing expense would have been $23.2 million and $60.5 million, respectively, for the third quarter and first nine months of 2003. Substantially all of the increase was due to our acquisition of Inrange in May 2003 and BI-Tech in June 2002.

Engineering and development expense for the third quarter and first nine months of 2003 totaled $12.2 million and $30.2 million, respectively, up 73% and 48%, respectively, from $7.1 million and $20.3 million in the third quarter and first nine months of 2002. Excluding integration expenses of $92,000 and $435,000 related to the Inrange acquisition, our engineering and development expenses would have been $12.1 million and $29.7 million, respectively, for the third quarter and first nine months of 2003. The increase was primarily due to our acquisition of Inrange in May of 2003. We are committed to the future development of our Fibre Channel director products, and our UltraNet® family of products. In future periods, we expect to continue to invest a significant portion of our resources in the engineering and development of new products, and new features for existing products.

General and administrative expenses for the third quarter and first nine months of 2003 totaled $4.2 million and $12.0 million, respectively, up 55% and 52%, respectively, from $2.7 million and $7.9 million in the third quarter and first nine months of 2002. Excluding integration expenses of $336,000 and $1.5 million related to the Inrange acquisition, our general and administrative expense, would have been $3.8 million and $10.5 million, respectively, for the third quarter and first nine months of 2003. The increase in expense was primarily due to our acquisition of Inrange in May 2003 and BI-Tech in June 2002.

Other expense for the third quarter and first nine months of 2003 totaled $844,000 and $863,000, respectively, compared to other income of $198,000 and $1.6 million for the third quarter and first nine months of 2002. In February 2002, we sold $125 million of 3% convertible subordinated notes due February 2007, raising net proceeds of $121 million. Coupon interest on the notes, plus amortization of debt issuance costs, resulted in interest expense in the third quarter and first nine months of 2003 and 2002 of $1.1 million and $3.2 million, respectively. Interest and other income totaled $272,000 and $1.7 million for the third quarter and first nine months of 2003, compared to $1.3 million and $4.8 million in the third quarter and first nine months of 2002. During the first quarter of 2003, we sold substantially all of our investments in marketable securities to finance our acquisition of Inrange on May 5, 2003 for $190 million in cash. The sale resulted in a net realized gain totaling $747,000, and was the primary reason for the reduction in interest income in 2003 compared to 2002.

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 full valuation allowance for our United States deferred tax assets, in our fourth quarter ended 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 until 15-20 years from now.

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

Cash, cash equivalents and marketable securities at October 31, 2003 totaled $66.5 million, a decrease of $143.0 million since January 31, 2003. The decrease is primarily due to our acquisition of Inrange in May of 2003. Net cash used to complete this transaction was $152.6 million. Cash flow from operations for the first nine months of fiscal 2003 totaled $22.8 million and proceeds related to the issuance of common stock totaled $1.4 million. Uses of cash for the first nine months of fiscal 2003 included $7.7 million for capital equipment and field support spares, and $3.9 million for the BI-Tech earn-out. Expenditures for capital equipment and field support spares have been, and will likely continue to be, a significant capital requirement.

At October 31, 2003, our available cash and marketable securities totaled $66.5 million. We believe our anticipated cash flows from operations, including cash flow improvements resulting from increased scale and cost synergies from the acquisition of Inrange, will be adequate to fund our operating plans and meet our current anticipated aggregate capital requirements, at least for the next twelve months. This belief is based upon a number of assumptions and estimates, including obtaining certain revenue levels from Inrange products and services, completion of certain restructuring activities and payments of integration and restructuring charges in line with estimates by management. If these estimates and assumptions do not turn out to be correct, or if we encounter unanticipated difficulties or economic conditions, our liquidity could be impaired.

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

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

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 also been reflected in the above table under the “Purchase Order” caption.

Our acquisition of BI-Tech originally required us to pay the former stockholders and BI-Tech employees additional consideration based on achievement of certain earnings for each of the two years beginning July 1, 2002. A modification to the purchase agreement was made during the second quarter of fiscal 2003, whereby the first earn out period ended April 30, 2003. It also guarantees the former stockholders a minimum payment for the second earn out period, which ends June 30, 2004, of at least $3.9 million. Payment of the second period earn out may be in the form of a note payable or stock at our option, or in the case of the employees, cash.

This Form 10-Q includes non-GAAP information regarding results from operations, which includes adjustments to amounts calculated under generally accepted accounting principles. The non-GAAP information is not in accordance with, or an alternative for GAAP and may be different from non-GAAP information used by other companies. Non-GAAP information is provided as a complement to results provided in accordance with generally accepted accounting principles. The non-GAAP information is provided to give investors a more complete understanding of the underlying operational results and trends in our performance. Management believes that the non-GAAP information is used by some investors and equity analysts to make informed decisions because the information may be more useful when analyzing historical results or predicting future results from operations. In addition, management uses the pro-forma information as a basis for planning and forecasting future periods

Our exposure to market risk due to changes in the general level of U.S. interest rates relates primarily to our cash, cash equivalents, and marketable securities. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk. We mainly invest our cash, cash equivalents and marketable securities in investment grade, highly liquid investments, consisting of U.S. government and agency securities, corporate debt securities and bank certificates of deposits. We believe that market risk due to changes in interest rates is not material.

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. However, we are currently considering entering into an interest rate swap agreement for all or a portion of our convertible debt. On October 31, 2003, the average bid and ask price of our convertible subordinated notes due 2007 was 89.13 resulting in an aggregate fair value of approximately $111.4 million. Our common stock is quoted on the Nasdaq National Market under the symbol “CMNT”. On October 31, 2003, the last reported sale price of our common stock on the Nasdaq Market was $9.89 per share.

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 pound sterling. As of October 31, 2003, we had no open forward exchange contracts.

The Company reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this report (the “Evaluation Date”). This review and evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on their review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms It should be noted that the design of any system of controls is based upon certain assumptions about the likelihood of future events, and there can be assurance that design will succeed in achieving its stated objective under all potential future conditions, regardless of how remote. However, the CEO and CFO believe the Company’s disclosure controls and procedures provide reasonable assurance that the disclosure controls and procedures are effective at the reasonable assurance level.

There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

The information set forth in Note 11 (Litigation) to the consolidated financial statements included in Part I of this Form 10-Q is hereby incorporated by reference.

During the quarter ended October 31, 2003, Messrs. Edward Walsh, William Collette, both officers of the Company and Mr. John Rollwagon, a Director, have all entered into effective 10(b) 5-1 trading plans which allow for the sale of our stock. The terms of these plans are as follows:

Mr. Erwin Kelen, a Director, also has adopted a 10(b)5-1 plan as disclosed in the Proxy Statement filed on May 8, 2003 and Form 8-K filed on February 11, 2002.

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

•

expectations regarding future liquidity revenue levels, gross margins, expenses, operating margins and earnings per share;

•

timing of and plans for the introduction or phase-out of products or services;

•

other plans, objectives, expectations and intentions contained in this Form 10-Q that are not historical facts.

When used in this Form 10-Q, the words “may,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” and similar expressions are generally intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements involve risks and uncertainties. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of certain risk factors, including but not limited to (i) competitive factors, including pricing pressures; (ii) variability in quarterly sales; (iii) economic trends generally and in various geographic markets; (iv) relationships with our strategic partners; (v) technological change affecting our products; (vi) whether any delayed orders will be received; (vii) unanticipated difficulties in integration of Inrange; (viii) unanticipated risks associated with introducing new products and features, and, (ix) risks associated with the unfavorable developments in litigation, (x) other events and other important factors, including those discussed under cautionary statements in Exhibit 99 to our Form 10-K filing with the Securities and Exchange Commission for the year ended January 31, 2003. We assume no obligation to update any forward-looking statements. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The forward looking statements speak as of the date hereof. Unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise.


3.1		Second Restated Articles of incorporation of the Company. (Incorporated by reference to Exhibits 3(i)-1 and 3(i)-2 to current report on Form 8-K dated May 25, 1999).
3.2		Articles of Amendment of the Second Restated Articles of the Company. (Incorporated by reference to Exhibit 3(i)-1 to current report on Form 8-K dated May 25, 1999.)
3.3		By-laws of the Company (Incorporated by reference to Exhibit 3 (ii)-1 to current report on Form 8-K dated May 25, 1999.)
4.1		Rights Agreement between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to Exhibit 1 to Form 8-A dated July 29, 1998 and Exhibit 1 to Form 8-A/A dated November 27, 2000.)
4.2		First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1 to Form 8-A/A dated November 27, 2000.)
4.3		First Amendment of Certificate of Designations, Preferences and Right of Series A Junior Participating Preferred Stock. ($.01 Par Value Per Share) of Computer Network Technology Corporation (Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27, 2000.)
11.		Statement Re: Computation of Net income (loss) per Basic and Diluted Share.(2)
31.1		CEO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934(2)
31.2		CFO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934(2)
32.		Computer Network Technology Corporation Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).(2)

A current report on Form 8-K was dated and furnished August 26, 2003, pursuant to Item 12 (Results of Operations and Financial Condition) to report the press release announcing the Company’s financial results for the second quarter of 2003 and certain other information.

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


Item		Description

3.1		Second Restated Articles of incorporation of the Company. (Incorporated by reference to Exhibits 3(i)-1 and 3(i)-2 to current report on Form 8-K dated May 25, 1999).
3.2		Articles of Amendment of the Second Restated Articles of the Company. (Incorporated by reference to Exhibit 3(i)-1 to current report on Form 8-K dated May 25, 1999.)
3.3		By-laws of the Company (Incorporated by reference to Exhibit 3 (ii)-1 to current report on Form 8-K dated May 25, 1999.)
4.1		Rights Agreement between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to Exhibit 1 to Form 8-A dated July 29, 1998 and Exhibit 1 to Form 8-A/A dated November 27, 2000.)
4.2		First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1 to Form 8-A/A dated November 27, 2000.)
4.3		First Amendment of Certificate of Designations, Preferences and Right of Series A Junior Participating Preferred Stock. ($.01 Par Value Per Share) of Computer Network Technology Corporation (Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27, 2000.)
11.		Statement Re: Computation of Net income (loss) per Basic and Diluted Share.(2)
31.1		CEO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934(2)
31.2		CFO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934(2)
32.		Computer Network Technology Corporation Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).(2)


Minnesota		41-1356476

(State of Incorporation)		(I.R.S. Employer Identification No.)


		October 31,		January 31,
		2003		2003

Inventories:
	Components and subassemblies	$	12,130	$	16,918
	Work in process		1,726		306
	Finished goods		9,518		6,867

		$	23,374	$	24,091


	Total

Balance February 1, 2003	$	14,113
Additional purchase price consideration for BI-Tech		4,228
Acquisition of Inrange		89,297
Translation adjustment		(26	)

Balance as of October 31, 2003	$	107,612


		October 31, 2003					January 31, 2003

		Gross Carrying		Accumulated			Gross Carrying		Accumulated
		Amount		Amortization			Amount		Amortization

Customer list		$	16,924	$	(1,376	)	$	1,630	$	(161	)
Trademarks			1,234		(124	)		—		—
Developed technology			20,248		(2,110	)		—		—
Non-compete agreements			250		(143	)		250		(50	)

	Total	$	38,656	$	(3,753	)	$	1,880	$	(211	)

Total other intangible assets, net		$	34,903				$	1,669


	Three months ended						Nine months ended
	October 31,						October 31,

	2003			2002			2003			2002

Risk free interest rate		3.25	%		3.06	%		2.89	%		3.93	%
Expected life		5.82			5.40			5.82			5.40
Expected volatility		86.2	%		87.8	%		86.2	%		87.8	%

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x		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO


PART I
	Item 1.
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Items 2-4. None
	Item 5. other information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-11 Statement Re: Computation of Net Income/loss
EX-31.1 Certification of Chief Executive Officer
EX-31.2 Certification of Chief Financial Officer
EX-32 Certification of CEO & CEO - Section 906


	Pro Forma					Pro Forma
	Three months ended					Nine months ended
	October 31,					October 31,

	2003		2002			2003			2002

Total revenue	$	99,616	$	108,816		$	288,821		$	317,617
Net income (loss)	$	237	$	(2,033	)	$	(17,091	)	$	(29,163	)
Net income (loss) per share	$	.01	$	(.08	)	$	(.63	)	$	(1.02	)


			Less Than		One to		Four to Five		After
Cash Obligation	Total		One year		Three Years		Years		Five Years

Capital leases	$	1.3	$	.5	$	.8	$	None	$	None
Operating leases	$	40.4	$	9.2	$	17.2	$	8.2	$	5.8
Purchase orders	$	20.1	$	19.8	$	.3	$	None	$	None
BI-Tech earn out	$	3.9	$	3.9	$	None	$	None	$	None
Convertible notes, plus interest	$	136.3	$	3.8	$	11.3	$	121.2	$	None


Employee/Director	Shares		Sale Price

William Collette		26,997	$15.00 - $20.00
Edward Walsh		61,562	$18.00
John Rollwagon		210,000	$15.00 - $20.00

(1)		Management contracts or compensatory plans or arrangements with the Company.

(2)		Filed herewith.


		By:		/s/ Gregory T. Barnum

				Gregory T. Barnum
				Chief Financial Officer
				(Principal financial officer)

		By:		/s/ Jeffrey A. Bertelsen

				Jeffrey A. Bertelsen
				Corporate Controller and Treasurer
				(Principal accounting officer)