COMPUTER NETWORK TECHNOLOGY CORP, 10-K, 1997-03-31

COMPUTER NETWORK TECHNOLOGY CORP
10-K, 1997-03-31
COMPUTER COMMUNICATIONS EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

_______________

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

_______________

For the fiscal year ended December 31, 1996
Commission file number: 0-13994

COMPUTER NETWORK TECHNOLOGY CORPORATION
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(Exact Name of Registrant as Specified in its Charter)

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Minnesota 41-1356476
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

605 North Highway 169, Suite 800, Minneapolis, Minnesota 55441
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(Address of Principal Executive Offices) (Zip Code)

(612) 797-6000
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(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value
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(Title of Class)
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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. [_]

The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 24, 1997 was approximately $127,248,000, based on a
closing price of $5.50 per share as reported by the Nasdaq National Market on
such date.

As of March 24, 1997, Registrant had 23,419,814 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 May 15, 1997 are
incorporated by reference into Part III of this Form 10-K.

Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1996 are incorporated by reference into Parts I and II of this Form 10-K.

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TABLE OF CONTENTS

PART I

Item 1. Business....................................................................................1
Overview....................................................................................1
Markets.....................................................................................2
Products....................................................................................4
Customer Support............................................................................9
Marketing and Sales.........................................................................10
Revenue Recognition Policy..................................................................10
Engineering and Development.................................................................11
Manufacturing and Suppliers.................................................................11
Competition.................................................................................12
Intellectual Property Rights................................................................12
Employees...................................................................................13
Item 2. Properties..................................................................................13
Item 3. Legal Proceedings...........................................................................13
Item 4. Submission of Matters to Vote of Security Holders...........................................13
Item 4.A Executive Officers of the Company...........................................................14

PART II

Item 5. Market for the Registrant's Securities and Related Shareholders Matters.....................17
Item 6. Selected Consolidated Financial Information.................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......17
Item 8. Consolidated Financial Statements and Supplementary Data....................................17
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure......................17

PART III

Item 10. Directors and Executive Officers............................................................18
Item 11. Executive Compensation......................................................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................18
Item 13. Certain Relationships and Related Transactions..............................................18

PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...............19

SIGNATURES..............................................................................................28

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PART I

Item 1. Business

Overview

Computer Network Technology Corporation ("CNT" or the "Company") designs,
manufactures, markets and supports a range of enterprise-wide information
management connectivity, access and recovery hardware and software products
designed to meet the complex needs of large organizations. These products are
marketed by CNT under the Channelink(R), FileSpeed(TM), Channelink Integrated
Gateway(TM), Web Integrator(TM) and Brixton(R) tradenames.

CNT's recovery and connectivity Channelink systems create high speed, wide-area
enterprise networks that interconnect traditional data centers, peripherals,
remote users, and the growing base of open system computer servers. These
products also enable data centers to be interconnected to enable full data
center recovery in cases of disaster, unintentional data loss, or partial
interruption within seconds, hours, or days, depending on the specific
configuration selected and the nature of the disaster.

CNT's access products enable desktop computer and terminal users operating
different networking protocols (i.e. TCP/IP and SNA) to share the same physical
networks and to access applications and data on different types of mainframe and
open systems servers. In addition, legacy databases and legacy applications
(such as those based on IBM products CICS or DB2) may be made accessible from an
Internet or Intranet Web Browser.

CNT markets its products and services in North America primarily through a
direct sales force and internationally through wholly-owned subsidiaries and
distributors. Select hardware and software products are also remarketed by
original equipment manufacturers ("OEMs") under other tradenames.

CNT emphasizes comprehensive customer support and training designed to maximize
quality and customer satisfaction. CNT believes that its customer service
programs provide significant added value to its customer base, enhance the
reputation of the Company, and accelerate selling products and services to
prospective customers.

CNT's executive offices are located at 605 North Highway 169, Suite 800,
Minneapolis, Minnesota 55441 and its telephone number is 612-797-6000. Its
World Wide Web site can be accessed at http://www.cnt.com. Unless the context
otherwise requires, "CNT" or the "Company" refers to Computer Network Technology
Corporation and its subsidiaries.

This annual report includes trade names, trademarks and registered trademarks of
companies other than CNT.

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Markets

CNT designs high-performance networking solutions that seamlessly integrate a
heterogeneous mix of technology, architectures, vendors and communication
standards that allow enterprises to preserve their investments in traditional
legacy data processing systems and today's open systems to create enterprise-
wide networks and intranets.

CNT principally addresses three enterprise information management markets: the
high-speed connectivity market with its Channelink and FileSpeed product lines,
the enterprise access market with its Channelink Integrated Gateway and Brixton
product lines, and the data center continous operations recovery market with its
Channelink and FileSpeed product lines.

Enterprise Connectivity

The Company's enterprise connectivity products facilitate data center
consolidation and centralization, while enabling certain input and output
peripherals to be more conveniently housed with geographically dispersed
regional customer operations. Increasingly, these new solutions are being
constructed by customers in conjunction with business process changes being
driven for cost efficiencies, improved customer services, or the penetration of
new markets with new services. Reducing the total number of data centers while
interconnecting the remaining centers for stability and workload sharing has
extended the life of legacy systems while deferring costly investments in these
centers as new, distributed computing systems are brought online.

These markets are also characterized by the desire to deploy open systems which
can leverage past investments in personal computers and can exploit emerging
Internet and Intranet Web-based computing architectures. By linking networks of
personal computers, UNIX-based distributed servers, and legacy data centers,
together with the Internet, data center operating processes and procedures,
perfected by 25 years of experience, can be combined with fresh approaches
fueled by the explosion and creativity engendered in the Internet. Market
expansion in the legacy - open systems interconnect market is being driven by
the significant transition from mainframe-based general accounting applications
to client-server, data-centric integrated business management systems.

CNT's products enable data centers and remotely located peripherals to
communicate over wide areas without significant degradation of performance. LAN
gateways enable communications for a wide range of LAN-based workstations and
servers with large-scale, channel-based systems used in enterprise-wide
networks. Network-based storage products provide direct network connections to
high capacity tape storage subsystems and on-line disk storage systems. Channel
networking applications have accounted for a substantial majority of CNT's
historical revenue and the Company will continue to emphasize supporting and
servicing this important market.

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Enterprise Access

Customers deploying the distributed and Internet/intranet model of computing
desire to provide access to both old and new applications from both legacy SNA
3270 networks and, in parallel, the customer's intranet or the public Internet.
Proprietary SNA networks connect Enterprise class IBM OS/390 computers and
midrange IBM AS/400 computers to proprietary IBM 3270 and 5250 terminals. While
performing 3270 and 5250 emulation using personal computers has been available
since 1983, these systems continue to limit efficient growth by requiring
proprietary dedicated SNA networks. Similarly, even after several years of
migration from legacy data bases to client-server application architectures,
practical and operational limits require that mainframe-based data remain
resident in centralized "Information Warehouses."

CNT serves this market, represented by almost all of the 2,000 largest
organizations world-wide, by linking personal computers to legacy mainframes in
a fashion that reduces the number of physical mainframe connections required,
replaces SNA with open TCP/IP protocols, and facilitates the combination and
sharing of expensive data communication channels with voice and other data
networks. Similarly, the Company's products connect common web browsers such as
the Netscape Navigator(R) and Microsoft's Internet Explorer(R) to legacy IBM
mainframe transaction systems based on CICS, IMS, and DB/2. The Company's
products reduce the need for mainframe computing resources by performing
expensive protocol conversion and compression activities in specialized hardware
and software.

The Company's enterprise access products allow organizations to provide
application access over open networks (e.g., SNA devices to SNA applications;
SNA devices to open systems applications; and TCP/IP and Netware clients to SNA
applications), SNA device emulation for open systems desktop computers, and
integration of mainframe applications and data with the Internet and corporate
intranets. These products allow customers with significant resources invested
in SNA mainframe-based networks, supporting devices such as terminal displays
and printers, to access computers with Unix-based applications and databases.
The Company's enterprise access products also allow Unix-based systems and
Windows-based PCs to access data and applications on IBM mainframes and IBM
AS/400 midrange systems. The Company's enterprise access software products
operate on a range of open systems computing platforms, including Unix systems
from vendors such as Sun Microsystems and IBM, as well as support for Windows
and other desktop operating environments. The Company's Channelink Integrated
Gateway product provides customers with a fully integrated hardware/software
solution that provides enterprise users connected to corporate TCP/IP networks
with highly available access to IBM SNA applications through terminal emulation,
printing and file transfer.

Enterprise Recovery

Today's global approach to business requires that data centers be open for
business twenty-four hours a day. The enterprise recovery market consists of
large organizations who require data processing services as a key part of their
service or product offerings and thereby require non-stop operation. Customers
who require non-stop operations typically deploy duplicate hardware and software
to ensure continuous availability. The Company develops and provides products

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which facilitate using public recovery centers or other customer data centers as
a recovery asset. In addition, gathering routine data backup copies is
exacerbated by the shortening window of time required for full copy backups
during enforced periods of inactivity. The Company provides solutions which
enable backups to occur simultaneously with normal transaction processing
activities.

The Company's enterprise information management and recovery products provide
high speed channel-based data networking that allow organizations to move and
share large amounts of data quickly and accurately between mainframes, remote
storage devices and open servers locally and over extended distances. The
Company's Channelink products provide high performance extended distance data
archival and retrieval from remote DASD and tape storage facilities that allow
customers to employ new strategies for storing and accessing mission-critical
data, including data duplexing for disaster protection and enterprise-wide data
sharing, while reducing associated storage costs. Customers are able to
seamlessly move files and updates between primary DASD located in the original
data center and secondary DASD located in an alternate data center that may be
thousands of miles from the original data center, with little degradation in
performance. The Company's FileSpeed product is designed to provide users with a
business continuation and disaster recovery capability by providing for very
high speed bulk data transfer between mainframes and open systems for backup,
data-base updates, and other data transfer applications. In addition, FileSpeed
can also be used to quickly back-up open systems server data to the same central
data repository used by the mainframe to facilitate data recovery and
synchronization of open systems and mainframe databases.

Products

Channelink

CNT's traditional product line has been the Channelink family of network
processors and software for enterprise networking and connectivity. Channelink
products support a variety of mainframes and peripheral devices, including disk
drives, optical storage devices, magnetic tape controllers, printers, check
sorters, document processors, imaging systems, microfiche recorders, terminal
and graphic controllers, plotters, data base computers and front end processors.
LAN interfaces provide connections to a wide variety of popular LANs, including
Ethernet, Token Ring, and FDDI. WAN interfaces modules provide connectivity
between network nodes over unlimited distances using common carrier
communication links such as T1, E1, E3 and DS-3. The Company configures and
installs Channelink networks to meet the specific geographic and interface
requirements of each customer's information movement applications. The Company
recently introduced an ATM Access Unit and DS-3 Data Compression for its
Channelink product line. The Company's ATM Access Unit supports the ATM protocol
for channel networking and makes it possible for organizations to use ATM
technology to access switched wide area connectivity using very high-speed
networks. DS-3 Data Compression adds a compression engine to the Channelink DS-3
interface and delivers enhanced throughput for data center and storage
networking applications.

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Channelink also includes support for the Small Computer Systems Interface (SCSI)
method of connecting computer peripherals to computers. SCSI device attachment
has continued to increase in performance, as NT and UNIX based computing systems
have grown in performance and customer utility. Currently, SCSI tape and disk
storage devices rival the performance of mainframe storage devices. Channelink
enables devices utilizing SCSI interfaces to be extended in a complimentary
fashion to mainframe peripherals. Since a single Channelink network processor
can support many mainframe device interfaces (ESCON, OEMI, and FIBRE) at the
same time as supporting many SCSI attached peripherals, communications costs can
be reduced by aggregating mainframe and UNIX client/server device extension
applications.

Channelink software is based on a real-time distributed operating system to
support a variety of concurrent device or channel interfaces and networking
software tasks. This technique enables protocol processing to be off-loaded from
the host and permits peripheral devices that previously were not included in
networks to be connected in enterprise-wide systems. Channelink products support
widely used industry standard communication protocols, such as TCP/IP, and a
number of de facto industry standard, device specific and peripheral interface
data transfer protocols. Channelink products incorporate software drivers,
network software functionality, error recovery functions, network management
software, pipelining, data priority and, for many types of data transfer
applications, application-specific software, to facilitate high speed
communication of information with low application processor overhead and
efficient, cost effective use of expensive, high bandwidth communications
facilities. A unique advantage of Channelink and Brixton is that it can be
transparently implemented by the customer, requiring no changes to existing
hardware and software on mainframes, servers, I/O devices and P C clients.

For managing and monitoring channel networks, the Company offers network
management software for legacy and open systems. CNT's Host Monitor Facility
software interfaces to IBM's NetView or other mainframe-based network management
subsystems. CNT's CMF is a PC-based network management system with a user
interface that connects to any network node and allows system-wide monitoring
and control facilities for Channelink networks. The Company also offers network
management software for Simple Network Management Protocol ("SNMP"), an industry
standard management protocol used by many LAN and workstation users in the
management of their networks.

To support mission-critical wide area networks ("WANs"), Channelink networks can
be configured with redundancy. CNT channel networks generally operate at
"channel speeds", which means end users may operate a number of peripheral
devices concurrently and remotely at speeds comparable to speeds that would be
achieved with direct local connections to the host. In addition, Channelink
products intelligently and transparently (to the end user) perform functions
designed to manage the network for maximum efficiency, without depending on host
computing cycles or host memory resources. The Channelink product architecture
has been enhanced continuously since its introduction in 1986 with new
interfaces, higher speed processors, faster

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and larger memories, expanded software functionality, and expanded network
management capabilities and support tools. Depending on the application, a
single Channelink node has a dynamic bandwidth of up to 450 megabits per second
("Mbps") and multiple Channelink nodes can be configured in parallel to provide
virtually unlimited bandwidth and significant alternate pathing for continuous
operation and no single point of failure.

Enterprise Access Software

Brixton PU2.1 SNA Server
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The Brixton PU2.1 SNA Server provides gateway functionality and access from a
TCP/IP environment to data and applications residing on mainframe and AS/400
systems. The Brixton server runs on an open systems (UNIX) server and is
architected so that processes can be distributed across more than one server to
increase performance and availability. The product also reduces mainframe
cycles by offloading TCP/IP and telnet processing. The Brixton PU2.1 SNA Server
supports 3287 printing so that mainframe printing can be distributed to LAN
attached printers. The SNA Server also supports LU types 1, 2, 3, 6.2 and 0. A
Graphical Management Interface is provided so that the PU2.1 SNA Server and
attached resources are managed as one entity.

Brixton PU5 SNA Server
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The Brixton PU5 SNA Server software provides 3270 terminals, communicating in
their native SNA protocols, with access to open systems without requiring
additional software on the mainframe. The Brixton PU5 SNA Server runs on an
open system (UNIX(R)) server and performs the necessary conversions between 3270
devices and applications running on an open system (UNIX) server. The PU5 SNA
Server can also be used in conjunction with the Brixton PU2.1 SNA Server to
allow 3270 devices to communicate to a host application over a TCP/IP backbone
using the Brixton Passthru functionality. The Brixton PU5 SNA Server creates a
virtual mainframe operating on a UNIX system by emulating the functionality of
an SNA host, allowing information to flow directly from existing SNA terminal
devices to UNIX applications without a mainframe connection.

Web Integrator Product Suite
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The Worldwide Web and its browser interface is quickly becoming a desktop
standard. The Web Integrator product suite allows customers to use the graphical
browser interface to simplify access to corporate data in a scalable manner. It
consists of three products that provide corporate data centers with access to
legacy applications and data using a web-based browser. The Web Integrator
product suite is server based and leverages the intranet in a high performance
and scalable implementation. The Web Integrator: Hot product eliminates the need
for TN3270E emulators on the desktop and connects into any TN3270E server. End-
users with Java-enabled browsers who need mainframe application access can
launch this 3270 Java-based emulator without any additional software on the
desktop. It runs in the Java browser environment and is downloaded from the
server when the user connects, off-loads processing from the server, and

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simplifies software distribution and maintenance. The Web Integrator: Software
Developer Kit uses highly scalable, high-performance Application Programming
Interfaces (APIs) written in Java to access legacy data. The Web Integrator:
Access product converts 3270 datastreams to HTML at the server and eliminates
the need for a TN3270 client on user workstations when a browser is resident.

SNA Client Emulation
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The Brixton 3270 and 5250 open client emulation software provides access to SNA
applications from a UNIX or PC desktop in a distributed environment. The 3270
and 5250 open client software emulate a wide range of IBM 3270 and 5250 devices
and have a graphical keyboard mapper that allows operators to customize keys to
map specific IBM functions. The 3270 and 5250 open clients have an intuitive
interface, featuring pull-down menus and point-and-click operations. Users can
extend the emulation features by using point-and-click macro makers to automate
frequent operator tasks. The products allow copy-and-paste within the emulator
window, between emulator windows, and between UNIX and emulator windows. The
3270 and 5250 open clients display emulation takes place only on the
workstation, freeing the client from SNA communications overhead.

Channelink Integrated Gateway

A growing number of customers seek to provide access to mainframe applications
and databases to large numbers of new and existing users. They desire however,
to minimize the access points (gateways), manage it centrally within their data
centers, as well as off-load mainframe processing cycles. The Channelink
Integrated Gateway provides this level of functionality in a very scalable
fashion. In addition, the Channelink Integrated Gateway meets the demands of
the data center manager for systems, network and server management tools and
alerts for performance and workload balancing.

The Channelink Integrated Gateway is a fully integrated hardware/software
solution that has the ability to provide thousands of TCP/IP clients connected
to corporate TCP/IP networks with access to IBM SNA applications through
terminal emulation, printing, and file transfer through a single system or
multiple systems. It accommodates growing access needs with a scalable platform
that allows new users to be added through simple configuration modifications
using a graphical management interface. This level of scalability also provides
efficient consolidation of gateway sessions served by departmental SNA gateways
or lower capacity interconnect controllers. Using TCP/IP's Domain Name Services
(DNS) standard, Channelink Integrated Gateway's Distributed Virtual Server
assures scalability by managing multiple physical gateways as though they were a
single system. Session processing is distributed throughout the gateway
network, so that as the number of sessions increases so does the capacity to
efficiently handle these sessions and the resulting increase in transactions
over the network. As users request SNA resources, sessions can be automatically
distributed across multiple systems to maximize availability and reduce traffic
on communication lines.

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Using Channelink Integrated Gateway's Graphical Management Interface (GMI),
thousands of individual users, user pools, physical unit and logical unit
definitions can be set up and managed using a centralized, point-and-click
interface. Through GMI, the administrator can determine the on-line status of
system resources such as identifying status and usage of a particular logical
unit (LU).

Channelink Integrated Gateway's hardware design provides redundancy within each
system or across multiple systems through configurations that support multiple
system processors, dual host attachments and channel connections, and a variety
of Local Area Network (LAN) interfaces. Each Channelink Integrated Gateway
functions as a TN3270 server providing up to 8,000 TN3270 clients with
concurrent access to IBM 3270 host applications. The system provides full
support for industry standard TN3270E (RFC 16547) and TN3270 (RFC 1646) as well
as TN3287 clients. This approach eliminates the requirement for expensive
mainframe TCP/IP protocol stacks and fully offloads the SNA-to-TCP/IP conversion
processes to the Channelink Integrated Gateway. The system also functions as a
Telnet server providing Telnet clients with 3270 terminal emulation for
accessing SNA host applications.

Local printing at the desktop is supported through built-in print drivers in
TN3270E (RFC1647) and TN3287 (RFC1646). IBM LU1 and LU3 print jobs can be sent
directly to workstation printers, using sessions defined as 3287 printers.
Print management software running on the Channelink Integrated Gateway also
allows shared printing to LPR/LPRD LAN-attached printers.

Channelink Integrated Gateway provides support for both LU0 and LU6.2
applications, acting as the server for API clients on TCP/IP networks
communicating with peer programs on the SNA host. This implementation delivers
SNA over the TCP/IP backbone - TCP/IP distributed SNA, rather than TCP/IP
encapsulated SNA.

For environments where mainframe TCP/IP protocol stacks are used (for sockets
applications, FTP file transfers, and general access to IBM SNA applications),
the Channelink Integrated Gateway delivers IBM 3172 Model 3 TCP/IP pass-through
functionality to connect users and applications. In environments where
transition to an offload approach from TCP/IP pass-through is planned,
Channelink Integrated Gateway offers migration by combining the TN3270 Offload
and TCP/IP pass-through applications in a single system.

The Channelink Integrated Gateway provides a practical way to facilitate the
needs of large IT organizations to "contract" with their end users for service
level agreements. Channelink Integrated Gateway provides a complete "end-to-
end" response time view from the mainframe all the way to the client desktop,
which allows the user to identify future throughput problems before they develop
and expand or reconfigure the network to avert problems. Users can be assigned
different permissions so that they can be given access to specific functions.
Only privileged administrators can modify the configuration or initiate a trace.
LUs are protected for authorized users, and the Channelink Integrated Gateway
documents activities and tracks attempts at unauthorized entry.

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FileSpeed

The Company has partnered with a development stage software company to develop
its FileSpeed(TM) product which includes the Company's Channelink SCSI Gateway
hardware and Parallel Data Mover(TM) (PDM(TM)) software to provide for high
speed channel-based bulk data networking between MVS and open servers with
performance of up to 9 megabytes per second on a single server.

FileSpeed works over both the MVS ESCON and parallel bus-and-tag channels and
open server SCSI channels. File/data transfers can be executed interactively or
through batch mechanisms. MVS file to/from programs on UNIX (e.g., pipes) can
be transferred via Disk-to-Disk, Disk-to-Tape, or Tape-to-Tape. On MVS,
interactive facilities are found under TSO, and batch facilities run via JCL.
On UNIX, interactive facilities are provided via standard terminal input and
batch via UNIX scripts. FileSpeed offloads bulk data between MVS and open
servers from backbone networks optimizing the efficiency of bulk end
transactional data, and provides 100% FTP offload which saves expensive MVS
server cycles.

Customer Support

The Company has developed a comprehensive support strategy designed to maximize
quality and customer satisfaction. A high level of continuing customer service
is integral to the Company's strategy of developing long-term, 100% satisfied,
customer relationships. The Company supports the commitment of its employees to
achieve this strategy through extensive training and the delegation of authority
and responsibility. CNT's employees are skilled in the design of high speed,
wide-area networks for large data centers. Every network incorporates the best
techniques for robust, "fail soft, self healing" network topology for continuous
operations.

The Company's support services group becomes involved with end users during
initial presales activities by analyzing their requirements, developing proposed
solutions, and providing project management guidance during implementation or
enhancement of the customer's enterprise-wide computing network.

CNT uses remote diagnostic tools to support customer networks seven days per
week, 24 hours per day, through the unique ability to dial in to these networks
worldwide and perform on-line troubleshooting. In a sizable majority of the
cases the Company provides timely resolution to customer problems without having
to visit the customer's site. In over 45% of the cases, the customer relies on
CNT to diagnose problems that are sourced to other vendor's hardware and/or
communications. Brixton products come with on-line help, comprehensive
documentation, and diagnostic tools to allow users to monitor their lines. When
necessary, CNT dispatches trained maintenance personnel, generally third party
maintenance providers, to provide repairs at the customer's facility.

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Marketing and Sales

The Company, along with its subsidiaries, markets its products in the United
States, Canada, the United Kingdom, France, Germany, Australia and Hong Kong
primarily through a direct sales force, and also through OEMs, systems
integrators, and value-added resellers. Outside of these countries, CNT markets
its products through independent distributors.

The Company derived approximately $25.2 million, $23.6 million, and $21.9
million, or 26%, 30%, and 28%, of its revenue from operations outside of the
United States and Canada for the years ended December 31, 1996, 1995, and 1994.
International operations are subject to various risks common to international
businesses, including exposure to currency fluctuations, political and economic
instability, the greater difficulty of administering business internationally,
and the need to comply with a wide variety of U.S. export and foreign import
laws and regulations. During 1996, sales to IBM and its multiple divisions
accounted for 18% of the Company's total revenue. Approximately 29% of the
revenue from IBM was attributable to a large number of outsourcing contracts
administered by ISSC/Advantis and 55% was attributable to OEM contracts with the
storage and networking divisions. No single customer accounted for more than
10% of the Company's total revenue in either 1995 or 1994. See note 10 to the
Company's Consolidated Financial Statements for additional information regarding
the Company's operations by geographic regions and major customers.

The Company manufactures its products based on a schedule of forecasted orders.
The Company's customers generally place orders for immediate delivery and
generally not in advance of need. Customers may generally cancel or reschedule
orders without penalties. Accordingly, the Company believes that backlog is
generally not meaningful for purposes of predicting its revenue for any fiscal
period.

The Company expects 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. In addition, the alienation of any major customer could have a
material effect on revenue. The level of product revenue reported by the
Company in any given period will continue to be effected by the receipt and
fulfillment of sizable new orders from OEMs and others.

Revenue Recognition Policy

Service fees are recognized as revenue when earned, which is generally on a
straight-line basis over the service period.

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Engineering and Development

The computer networking industry is characterized by rapidly changing
technology, new standards, and changing customer requirements. The Company
believes that its long-term success in the marketplace depends upon its
continuing ability to develop and integrate advanced network hardware and
software technologies.

During the past year, the Company completed development and announced its
Channelink Integrated Gateway, FileSpeed, and Web Integrator products and
performance enhancements for its Channelink product line including ATM support,
SCSI device connection, and DS3 compression. File mirroring of disk data was
also announced for both IBM (XRC) and EMC's (SRDF).

To meet the future networking demands of its customers, the Company expects to
continue to: (i) increase the compatibility and interoperability of its
products with the products of other vendors; (ii) emphasize the flexible and
modular architecture of its products to permit the introduction of new
capabilities in a manner that can be used within existing networks and to
provide a framework for existing customers to incorporate and install new CNT
products, features, and functions; (iii) continue to focus on providing
sophisticated diagnostic support tools to help deliver both high network
availability and, in the event of failure, rapid return to service; and (iv)
develop additional products to meet the demands of its customers, including new
technologies like ATM and fibre channel on future platforms. Engineering
and development expenses, excluding special charges, were approximately 15% of
CNT's total revenue, for each of the years in the three year period ended
December 31, 1996. The Company currently intends to continue to apply a
significant portion of its resources to product enhancements and new product
development for the foreseeable future.

Manufacturing and Suppliers

The Company manufactures its products and systems from subassemblies, parts, and
components, such as integrated circuits, printed circuit boards, power supplies,
and metal parts manufactured by other vendors. Certain items manufactured by
suppliers are made to the Company's specific design criteria. In-house
manufacturing activities for the Company's products primarily involve quality
assurance testing of subassemblies and final system assembly, integration, and
quality assurance testing. Recently, CNT was recertified under ISO 9002, an
international standard of quality, for the manufacture and support services of
high speed electronic communications devices and computer networking systems.

The Company believes that it currently possesses adequate supply channels.
Components and subassemblies used in the Company's products and systems are
generally available from a number of different suppliers; however, certain key
components in the Company's products are currently purchased from only one
source or from a limited number of sources. The Company does not anticipate any
difficulty in obtaining an adequate supply of required components. An
interruption in its existing supplier relationships or delays by some suppliers,
however, could result in production delays and have an adverse effect on the
Company.

11
<PAGE>

Competition

The networking industry is highly competitive. It is characterized by rapidly
advancing technology and evolving industry standards, resulting in frequent
product and feature introductions and improvements in the relative
price/performance of products. CNT competes with several companies that have
greater engineering and development resources, marketing resources, financial
resources, manufacturing capability, customer support resources, and name
recognition than those of the Company.

The principal competitive factors affecting the markets for the Company's
products include customer service, flexibility, price/performance, reliability,
ease of use, and functionality. In many situations the potential customer has
an installed base of a competitor's products, which can be difficult to
dislodge. IBM, Microsoft, and others can significantly influence customers and
control technology in the Company's markets.

Rapid change, new technologies and worldwide deregulation of the
telecommunications industry are generally positive developments for the Company
because they should have the impact of reducing carrier costs and increasing
bandwidth speeds and capacity. However, the many and unpredictable nature of
the changes also carries with it some risk of dislocation for CNT.

There can be no assurance that the Company can compete successfully with its
current competitors or with competitors that may subsequently enter the market,
particularly the software market, which is characterized by low barriers to
entry. There also can be no assurance that CNT will effect technological
changes necessary to maintain its competitive position.

Intellectual Property Rights

The Company relies on a combination of trade secret, copyright, patent, and
trademark law, nondisclosure agreements, and technical measures to establish and
protect its proprietary rights to its products. Such protection may not
preclude competitors from developing products with features similar to the
Company's products. Because of the rapid pace of technological change in data
communications and in the computer and networking industries, the Company
believes that patent and copyright protection are less significant to the
Company's competitive position than factors such as the effectiveness and
quality of its support services; the knowledge, experience, and ability of the
Company's employees; and the frequency of product enhancements.

The Company has from time to time received, and may in the future receive,
communications from third parties asserting patents against the Company which
may relate to certain of the Company's products. Although the Company believes
that it possesses all required proprietary rights to the technology involved in
its products and that its products, trademarks, and other intellectual property
rights do not infringe upon the proprietary rights of third parties, there can
be no assurance that others will not claim a proprietary interest in all or a
part of such technology or assert claims of infringement. Any such claim,
regardless of its merits, could involve the Company in costly litigation and
have a material adverse effect on the Company.

12
<PAGE>

Because of the existence of a large number of patents in the networking field
and the rapid rate of issuance of new patents, it is not economically practical
to determine in advance whether a product infringes patent rights of others.
The Company believes that, based upon industry practice, any necessary license
or rights under such patents may be obtained on terms that would not have a
material adverse effect on the Company's consolidated financial position or
results of operations; however, there can be no assurance in this regard.

Employees

As of December 31, 1996, the Company had 493 full-time employees, including 49
full-time employees of its wholly-owned foreign subsidiaries. The Company
believes that its relations with its employees are good. The Company considers
its ability to attract and retain qualified employees and to motivate such
employees to be essential to the future success of the Company. Competition for
such highly skilled personnel is particularly intense in the computer and data
communications industry, and no assurance may be given that the Company will
continue to attract and retain qualified employees.

Item 2. Properties

The Company's principal manufacturing, engineering, and development functions
are located in leased space in Maple Grove, Minnesota, a suburb of Minneapolis.
The Company's administrative offices are located in leased space in Plymouth,
Minnesota, a suburb of Minneapolis. The Company also leases space in
Westborough, Massachusetts, primarily related to the development and support of
its enterprise access software products. The Company's subsidiaries lease
office space in England, France, Germany, Australia, and Hong Kong. The Company
leases sales offices for its direct sales staff and systems consultants in a
number of locations throughout the United States and Canada. The Company
believes that its facilities are adequate to meet its current needs.

Item 3. Legal Proceedings

The Company is exposed to a number of asserted and unasserted claims encountered
in the normal course of business. In the opinion of management, the resolution
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.

Item 4. Submission of Matters to Vote of Security Holders

None.

13
<PAGE>

Item 4.A Executive Officers of the Company

The following table contains certain information regarding the current executive
officers of the Company.

Name Position Served Age

Thomas G. Hudson President, Chief Executive Officer, Acting 50
Chief Financial Officer and Director

Richard E. Carlson Vice President of Manufacturing 59

William C. Collette Vice President of Engineering 53

Peter Dixon Vice President of International 47

Richard G. Helgeson Vice President of Sales 45

B.D. (Bill) Johnson Vice President of Marketing 45

Mark R. Knittel Vice President of Architecture and Business 42
Development

Scott A. McCourt Vice President of Brixton Development 42

Kristine E. Ochu Vice President of Human Resources 35

Julie C. Quintal Vice President of Customer Support 38

14
<PAGE>

Thomas G. Hudson was appointed President and CEO and a Director of the Company
in June 1996, and Acting Chief Financial Officer since December 1996. From 1993
to 1996, Mr. Hudson was a Senior Vice President of McGraw Hill Companies,
serving as General Manager of its F.W. Dodge Division, a leading provider of
information and economic analysis to the construction industry and as Senior
Vice President, Corporate Development. Prior to joining McGraw Hill, Mr. Hudson
served in a number of management positions at IBM from 1968 to 1993, most
recently as Vice President and General Manager of its Services Section Division.
Mr. Hudson's IBM career included varied product development, marketing and
strategic responsibilities for IBM's financial services customers and included
extensive international and large systems experience. Mr. Hudson received his
B.S. from the University of Notre Dame and his M.B.A. from New York University.
He attended the Harvard Advanced Management Program in 1990.

Richard E. Carlson was appointed Vice President of Manufacturing in January
1992. Mr. Carlson served as Director of Manufacturing from August 1990 to
January 1992. From 1981 to 1990, Mr. Carlson was employed by Zycad Corporation,
a manufacturer of special purpose computers, most recently as Vice President of
Product Development and Operations. Mr. Carlson holds a bachelor of science
degree in mechanical engineering from the University of Minnesota.

William C. Collette was appointed Vice President of Engineering in December
1995. Mr. Collette served as 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.

Peter Dixon was appointed Vice President of International in January 1990 and
was elected an executive officer of the Company in April 1991. He served as
Vice President of Strategic Account Marketing from January 1989 to January 1990
and as Director of Distribution Marketing and Sales from February 1988 to
January 1989. From 1985 to 1988, Mr. Dixon served as an Account Manager with
National Advanced Systems Canada, Inc. and its predecessor, Sand Technology
Systems, Inc., companies involved in the marketing of mainframe peripherals.

Richard G. Helgeson was appointed Vice President of Sales in September 1995.
From November 1994 to August 1995, Mr. Helgeson was employed by Raptor Systems,
a software development company, as a Regional Sales Manager. From June 1991
until November 1994, Mr. Helgeson was employed by Wellfleet Communications, a
computer networking company, as Pacific Northwest Regional Manager. Prior to
June 1991, Mr. Helgeson was employed by Vitalink Communications Corporation, a
data communications products manufacturer, as Pacific Northwest Account
Executive. Mr. Helgeson has a bachelors degree in english and education, and a
masters degree in english from the University of Montana.

15
<PAGE>

B. D. (Bill) Johnson was appointed Vice President of Marketing in January 1997.
From November 1990 to January 1997, Mr. Johnson held positions of Vice President
Product Marketing, Vice President Information Systems, and Vice President of
Corporate Business Development at Banyan Systems, Inc. From March 1984 to
November 1990, Mr. Johnson was employed at Western Digital Corporation's
Ethernet Communications Business Unit, which was formed from the company
ViaNetix, Inc., a networking business, which Mr. Johnson co-founded. Mr. Johnson
has a bachelors of science degree in electrical engineering from Oklahoma State
University, and a masters degree in business administration from the University
of Colorado.

Mark R. Knittel was appointed Vice President of Architecture and Business
Development in March 1997. From 1977 to March 1997, Mr. Knittel was employed
with IBM where he held several development executive positions for both hardware
and software networking products, as well as multiple strategy positions, and
was the manager of the SNA design and architecture group. From September 1995 to
March 1997, Mr. Knittel was the 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.

Scott A. McCourt was appointed Vice President of Brixton Development in November
1995. From November 1992 until November 1995, Mr. McCourt served as Director of
Software Engineering for Mercury Computer Systems, a computer manufacturer.
From October 1988 until November 1992, Mr. McCourt served as Research and
Development Lab Manager - Distributed Object Computing Program for Hewlett
Packard Company. Mr. McCourt has a bachelors degree in computer science and
biology from Hofstra University, and a masters degree in computer science from
Indiana University.

Kristine E. Ochu was appointed Vice President of Human Resources in March 1996,
and served as Director of Human Resources from May 1995 to March 1996. From
January 1994 to May 1995, Ms. Ochu was employed by Data Systems and Management,
a software development company, as Manager of Human Resources. From 1991 to
1994, Ms. Ochu was employed as a Director of Human Resources by DataCard, Inc.,
a diversified high technology manufacturing company. Ms. Ochu holds a bachelors
degree in psychology and a masters degree in industrial relations from the
University of Minnesota. She attended the University of Michigan Advanced Human
Resources Executive Program in December 1996.

Julie C. Quintal was appointed Vice President of Customer Support in May 1993.
From 1985 until May 1993, Ms. Quintal was employed by Dataserv Inc., a computer
service company, most recently as Division Vice President of Custom Solutions.
Ms. Quintal holds a bachelor of science degree in business administration,
management, and industrial relations from Mankato State University.

16
<PAGE>

PART II

Item 5. Market for the Registrant's Securities and Related Shareholders Matters

The information set forth under the captions "Price Range of the Company's
Common Stock" and "Dividends" on page 28 of the 1996 Annual Report to
Shareholders is incorporated herein by reference.

Item 6. Selected Consolidated Financial Information

The information set forth under the caption "Selected Financial Data" on page 10
of the 1996 Annual Report to Shareholders is incorporated herein by reference.

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

The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 11 through
14 of the 1996 Annual Report to Shareholders is incorporated herein by
reference.

Item 8. Consolidated Financial Statements and Supplementary Data

The Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements on pages 15 through 26 of the 1996 Annual Report to
Shareholders is incorporated herein by reference. The information set forth
under the caption "Quarterly Financial Data" on page 27 of the 1996 Annual
Report to Shareholders is incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants and Financial Disclosure

None.

17
<PAGE>

PART III

Item 10. Directors and Executive Officers

The information set forth under the caption "Election of Directors" in the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 15, 1997, to be filed with the Securities and Exchange Commission (the
"Commission") on or before April 30, 1997, is incorporated herein by reference.
For information concerning the executive officers, see Item 4.A. of this Annual
Report on Form 10-K.

Item 11. Executive Compensation

The information set forth under the captions "Summary Compensation Table",
"Option Tables", "Employment Agreements" and "Election of Directors -
Compensation of Directors" in the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 15, 1997, to be filed with the
Commission on or before April 30, 1997, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 15, 1997, to be filed with the
Commission on or before April 30, 1997, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

None.

18
<PAGE>

PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K.

(a) 1. Consolidated Financial Statements of Registrant

The following consolidated financial statements of the Company are incorporated
by reference to the 1996 Annual Report to Shareholders.

<TABLE>
<CAPTION>
Pages in 1996
Annual Report to
Shareholders
------------
<S> <C>
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994......................... 15

Consolidated Balance Sheets as of December 31, 1996 and 1995 16

Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994............. 17

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994......................... 18

Notes to Consolidated Financial Statements................. 19-25

Independent Auditors' Report............................... 26

</TABLE>

(a) 2. Consolidated Financial Statement Schedules of Registrant

Independent Auditors' Report on Consolidated Financial Statement
Schedule

Schedule II: Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994.

All other schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial
statements or related notes thereto.

19
<PAGE>

(a) 3. Exhibits

Of the exhibits listed below, the following are management contracts
or compensatory plans or arrangements with the Company:

Exhibit Description
-------- -----------

10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated
by reference to Exhibit 10F Form S-2 Registration
Statement No. 33-41985.)

10D. Amended and Restated Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10A Form S-8
Registration Statement File No. 33-41986.)

10E. Amended 1986 Nonqualified Stock Option Plan.
(Incorporated by reference to Exhibit 10B Form S-8
Registration Statement No. 33-41986.)

10F. Certificate of Resolutions contained in Minutes of
Annual Meeting of Shareholders on May 30, 1990
increasing shares reserved under ISOP from 500,000 to
1,000,000. (Incorporated by reference to Exhibit 10C
Form S-8 Registration Statement No. 33-41986.)

10G. Certificate of Resolutions contained in Minutes of
Special Meeting of the Board of Directors on April 25,
1991 increasing the number of shares reserved under the
NSOP from 1,100,000 to 1,600,000. (Incorporated by
reference to Exhibit 10D Form S-8 Registration Statement
No. 33-41986.)

10H. 1992 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 28 Form S-8 Registration Statement
No. 33-48954.)

10I. 1992 Stock Award Plan. (Incorporated by reference to
Exhibit 28 Form S-8 Registration Statement No. 33-
48944.)

20
<PAGE>

10L. Minutes of Annual Meeting of Shareholders on May 27,
1993 increasing shares reserved under the 1992 Stock
Award Plan from 650,000 to 1,050,000 and increasing
shares reserved under the 1992 Employee Stock Purchase
Plan from 150,000 to 300,000. (Incorporated by
reference to Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.)

10N. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)

10O. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 to Form S-8
Registration Statement No. 33-83266.)

10P. Amendment to 1992 Stock Award Plan increasing shares
reserved from 1,050,000 to 3,250,000. (Incorporated by
reference to Form S-8 Registration Statement No. 33-
83262.)

10Q. Amendment to Employee Stock Purchase Plan increasing
shares reserved from 300,000 to 400,000. (Incorporated
by reference to Form S-8 Registration Statement No. 33-
83264.)

10R. Amendment to and Restatement of Employment Agreement
by and between the Company and C. McKenzie Lewis, III.
(Incorporated by reference to Exhibit 10S to Annual
Report on Form 10-K for the fiscal year ended December
31, 1995.)

10S. Severance agreement by and between the Company and
Eugene D. Misukanis. (Incorporated by reference to
Exhibit 10T to Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)

10T. Amendment No. 1 to Severance Agreement by and between
the Company and Eugene D. Misukanis. (Incorporated by
reference to Exhibit 10Y on Form 10-Q for the quarterly
period ended June 30, 1996.)

21
<PAGE>

10U. Employment Agreement by and between the Company and
Thomas G. Hudson as amended. (Incorporated by reference
to Exhibit 10Z on Form 10-Q for the quarterly period
ended June 30, 1996.)

10W. Minutes of Annual Meeting of Shareholders on May 17,
1996 increasing shares reserved under the 1992 Stock
Award Plan from 3,250,000 to 4,350,000; to provide for
the automatic grant of certain stock options to
nonemployee directors upon initial election or
appointment to the Executive Committee of the Board and
upon initial election as Chairman or Vice Chairman of
the Board; and to increase the maximum number of shares
subject to options that can be awarded to any single
employee during any calendar year to 750,000; and
increasing shares reserved under the 1992 Employee Stock
Purchase Plan from 400,000 to 450,000 and to limit the
number of shares that may be purchased thereunder to
5,000 per Participant for any annual Purchase Period.

22
<PAGE>

The following exhibits are filed herewith:

Exhibit Description
------- -----------

2A. Agreement and Plan of Merger among Computer Network
Technology Corporation, BRX Corp., Brixton Systems,
Inc., and certain Significant Shareholders of Brixton
Systems, Inc. dated as of February 4, 1994.
(Incorporated by reference to Exhibit 2 to current
report on Form 8-K dated February 22, 1994.)

3A. Restated Articles of Incorporation of the Company, as
amended. (Incorporated by reference to Exhibit 2 to
current report on Form 8-K dated June 22, 1992.)

3B. By-laws of the Company, as amended. (Incorporated by
reference to Exhibit 3B Annual Report on Form 10-K for
fiscal year ended December 31, 1991.)

10A. Lease Agreement dated November 30, 1990 by and between
TOLD Development Company, a general partnership, and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10C Form S-2 Registration
Statement No. 33-41985.)

10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated by
reference to Exhibit 10F Form S-2 Registration Statement
No. 33-41985.)

10C. Subscription Agreements of Kanematsu Electronics Ltd.
and Kanematsu USA Inc. dated October 22, 1990.
(Incorporated by reference to Exhibit 10G Form S-2
Registration Statement No. 33-41985.)

10D. Amended and Restated Incentive Stock Option Plan.
(Incorporated by reference to Exhibit 10A Form S-8
Registration Statement No. 33-41986.)

10E. Amended 1986 Nonqualified Stock Option Plan.
(Incorporated by reference to Exhibit 10B Form S-8
Registration Statement No. 33-41986.)

23
<PAGE>

10H. 1992 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 28 Form S-8 Registration Statement
No. 33-48954.)

10I. 1992 Stock Award Plan. (Incorporated by reference to
Exhibit 28 Form S-8 Registration Statement No. 33-
48944.)

10J. Sublease Agreement by and between ITT Consumer Financial
Corporation and Computer Network Technology Corporation
dated October 1, 1993. (Incorporated by reference to
Exhibit 10X Annual Report on Form 10-K for fiscal year
ended December 31, 1993.)

10K. First Amendment to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network
Technology Corporation dated October 26, 1993.
(Incorporated by reference to Exhibit 10Y Annual Report
on Form 10-K for fiscal year ended December 31, 1993.)

10L. Minutes of Annual Meeting of Shareholders on May 27,
1993 increasing shares reserved under the 1992 Stock
Award Plan from 650,000 to 1,050,000 and increasing
shares reserved under the 1992 Employee Stock Purchase
Plan from 150,000 to 300,000. (Incorporated by reference
to Exhibit 10BB Annual Report on Form 10-K for fiscal
year ended December 31, 1993.)

<PAGE>

10M. Amendment No. 1 to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network
Technology Corporation dated February 9, 1994.
(Incorporated by reference to Exhibit 10CC Form 10Q for
the quarterly period ended March 31, 1994.)

10N. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)

10O. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8
Registration Statement No. 33-83266.)

10P. Amendment to 1992 Stock Award Plan increasing shares
reserved from 1,050,000 to 3,250,000. (Incorporated by
reference to Form S-8 Registration Statement No. 33-
83262.)

10Q. Amendment to Employee Stock Purchase Plan increasing
shares reserved from 300,000 to 400,000. (Incorporated
by reference to Form S-8 Registration Statement No. 33-
83264.)

10R. Amendment to and Restatement of Employment Agreement by
and between the Company and C. McKenzie Lewis III.
(Incorporated by reference to Exhibit 10S to Annual
Report on Form 10-K for fiscal year ended December 31,
1995.)

10S. Severance Agreement by and between the Company and
Eugene D. Misukanis. (Incorporated by reference to
Exhibit 10T to Annual Report on Form 10-K for fiscal
year ended December 31, 1995.)

10T. Amendment No. 1 to Severance Agreement by and between
the Company and Eugene D. Misukanis. (Incorporated by
reference to Exhibit 10Y on Form 10-Q for the quarterly
period ended June 30, 1996.)

25
<PAGE>

10U. Employment Agreement by and between the Company and
Thomas G. Hudson as amended. (Incorporated by reference
to Exhibit 10Z on Form 10-Q for the quarterly period
ended June 30, 1996.)

10V. Lease Agreement between Teachers Realty Corporation and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10AA on Form 10-Q for the
quarterly period ended June 30, 1996.)

11. Statement Re: Computation of Net Income (Loss) per
Common and Common Equivalent Share.

13. Annual Report to Shareholders for the fiscal year ended
December 31, 1996. (Only those portions specifically
incorporated by reference herein shall be deemed filed
with the Commission.)

21. Subsidiaries of the Registrant.

23. Independent Auditors' Consent.

27. Financial Data Schedule.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Company during the fourth
quarter of 1996.

26
<PAGE>

Independent Auditors' Report on Financial Statement Schedule

The Board of Directors and Shareholders
Computer Network Technology Corporation:

Under the date of January 27, 1997, except as to Note 14, which is as of March
10, 1997, we reported on the consolidated balance sheets of Computer Network
Technology Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 annual report to shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1996. In connection with our audits of
the aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Minneapolis, Minnesota
January 27, 1997, except as to Note 14,
which is as of March 10, 1997

27
<PAGE>

Schedule II
-----------

COMPUTER NETWORK TECHNOLOGY CORPORATION

Valuation and Qualifying Accounts

Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions
-------------------------------------------

Balance at Charged Charged Balance at
Beginning to costs & to other end of
Description of period expenses account Deductions period
- --------------------------------- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts
and sales returns $1,130,726 -- -- (232,030) $ 898,696

Year ended December 31, 1995
Allowance for doubtful accounts
and sales returns $ 692,130 489,000 -- (50,404) $1,130,726

Year ended December 31, 1994
Allowance for doubtful accounts
and sales returns /(1)/ $ 87,000 318,000 346,500 (59,370) $ 692,130

</TABLE>

(1) In connection with its acquisition of Brixton Systems, Inc., on March 10,
1994, the Company recorded an allowance for doubtful accounts and sales
returns in the amount of $346,500.

28
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

COMPUTER NETWORK TECHNOLOGY CORPORATION

Dated: March 28, 1997 By:/s/ Thomas G. Hudson
------------------------------------------------
Thomas G. Hudson, President and Chief
Executive Officer,
and Acting Chief Financial Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

/s/ Thomas G. Hudson
- ---------------------------
Thomas G. Hudson President and Chief Executive March 28, 1997
Officer, and Acting Chief
Financial Officer (Principal
Executive and Financial Officer)
and Director

/s/ Jeffrey A. Bertelsen
- ---------------------------
Jeffrey A. Bertelsen Corporate Controller and Treasurer March 28, 1997
(Principal Accounting Officer)

/s/ Erwin A. Kelen
- ---------------------------
Erwin A. Kelen Director March 28, 1997

/s/ Lawrence Perlman
- ---------------------------
Lawrence Perlman Director March 28, 1997

/s/ John A. Rollwagen
- ---------------------------
John A. Rollwagen Director March 28, 1997

29
<PAGE>

INDEX TO EXHIBITS

Exhibit Description Page
- ------- ----------- ----

2A. Agreement and Plan of Merger among Computer Network
Technology Corporation, BRX Corp., Brixton Systems, Inc.,
and certain Significant Shareholders of Brixton Systems, Inc.
dated February 4, 1994. (Incorporated by reference to
Exhibit 2 to current report on Form 8-K dated February
22, 1994.)

3A. Restated Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 2 to current report on
Form 8-K dated June 22, 1992.)

3B. By-laws of the Company, as amended. (Incorporated by reference
to Exhibit 3B Annual Report on Form 10-K for fiscal year ended
December 31, 1991.)

10A. Lease Agreement dated November 30, 1990 by and between TOLD
Development Company, a general partnership, and Computer Network
Technology Corporation. (Incorporated by reference to
Exhibit 10C Form S-2 Registration Statement No. 33-41985.)

10B. Computer Network Technology Corporation 401(k) Salary Savings
Plan effective January 1, 1991. (Incorporated by reference to
Exhibit 10F Form S-2 Registration Statement No. 33-41985.)

10C. Subscription Agreements of Kanematsu Electronics Ltd. and
Kanematsu USA Inc. dated October 22, 1990. (Incorporated by
reference to Exhibit 10G Form S-2 Registration Statement
No. 33-41985.)

10D. Amended and Restated Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 10A Form S-8 Registration Statement No.
33-41986.)

<PAGE>

10E. Amended 1986 Nonqualified Stock Option Plan. (Incorporated
by reference to Exhibit 10B Form S-8 Registration Statement
No. 33-41986.)

10F. Certificate of Resolutions contained in Minutes of Annual
Meeting of Shareholders on May 30, 1990 increasing shares
reserved under ISOP from 500,000 to 1,000,000. (Incorporated
by reference to Exhibit 10C Form S-8 Registration Statement
No. 33-41986.)

10G. Certificate of Resolutions contained in Minutes of Special
Meeting of the Board of Directors on April 25, 1991 increasing
the number of shares reserved under the NSOP from 1,100,000 to
1,600,000. (Incorporated by reference to Exhibit 10D Form S-8
Registration Statement No. 33-41986.)

10H. 1992 Employee Stock Purchase Plan. (Incorporated by reference
to Exhibit 28 Form S-8 Registration Statement No. 33-48954.)

10I. 1992 Stock Award Plan. (Incorporated by reference to Exhibit 28
Form S-8 Registration Statement No. 33-48944.)

10J. Sublease Agreement by and between ITT Consumer Financial
Corporation and Computer Network Technology Corporation dated
October 1, 1993. (Incorporated by reference to Exhibit 10X
Annual Report on Form 10-K for fiscal year ended
December 31, 1993.)

10K. First Amendment to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network Technology
Corporation dated October 26, 1993. (Incorporated by reference
to Exhibit 10Y Annual Report on Form 10-K for fiscal year ended
December 31, 1993.)

<PAGE>

10L. Minutes of Annual Meeting of Shareholders on May 27, 1993
increasing shares reserved under the 1992 Stock Award Plan
from 650,000 to 1,050,000 and increasing shares reserved under
the 1992 Employee Stock Purchase Plan from 150,000 to 300,000.
(Incorporated by reference to Exhibit 10BB Annual Report on
Form 10-K for fiscal year ended December 31, 1993.)

10M. Amendment No. 1 to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network Technology
Corporation dated February 9, 1994. (Incorporated by reference
to Exhibit 10CC Form 10Q for the quarterly period ended
March 31, 1994.)

10N. March 10, 1994 Incentive Stock Option Agreements. (Incorporated
by reference to Exhibit 28.2 Form S-8 Registration Statement
No. 33-83266.)

10O. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8 Registration
Statement No. 33-83266.)

10P. Amendment to 1992 Stock Award Plan increasing shares reserved
from 1,050,000 to 3,250,000. (Incorporated by reference to
Form S-8 Registration Statement No. 33-83262.)

10Q. Amendment to Employee Stock Purchase Plan increasing shares
reserved from 300,000 to 400,000. (Incorporated by reference to
Form S-8 Registration Statement No. 33-83264.)

10R. Amendment to and Restatement of Employment Agreement by and
between the Company and C. McKenzie Lewis III. (Incorporated by
reference to Exhibit 10S to Annual Report on Form 10-K for fiscal
year ended December 31, 1995.)
<PAGE>

10S. Severance Agreement by and between the Company and Eugene D.
Misukanis. (Incorporated by reference to Exhibit 10T to Annual
Report on Form 10-K for fiscal year ended December 31, 1995.)

10T. Amendment No. 1 to Severance Agreement by and between the
Company and Eugene D. Misukanis. (Incorporated by reference to
Exhibit 10Y on Form 10Q for the quarterly period ended
June 30, 1996.)

10U. Employment Agreement by and between the Company and Thomas G.
Hudson as amended. (Incorporated by reference to Exhibit 10Z on Form
10Q for the quarterly period ended June 30, 1996.)

10V. Lease Agreement between Teachers Realty Corporation and Computer
Network Technology Corporation. (Incorporated by reference to
Exhibit 10AA on Form 10Q for the quarterly period ended
June 30, 1996.)

10W. Minutes of Annual Meeting of Shareholders on May 17, 1996
increasing shares reserved under the 1992 Stock Award Plan from
3,250,000 to 4,350,000; to provide for the automatic grant of
certain stock options to nonemployee directors upon initial
election or appointment to the Executive Committee of the Board
and upon initial election as Chairman or Vice Chairman of the
Board; and to increase the maximum number of shares subject to
options that can be awarded to any single employee during any
calendar year to 750,000; and increasing shares reserved under
the 1992 Employee Stock Purchase Plan from 400,000 to 450,000 and
to limit the number of shares that may be purchased thereunder to
5,000 per Participant for any annual Purchase
Period............................................Electronically Filed

11. Statement Re: Computation of Net Income (Loss) per Common and
Common Equivalent Share............................Electronically Filed

<PAGE>

13. Annual Report to Shareholders for the fiscal year ended
December 31, 1996. (Only those portions specifically
incorporated by reference herein shall be deemed filed with
the Commission.)..................................Electronically Filed

21. Subsidiaries of the Registrant....................Electronically Filed

23. Independent Auditors' Consent.....................Electronically Filed

27. Financial Data Schedule...........................Electronically Filed

<PAGE>

Exhibit 10W
-----------

May 17, 1996

MINUTES
OF
ANNUAL MEETING
OF
SHAREHOLDERS

The Annual Meeting of Shareholders of the Corporation was held at the
Marriott City Center, Minneapolis, Minnesota, on May 17, 1996. A Notice of
Annual Meeting and Proxy Statement were mailed on or about April 8, 1996 to each
shareholder of record on March 20, 1996.

John A. Rollwagen, Chairman of the Board of Directors of the Corporation,
convened the meeting at 10:00 a.m. and served as chair. Mr. Rollwagen began the
meeting by introducing the other directors present, Erwin A. Kelen, Lawrence
Perlman, and Bruce T. Coleman, and the executive officers of the Corporation.
Mr. Rollwagen also introduced Mark Goodburn, a partner of KPMG Peat Marwick, the
Corporation's independent auditor, and stated that Mr. Goodburn would be
available to answer questions at the conclusion of the meeting. Mr. Rollwagen
reported that a majority of the outstanding shares of Common Stock on March 20,
1996, the record date for the meeting, were represented by proxy and,
accordingly, a quorum was present. Mr. Rollwagen indicated that the minutes
from the previous Annual Meeting of Shareholders were available for inspection
and appointed Jeffrey A. Bertelsen and Suzanne M. Nelson as inspectors for the
purpose of counting ballots.

Mr. Rollwagen first addressed the election of directors for the coming
year and indicated that each of Messrs. Rollwagen, Kelen, Perlman, and Coleman
were standing for re-election. Mr. Rollwagen asked if there were any other
nominations and, there being none, the nominations were closed. Mr. Rollwagen
then stated that the remaining three items on the agenda, as set forth in the
Notice and discussed in the Proxy Statement, were:

(i) to approve the proposed amendment to the 1992 Stock Award Plan to
increase the number of shares authorized for issuance thereunder from
3,250,000 to 4,350,000; to provide for the automatic grant of stock options to
nonemployee directors upon initial election to the Executive Committee and
upon initial election as Chairman or Vice Chairman; and to increase the
maximum number of shares subject to options that can be awarded to any single
employee during any calendar year to 750,000;

(ii) to approve the proposed amendment to the 1992 Employee Stock
Purchase Plan to increase the number of shares authorized for issuance
thereunder from 400,000 to 450,000 and to limit the number of shares that may
be purchased to 5,000 per Participant for any annual Purchase Period; and

<PAGE>

May 17, 1996

(iii) to ratify and approve the appointment of KPMG Peat Marwick as
independent auditors for the year ending December 31, 1996.

Mr. Rollwagen opened the meeting for questions on the proposals and,
there being none, requested shareholders desiring to vote in person to provide
their ballots to the inspectors of election and directed the inspectors to
tabulate the votes.

Mr. Rollwagen then explained that over 82% of the shares voted had voted
in favor of each item on the agenda. As no one voted in person, Mr. Rollwagen
declared that each item had passed and, there being no further business to come
before the meeting, Mr. Rollwagen adjourned the meeting.

Respectfully submitted,

/s/ Jeffrey A. Bertelsen
-------------------------
Jeffrey A. Bertelsen,
Assistant Secretary

<PAGE>

Exhibit 11
----------

COMPUTER NETWORK TECHNOLOGY CORPORATION

Statement Re: Computation of Net Income (Loss)
Per Common and Common Equivalent Share

(Not Covered by Independent Auditors' Report)

<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1996 /(1)/ 1995 /(1)/ 1994 /(1)/
----------- ----------- -----------
<S> <C> <C> <C>
Net Income (loss) $ 1,359,731 $ 4,022,448 $(4,714,385)
=========== =========== ===========
Primary Earnings (Loss) Per Share
- ---------------------------------
Weighted average number of
common shares outstanding 23,240,605 22,674,707 21,971,983

Dilutive effect of
outstanding common
equivalent shares 316,112 768,430 -
----------- ----------- -----------

Weighted average number of
common and common equivalent
shares outstanding 23,556,717 23,443,137 21,971,983
=========== =========== ===========
Net income (loss) per common
and common equivalent share $ .06 $ .17 $ (.21)
=========== =========== ===========

Fully Diluted Earnings (Loss) Per Share:
- ----------------------------------------
Weighted average number of
common shares outstanding 23,240,605 22,674,707 21,971,983

Dilutive effect of
outstanding common
equivalent shares 412,854 828,658 -
----------- ----------- -----------

Weighted average number of
common and common equivalent
shares outstanding 23,653,459 23,503,365 21,971,983
=========== =========== ===========

Net income (loss) per common
and common equivalent share $ .06 $ .17 $ (.21)
=========== =========== ===========

</TABLE>

(1) For the years ended December 31, 1996 and 1995, outstanding stock options
and warrants issuable under various stock option plans and warrant
agreements, and common shares issuable under the employee stock purchase
plan (as disclosed in the notes to the consolidated financial statements
incorporated by reference in this Form 10-K) are converted to common
equivalent shares by the treasury stock method. For the year ended
December 31, 1994, such stock options, warrants, and shares issuable under
the employee stock purchase plan are not included in the computation due to
their anti-dilutive nature.

<PAGE>

[CNT LOGO]

Building a New Future

[Artwork depicting CNT Building Blocks]

1996 Annual Report

Computer Network Technology Corporation

<PAGE>

Profile

Computer Network Technology Corporation (NASDAQ: CMNT) is an acknowledged
worldwide leader in the design and marketing of high-performance networking
solutions that seamlessly integrate traditional legacy data processing systems
with open systems to create enterprise-wide networks and Intranets. CNT offers
Fortune 1000 customers a diverse mix of technologies for enterprise data access,
high speed communications and flexible interconnectivity. CNT products provide
open systems connectivity, data center consolidation and disaster recovery,
network based storage solutions and Internet and legacy applications access.

With a customer base including more than half of the Fortune 100, CNT is
recognized for its commitment to 100% customer satisfaction, and for its proven
expertise in high-speed connectivity over extended distances for both mission
critical data and applications. CNT's products are sold worldwide through a
direct sales force and a network of authorized distributors. CNT is
headquartered in Minneapolis, Minnesota, with product development and
manufacturing operations in Minneapolis and Westborough, Massachusetts.

Key Business Strategies

We are building "the new Computer Network Technology Corporation," positioned to
take advantage of emerging needs in the fast-changing data management and
networking environments, by:
.Introducing new products into growth markets
.Leveraging CNT technology into partnership sales opportunities
.Investing in people, training, support and cross-functional processes.

<TABLE>
<CAPTION>
<S> <C>
Table of Contents
Letter to Shareholders 2
Enterprise Information Management:
Recovery 4
Access 6
Connectivity 8
Selected Financial Data 10
Management's Discussion and Analysis 11
Financial Statements and Notes 15
Independent Auditors' Report 26
Investor Information 28
Corporate Information Inside Back Cover
</TABLE>

<PAGE>

Financial Highlights
(in thousands except per share data)

For the Year 1996 1995 Change
<S> <C> <C> <C>
Revenue $97,109 $78,837 23 %
Net income before special charges 3,088* 5,572* (45)%
Net income per share before
special charges .13* .24* (46)%
Net income 1,360 4,022 (66)%
Net income per share .06 .17 (65)%

At Year End

Total assets $82,379 $79,134 4 %
Shareholders' equity 64,161 60,506 6 %
Working capital 48,734 44,282 10 %
Closing stock price 5.00 4.50 11 %
</TABLE>

(Revenue, Net Income (Loss) Per Share and Shareholders' Equity Bar Charts Appear
Here)

<TABLE>
<CAPTION>
Revenue Net Income (loss) Shareholders Equity
(in Millions) Per Share (in Millions)
<S> <C> <C>
92 = $34 92 = $.21 92 = $20
93 = $56 93 = $.26/$.28* 93 = $49
94 = $80 94 = ($.21)/$.29* 94 = $54
95 = $79 95 = $.17/.24* 95 = $61
96 = $97 96 = $.06/.13* 96 = $64
</TABLE>
*Excludes a charge in 1996 of $2.7 million, or $.07 per share after tax, for the
write-down of purchased technology; excludes a charge in 1995 of $2.5 million,
or $.07 per share after tax, attributable to a management reorganization;
excludes charges in 1994 aggregating $.40 per share after tax of $9.3 million
for purchased in-process research and development, $2.8 million for the write-
down of excess inventory, and $.5 million related to a reduction in workforce;
excludes a charge in 1993 of $.5 million, or $.02 per share after tax, for
purchased in-process research and development and other acquisition costs.

[GRAPH APPEARS HERE]

1
<PAGE>

To Our Shareholders

[Photo of Thomas Hudson]

CNT is in the midst of a necessary and exciting transition. Joining CNT in mid-
1996, I found a company in search of renewed growth and sustainable profits. As
an engineering-driven organization, CNT had difficulty converting R&D
investments into new products. Manufacturing efficiencies were limited by a
custom-product business orientation. Past acquisitions, Ultra and Brixton(R),
were slow to be integrated. CNT was also challenged to profitably expand
domestic and international sales. We are positioned as a channel extension
company and are not as well known for the rich technology building blocks that
we offer to create a wide range of network solutions. We need to change that.
Having said this, CNT has a wonderful installed base of customers and a
workforce committed to quality service and 100 percent customer satisfaction.

Fiscal 1996 results were not satisfactory, but we took important corrective
steps to build on our base and position CNT for a stronger future. Today, CNT is
more focused on the recovery, access and connectivity needs of our customers. We
bring to our customers exceptional products and knowledge in four areas:
heterogeneous IT architectures for computers and communications; mainframes and
distributed storage management; wide area networking; and legacy and open
systems interconnection. We have key core competencies in systems consulting,
connecting, emulating and leveraging customers' existing investments with new
technologies. We are acutely aware of the technology challenges our customers
face.

The Year in Review
During 1996 we:

- Achieved a 23 percent growth in revenues principally from new success
selling products through our strategic partners, as well as continued growth in
service fees which reflects our growing base of installed products.

- Reported net income before special charges of $3.1 million, or $0.13 per
share, versus net income before special charges of $5.6 million, or $0.24 per
share, in 1995.

- Took a $2.7 million pretax charge, or $.07 per share, for the write-down
of the Brixton purchased software technology asset. It became evident that
changing market conditions and evolving customer requirements had shortened the
expected life of the original Brixton software asset, a business acquired in
1994.

- Invested $8 million to strengthen our organization, particularly the
sales infrastructure. After boosting the sales force by 30 percent, we began
redeploying in late 1996 the Brixton-dedicated team to represent our full line
of products. We expect this initiative will have tangible results in the second
half of 1997. We must improve our sales productivity in 1997.

- After a long hiatus in product introductions, we brought a series of new
products to market in late 1996 and early 1997. These new products, which are
discussed further in this report, are designed to meet new and existing customer
needs for enterprise information management: enhanced communication bandwidth
management, high-performance access to SNA mainframe applications and data bases
by open system users, high-speed file transfer, network-based storage
applications and high-performance Intranet/Internet access to corporate data.

- Invested approximately 15% of revenues in engineering to improve product
quality and develop new technology for release later in 1997 and beyond.

- Added IBM and EMC to CNT's list of prestigious marketing partners. This
report includes an example of our work with IBM/Business Recovery Services--a
new electronic vaulting and data recovery operation recently installed for
NationsBank. Our growing list of partners, which also includes Sun Microsystems,
demonstrates their confidence in our technology and products. Working together,
we can more rapidly deliver product solutions to the market. Partnering
relationships provided approximately $13 million of 1996 product revenues.

- Maintained a strong financial position. 1996 operations generated
approximately $12 million of positive cash flow. We ended 1996 with
approximately $35 million of cash on hand.

These actions and accomplishments did not result in a satisfactory return
for shareholders

2
<PAGE>

I AM COMMITTED TO ACHIEVING IMPROVED SHAREHOLDER RETURNS AS WE SUCCESSFULLY
EXECUTE OUR BUSINESS PLANS.

in 1996. We are making many fundamental changes that set the stage for a new,
stronger CNT to emerge in 1997.

Reinventing CNT

Channel extension products helped launch companies into a new era of business
computing and delivered CNT's early success. (CNT's leading-edge channel
extension products - Channelink(R)- are the core devices connecting large,
distant and dissimilar mainframes and networks.)

Today, large enterprises find themselves in a diverse, heterogeneous mix of
technology, architecture, vendors and standards for computing and communication.
As companies seek to exploit new technologies, they are confronted by existing
investments in legacy mainframes, servers, open systems and infrastructure. At
the same time, there is an explosion of capacity in the amounts of computer
bandwidth available and storage capacity in use for both mainframes and
distributed open systems. Significant changes in technology are redefining the
risk/return formulas of information management. CNT has the service and product
answers to leverage and protect these investments, enable coexistence among
multiple technologies and quickly integrate new enterprise solutions.

Our seven-days-a-week, 24-hours-a-day service team solves CNT-related
problems and helps customers with many non-CNT problems. This legendary service
differentiates CNT and has become an inseparable part of the product solution we
provide to our Fortune 1000 customers.

CNT has developed a new product strategy that is seeded and based in our
service, support and delivery capability. We will capitalize on Channelink's
strength as we add rich technology, develop new platforms and launch new
products. We recently expanded our software application solutions to give
customers the building blocks to solve other information management problems:
FileSpeed(TM), which provides high-speed data transfer; Channelink
Integrated Gateway(TM), which delivers high-performance, enterprise-wide
application access; and the Web Integrator(TM) Suite, which transforms the
browser into a corporate information access tool and improves responsiveness to
end-user requests and rapid prototyping of new applications.

CNT will continue to identify customers' business problems and apply our
technology to delivering responsive product solutions. We also pledge our 1-800
service team to maintaining the integrity of customers' worldwide, mission-
critical applications.

1997 Outlook

In 1996, we laid a strong organizational foundation and set some aggressive
goals for 1997. We are working to grow the base business as we target growth
markets with our new products. We will focus on a broader universe of customer
needs in enterprise information management: recovery, access and connectivity.
Ongoing research and development will focus on new product development and
continuous quality and process improvements.

Our organization is strengthening today as a result of new cross-functional
product development disciplines and a more market-oriented focus. CNT's
products, along with our new partnering initiatives, should enable us to deliver
better financial results as 1997 unfolds. I am committed to achieving improved
shareholder returns as we successfully execute our business plans. I want to
thank our superb employees, whose dedication and expertise are an integral part
of the new CNT. I also want to thank our shareholders for their continued
support.

Sincerely,

/s/ Thomas G. Hudson

Thomas G. Hudson
President, Chief Executive Officer and
Acting Chief Financial Officer
March 24, 1997

3
<PAGE>

Enterprise Information Management: Recovery

Delivering High-Performance Data Backup and Recovery at NationsBank
- -------------------------------------------------------------------

NationsBank is the fourth largest financial institution in the U.S., with $229
billion in assets and retail banking operations in 16 states and the District of
Columbia. It operates three large data centers located across the country.

"Banking is an information business. And a company the size of NationsBank
handles an enormous amount of information every day," said Hugh L. McColl Jr.,
chairman of NationsBank. In fact, NationsBank transmits to electronic vaulting
facilities an estimated two terabytes of data each day. "This data must flow
constantly, without interruption, because our millions of customers demand it,"
McColl said. "We must always be open for business."

Partnering with IBM's Business Recovery Services (BRS) and NationsBank, CNT
is contributing vital technology to this comprehensive disaster avoidance and
business transaction recovery capability. The new NationsBank system provides
ongoing, real-time data backup and recovery for the bank's critical mainframes
in the event of a disruption.

The result: a significantly shorter recovery period than was previously
possible, saving precious time, computing resources and lost productivity. The
bank also avoids many disruptions and gains a third strategically located
facility in case of disaster.

"If a NationsBank application goes down, IBM's recovery center will help
reestablish the application within hours and protect real-time customer data,"
said Anthony Martinez, director of business recovery services at IBM Global
Services.

CNT's Channelink technology connects NationsBank data centers with the IBM
recovery center. Information at both data centers is regularly updated and
stored in robotically-equipped IBM vaults housing more than 20,000 electronic
storage tapes. The NationsBank recovery system accomplishes:

. electronic remote journaling to capture intra-day transaction data;

. standby systems to ensure immediate availability of critical systems;
and a

. continuously operating network node to make certain the entire network
infrastructure is connected to the recovery center when needed.

The speed, reliability and functionality of this CNT-facilitated data
recovery operation "raises the bar" for data management and recovery in the
banking industry. CNT is now adding its DS-3 communications compression
capability to the NationsBank Channelink installation. This new feature will
halve the number of NationsBank advanced communications circuits, yielding
hundreds of thousands of dollars in savings each month.

Providing High-Performance Access and Real-time Back-up to Disk Data
- --------------------------------------------------------------------

A major U.S. automaker maintains its critical data in a disk storage rather than
a tape environment because of the disk format's faster data retrieval
characteristics. With two data centers and a heavy load of information to be
managed, the automaker was seeking a highly reliable way to perform real-time
data backup at both locations. The automaker's choice was to use a CNT software
solution for fast, high-performance connectivity over a wide-area network. This
solution enables the automaker's employees to access disk-stored information
from the central data center and alternate disk repositories--despite distance
and without additional host software. With this solution, the automaker can now
restore mission-critical data remotely at native or better-than-native speeds.
The technology also accommodates rapid data center consolidation or relocation
as business conditions dictate. In addition, this disk-based solution
eliminates the need for time-consuming, costly tape backup of key applications.
This solution provided significantly faster, more flexible data access and a
considerable reduction in data communication costs.

4
<PAGE>

The CNT Difference

Today's round-the-clock global economy runs on information. The pressure of
global transactions has virtually eliminated the time window for data backup. To
compete in this new environment, companies can either invest in duplicate
processing OR structure facilities to perform real-time backup. CNT Channelink
hardware and software support real-time data backup and recovery. Among these
products is the interoperability with EMCs Symetrix (SRDF) business continuance
software for long-distance data mirroring. CNT's CopyXpress software provides
connectivity for IBM's Extended Remote Copy (XRC), permitting fast data transfer
in remote disk environments. Filespeed offers high performance backup methods
for open systems.

[ARTWORK DESCRIBING ENTERPRISE INFORMATION SOLUTIONS FOR HETEROGENEOUS
ENVIRONMENTS]

Timely and affordable recovery options can be built with CNT building blocks
that offer a range of options balancing customers' needs for critical, timely
recovery (seconds, hours or days) and affordability.

5
<PAGE>

Enterprise Information Management:
Access

Facilitating Integrated Company-Wide Network Access
- ----------------------------------------------------

Managing huge amounts of data quickly and cost-effectively is a critical
component of success in the increasingly competitive healthcare industry.
Through a series of acquisitions, one of America's largest health care providers
merged multiple local area networks (LANS) serving the desktop computers of
employees across the country, requiring a new solution for network management
and coordination. The company's long-term success depended on establishing
reliable communication between the LAN architectures and the company's
mainframe. The health provider required a solution that would enable it to
leverage its existing mainframe investment and delay additional central
processing purchases while increasing information accessibility and providing a
foundation for future Intranet- and Internet-based standard solutions. CNT's
Channelink Integrated Gateway hardware and software provided the gateways to
link the LANS and mainframes into a single, highly effective system. The
gateways also reduced the computing load on the mainframe computers by shifting
server processing from the expensive mainframes to CNT's cost-effective
platform. With CNT's server performance, the company's growing user traffic
could be accommodated with fewer gateways and easily administered via an on-
screen management system. This solution quickly delivered considerable savings,
and the health provider now has the communications infrastructure to accommodate
additional acquisitions and support future Intranet/Internet architectures with
less impact on its legacy systems.

Improving Access and Network Streamlining
- -----------------------------------------

A major national designer and manufacturer of office furniture and work
environments was anxious to streamline its existing data sharing network of more
than 67 gateways between its mainframe and various LANS nationwide. It found the
answer in CNT's Channelink Integrated Gateway, which reduced the number of
access gateways to just two. The new hardware and software gateway solution
functions as a single system, using a high-performance, user-friendly interface
for easy desktop viewing, configuration, monitoring and administration rather
than requiring staff presence at the site of the actual gateway. By
consolidating LAN traffic on fewer high-performance CNT gateways, the company
gained valuable mainframe capacity, lowered its costs of access software and
network management, and was able to handle the increased communications load
generated by its growing national business.

Providing User-Friendly Access for Employees and Customers
- ----------------------------------------------------------

To create a competitive advantage, a major bank in The Netherlands was seeking a
cost-effective, user-friendly way for its employees and customers to do their
banking transactions electronically. The bank required a quick solution that
could accommodate thousands of mainframe transactions without building a costly
new private network. The bank's solution: use the Internet, an already
established public access system. CNT's Web Integrator Product Suite was
selected to provide the friendly interfaces for banking transactions between the
mainframe and the user. The bank has already improved its round-the-clock
service to its patrons while realizing savings on in-person and telephone
transactions. With potentially more transactions and inquiries handled on
gateways, the bank's mainframe is used more efficiently -- delaying costly new
data center investments. Best of all, the bank is now able to serve its
employees and thousands of new customers much more affordably. CNT's Web
Integrator Product Suite is designed for use by companies that wish to provide
friendly, cost-effective and secure Web access to legacy mainframe systems.

<PAGE>

The CNT Difference

Data is a critical corporate asset often protected in centralized data centers.
Business success now increasingly depends on combining mission-critical
mainframe data with decentralized user access. CNT's integrated hardware and
software products help link diverse architectures, facilitating local and wide
area networks and maximizing communications and computing capabilities. CNT is
creating new, leading-edge integrated hardware and software products that link
data networks and provide internet and Intranet access to mainframe data via the
Channelink Integrated Gateway and the Web Integrator Product Suite.

[Artwork Describing Enterprise Information Solutions for
Heterogeneous Environments]

Graphics-intensive desktop applications expand communications bandwidth, which
boosts the cost of supporting distributed terminal networks. CNT products drive
down costs by off-loading mainframe cycles, reducing software maintenance and
the number of required gateways.

<PAGE>

Enterprise information management:
Connectivity

Delivering Lower Operating Expenses Through Data Center Consolidation
- ---------------------------------------------------------------------

Following an aggressive acquisition program, a leading national money-center
bank needed to consolidate its 15 data processing centers into two megacenters
that worked together seamlessly. The bank selected the CNT Channelink hardware
and communications software platform, which offered the capabilities the bank
was seeking without re-investing in new central computing technology:
maximizing the speed of peripheral equipment, optimizing the distribution of
multiple data loads over communications channels, prioritizing processing
functions and maximizing costly communications resources. The new data center
network increased the processing capacity, speed and reliability of the bank's
mission-critical data processing, while delivering significant savings in
hardware, software, communication and data operations. The CNT Channelink
solution paid for itself within a few months and continues to accommodate the
computing needs of additional banks this customer has recently acquired.

Delivering Real-Time Information Recovery and Lower Costs Through
Data "Mirroring"
- ----------------

Last year, a major long-distance telecommunications firm determined that slow
information backup and recovery was an unacceptable business risk. CNT's high-
performance Channelink data center linking products enabled the telephone giant
to "mirror" its data between its distant mainframe computers at virtually real-
time speeds--essentially a delay-free disaster recovery capability. This
solution provides an unprecedented level of disruption avoidance and
uninterrupted distribution of customer statements. The result: consistently on-
time billing and stronger cash flow.

Driving Down Costs Through Remote Printing
- ------------------------------------------

One of the world's largest brokerage and investment banking firms has three
strategically located data centers to handle millions of customer accounts.
Among other duties, the data centers regularly generate approximately 400
million account reports, equal to an estimated 60 million pages each month. To
reduce its considerable report printing and mailing costs, the firm dispersed
its downtown printing operations to seven less-expensive, lower-taxed suburban
locations sited near postal stations nationwide. Each remote printer is driven
by the data center computers via CNT's Channelink products. Thanks to the CNT
connectivity solution, the brokerage realized immediate and substantial savings
through lower real estate and reduced bulk mailing costs.

Sharing Vital Data Efficiently
- -------------------------------

A prominent, global petroleum producer and refiner uses vast amounts of seismic
data worldwide in the continual hunt for oil and gas reserves. The data is
stored on thousands of computer tapes in data center silos, but the information
is regularly needed by the producer's geophysical analysts at workstations
worldwide. The company needed a fast, reliable way to transfer its huge files
of seismic data from the tape silos, which use a traditional enterprise
communications protocol, to the workstations, which reside in an open systems
communications environment. The petroleum producer selected CNT's gateway
technology for its value, performance and ability to handle tape processing at
the gateway instead of at the host computer. CNT's gateway technology provides
workstation access to mainframe and remote tape and disk systems and facilitates
very high speed data transfers between the workstations, network servers and
mainframe computers, which now process approximately 1 terabyte of data daily.

<PAGE>

The CNT Difference

Managing data reliably, flexibly and cost-effectively over large distances is
mission-critical. CNT's constantly evolving hardware and software tackle the
most complex challenges -- at industry-leading, near-native speeds as new
software further improves the price performance of CNT's data networking
solutions. The ATM Channelink enhancement supports new network architectures
with bandwidth on demand, improved resiliency and dynamic switching. The DS-3
data compression enhancement provides immediate relief from increasing
communications bandwidth costs. Our advanced Filespeed integrated hardware and
software solutions support very high-speed, channel-based bulk data networking.

[Artwork describing Enterprise Information Systems Solutions for Heterogeneous
Environments]

Demands for increased I/O subsystem performance have limited the distances
between computers, storage and peripheral equipment. CNT Channel Extension
products completely eliminate this constraint to modern centralized and
distributed data center design.

<PAGE>

Selected Financial Data

Selected Consolidated Statements of Operations Data
(In thousands, except per share data)
<TABLE>
<CAPTION>

Years Ended December 31
-------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------
<S> <C> <C> <C> <C> <C>

Revenue $97,109 $78,837 $79,542 $55,687 $34,265
Income (loss) from operations (49) 4,927 (3,049) 8,059 3,805
Income (loss) before income taxes 2,024 6,534 (1,789) 7,901 3,832
Net income (loss) 1,360 4,022 (4,714) 5,001 3,552
Net income (loss) per common and
common equivalent share $ .06 $ .17 $ (.21) $ .26 $ .21
Weighted average number of common
and common equivalent shares 23,557 23,443 21,972 19,228 17,263

Selected Consolidated Balance Sheets Data
(In thousands, except employee data)
December 31
-------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------

Current assets $66,952 $61,525 $53,062 $53,506 $23,075

Current liabilities 18,218 17,243 17,675 17,103 9,470
Working capital 48,734 44,282 35,387 36,403 13,605

Total assets 82,379 79,134 73,149 66,101 30,295

Long-term obligations - - 163 448 622

Shareholders' equity $64,161 $60,506 $53,979 $48,550 $20,203

Number of full-time employees 493 408 338 326 212

</TABLE>

10
<PAGE>

Management's Discussion and Analysis of
Financial Condition and Results of Operations

Results Of Operations

As an aid to understanding the Company's operating results, the following table
sets forth certain information derived from the Consolidated Statements of
Operations. (All amounts are expressed as a percentage of total revenue except
gross profit, which is expressed as a percentage of the related revenue.)

Percentage of Revenue 1996 1995 1994
----------------------
<S> <C> <C> <C>
Revenue:
Product sales 76.4% 77.2% 82.1%
Service fees 23.6 22.8 17.9
----------------------
Total revenue 100.0 100.0 100.0
----------------------

Gross profit:
Product sales 65.2 70.8 63.8
Service fees 24.7 17.7 9.9
----------------------
Total gross profit 55.6 58.7 54.2
----------------------

Operating expenses:
Sales and marketing 31.2 27.9 25.8
Engineering and development 14.4 16.1 14.3
General and administrative 7.3 8.5 6.2
Purchased in-process research and development - - 11.7
Write-down of purchased technology 2.8 - -
----------------------
Total operating expenses 55.7 52.5 58.0
----------------------

Income (loss) from operations (0.1) 6.2 (3.8)
Other income, net 2.2 2.1 1.6
----------------------

Income (loss) before income taxes 2.1 8.3 (2.2)
Provision for income taxes 0.7 3.2 3.7
----------------------
Net income (loss) 1.4% 5.1% (5.9)%
----------------------
</TABLE>

Revenue

The Company's revenue primarily includes the licensing, sale and support of
products for high performance enterprise networking and connectivity, enterprise
access and enterprise information management and recovery that integrates
traditional legacy data processing systems with open systems to create
enterprise-wide networks.

Revenue from product sales increased 22% in 1996 compared to a decrease of
7% in 1995 and an increase of 41% in 1994. The increase in revenue from product
sales for 1996 is attributable to OEM product sales of the Company's channel
connectivity controller to IBM and initial sales of the Company's new integrated
gateway product. During 1996, the Company recognized revenue from OEM product
sales to IBM, Sun Microsystems and others of approximately $13.0 million,
compared to revenue from OEM product sales in 1995 of approximately $2.4
million. The decrease in revenue from product sales in 1995 was primarily
attributable to a decrease in the sale of the Company's traditional enterprise
networking and connectivity products of 12%, due to a reduction in orders from
domestic end-user customers, which was partially offset by an increase in the
sale of these products to the Company's international distributors and a 74%
increase in the sale of the Company's enterprise access software products. The
expected reduction in product sales from the Company's discontinued UltraNet
product line also contributed to the decrease.

Revenue from service fees, which primarily reflects maintenance, network
reconfiguration and professional services from the Company's technical support
personnel, increased 28%, 26% and 51% in 1996, 1995 and 1994, respectively. The
year-to-year growth in service fees has primarily resulted from the growing base
of customers using the Company's enterprise-wide networking products.

In 1996, international revenue increased 7%, compared with increases of 8%
and 31% in 1995 and 1994, respectively. During the 1994 to 1996 period, the
Company derived 30% to 26% of its total revenue from international customers
each year. During 1996, sales to one customer and its multiple divisions
accounted for 18% of the Company's total revenue. No single customer accounted
for more than 10% of the Company's total revenue in either 1995 or 1994.

During the second half of 1995 and the first half of 1996, the Company
hired additional sales representatives and sales consultants to focus
exclusively on market opportunities for the Company's enterprise access software
products. This strategy has not proven to be an effective use of resources as
the additional investment did not increase sales of the Company's enterprise
access software products. The Company subsequently reassigned certain sales
representatives and sales consultants to sell the Company's entire family of
products in other sales territories to permit broader account coverage.

In January 1997, the Company introduced its new Channelink Integrated
Gateway and Web Integrator product suites that improve mainframe application
access and customer access to Internets and Intranets, and its new

<PAGE>

FileSpeed product for data networking and recovery. In addition, the Company
also announced a joint development agreement with EMC under which the two
companies have developed interoperability between EMC's SRDF business
continuance software and the Company's enterprise networking and connectivity
products. The Company believes these new products and relationships should
result in continuing demand for its products in both domestic and international
markets. The Company believes that the reassignment of its sales representatives
and sales consultants to provide broader account coverage will allow for better
utilization of its existing sales resources and investments. In addition, the
Company believes it can increase demand for its products by continuing to
identify new applications and markets for its technology and by continuing to
pursue the sale of these products through outbound technology initiatives,
including OEMs.

The Company expects 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 revenue reported by the Company in any
given period will continue to be effected by the receipt and fulfillment of
sizable new orders from OEMs and others.

Special Charges

During 1996, the Company recorded a $2.7 million pre-tax charge for the write-
down of its purchased Brixton technology asset due to changing market conditions
and evolving customer requirements for SNA, Internet and open systems gateway
products (see note 1 to the Consolidated Financial Statements).

During 1995, the Company recorded a $2.5 million pre-tax charge related to
its management reorganization, which was included in the Consolidated Statements
of Operations as follows: sales and marketing - $155,000; engineering and
development - $1,503,000; general and administrative - $842,000. Included in
this charge is an expense of $1,120,000 relating to a potential obligation for
the repurchase of up to 280,000 shares of the Company's common stock from a
former officer and director on the last trading day of calendar year 1997 for a
price of $8.50 per share. During 1996, the former officer and director sold
182,600 common shares on the open market which were subject to the repurchase
obligation. Engineering and development expense was reduced by $779,000 in 1996
due to the sale of these shares and fluctuations in the market price of the
Companys common stock. At December 31, 1996, the Company's remaining obligation
with respect to the common equity put option is for the potential repurchase of
up to 97,400 shares of its common stock. The Company will continue to adjust
compensation expense in future periods to reflect fluctuations in the market
price of its common stock until such time as the Company has no remaining
obligation to repurchase stock from the former officer and director (see note 6
to the Consolidated Financial Statements).

During 1994, the Company recorded a $9.3 million pre-tax charge for
purchased in-process research and development associated with the acquisition of
Brixton, and a $2.8 million pre-tax charge to cost of product sales for the
write-down of inventory associated with its discontinued UltraNet product line.
Also during 1994, the Company recorded a pre-tax charge of approximately
$500,000 related to a reduction in work force, which was included in the
Consolidated Statements of Operations as follows: cost of service fees -
$81,000; sales and marketing - $196,000; engineering and development - $190,000;
general and administrative - $33,000.

Gross Profit

In 1996, the gross profit margin from product sales was 65%, as compared to 71%
in 1995 and 68% in 1994, excluding the UltraNet inventory charge. The decrease
in gross profit margins from product sales in 1996 primarily resulted from lower
margin OEM sales of the Company's channel connectivity controller to IBM, a
decrease in higher-margin software sales as a percentage of total product sales,
and increased charges for inventory obsolescence. The increase in gross profit
margins from product sales in 1995 when compared to 1994 (excluding the UltraNet
inventory charge) primarily resulted from a larger percentage of total product
revenue coming from the sale of the Company's higher-margin enterprise access
software products. Actual gross profit margins on product sales in 1997 will
depend on a number of factors, including the mix of products, market acceptance
of the Company's

<PAGE>

new products, the relative amount of products sold through indirect distribution
sources and the level of continuing price competition.

Gross profit margins from service fees were 25%, 18% and 10% in 1996, 1995
and 1994, respectively. The increase in gross profit margins from service fees
in 1996 primarily resulted from improving economies of scale as a steadily
increasing base of customers are contracting for maintenance services. The
Company believes that any improvements resulting from economies of scale in 1997
will be offset by additional investments the Company expects to make in its
service business to support new product introductions.

Operating Expenses

Sales and marketing expenses, excluding special charges, increased 39%, 7% and
46% in 1996, 1995 and 1994, respectively. The increase in sales and marketing
expense for 1996 is primarily attributable to the expansion of the Company's
sales organization and an increase in commission expense due to the higher level
of sales in 1996. The increase in sales and marketing expenses during 1995 when
compared to 1994 is primarily attributable to an increase in employee
recruitment and other costs associated with expansion of the Company's sales
organization, which were partially offset by lower commission expense. The
Company presently anticipates that the reassignment of certain sales
representatives and sales consultants to permit broader account coverage for the
Company's products will increase the productivity level of its existing sales
and marketing investments, and will result in a slower rate of growth in sales
and marketing expense in 1997.

Engineering and development expense primarily consists of compensation and
related fringe benefits, depreciation, and consulting expenses related to new
product development and enhancements to existing products. Excluding special
charges, the 32% increase in engineering and development expense for 1996 is
primarily attributable to increases in compensation costs associated with
expansion of the engineering staff, consulting and expenditures for engineering
prototype materials. Engineering and development expenses, excluding special
charges, remained relatively flat in 1995 when compared to 1994. As a percentage
of total revenue, engineering and development expense excluding special charges
ranged from 14% to 15% of total revenue each year during the 1994 to 1996
period. The Company anticipates investing approximately 15% of total revenue on
engineering and development in 1997, which includes investments in current and
future products. The Company believes a sustained high level of investment in
engineering and development is essential to customer satisfaction and future
revenue.

General and administrative expenses, excluding special charges, increased
21%, 19% and 47% in 1996, 1995 and 1994, respectively. The increase in 1996 is
primarily attributable to director and executive compensation, including costs
to recruit and retain a new Director of Information Technology and a Chief
Executive Officer, and employee severance. The increases in 1996 and prior
periods are also attributable to expansion of the Company administrative
organization due to increases in the level of orders and revenue. As a
percentage of total revenue, general and administrative expenses, excluding
special charges, ranged from 6% to 8% of total revenue each year during the 1994
to 1996 period.

Interest income increased during the 1994 to 1996 period because of higher
average balances of cash and marketable securities.

In 1996 and 1995, the Company recorded a provision for income taxes at an
effective rate of approximately 33% and 38%, respectively. The reduction in the
1996 effective tax rate is primarily attributable to a reduction in the level of
nondeductible foreign losses and the purchased technology write-down. In 1994,
excluding a non-deductible charge for purchased in-process research and
development, the Company recorded a provision for income taxes at an effective
rate of 39%.

The Company's United States income tax returns for the years 1993 through
1995 are currently under examination. Management believes adequate provision
for income taxes has been provided for all years through 1996.

Liquidity and Capital Resources

The Company has historically financed its operations through the private and
public sales of equity securities, bank borrowing under lines of credit, capital
equipment leases and cash generated from operations.

13
<PAGE>

Cash, cash equivalents and marketable securities at December 31, 1996
totaled $35.1 million, an increase of $6.7 million during 1996. This increase
resulted from cash provided by operations of $12.1 million, financing activities
of $1.9 million (resulting from the proceeds from the exercise of employee stock
options and issuance of shares under the Company's employee stock purchase
plan), partially offset by cash used for investing in property and equipment,
field support spares, other assets and exchange rates of $7.3 million.
Expenditures for capital equipment and field support spares have been, and will
likely continue to be, a significant capital requirement. The Company plans to
invest aggressively in productivity tools for its employees and in its field
support spares. In addition, in March 1997, the Company's board of directors
authorized the repurchase of up to 2,000,000 shares of its common stock on the
open market.

The Company believes that its current balances of cash, cash equivalents
and marketable securities, when combined with anticipated cash flow from
operations, will be adequate to fund its operating plans and meet its currently
anticipated aggregate capital requirements, at least through 1997.

The Company believes that inflation has not had a material impact on its
operations or liquidity to date.

Forward Looking Statements

Certain statements in this Annual Report and in the Company's press releases and
oral statements made by or with the approval of the Company's executive officers
constitute or will constitute "forward-looking statements". All forward-looking
statements involve risks and uncertainties, and actual results may be materially
different. The following factors are among those that could cause the Company's
actual results to differ materially from those set forth in such forward-looking
statements. The Company's ability to successfully identify and incorporate new
technologies into new and enhanced products and to develop and maintain
compatibility and interoperability with the products of others, as well as new
product introductions by competitors and the continuing availability of
intellectual property licenses on commercially available terms may impact the
Company's ability to increase demand for its products. The success of the
Company's sales force reassignment to provide for broader account coverage and
better utilization of existing resources and to bring about a slower rate of
growth in sales and marketing expense may be impacted by the expertise and
commitment of the effected personnel, market acceptance of new and existing
products and competitive market conditions. The unanticipated need to enhance or
modify products due to changing market requirements, the success of current
product programs, the need to meet unanticipated product opportunities and the
amount of total revenue in 1997 may affect whether engineering and development
expense will equal approximately 15% of total revenue in 1997. The Company's
ability to generate revenue as presently expected, unexpected expenses and the
need for additional funds to react to changes in the marketplace, including
unexpected increases in personnel and product development expenses, may affect
whether the Company has sufficient cash resources to fund its operating plans
and capital requirements through at least 1997.

Other factors that could cause the results of the Company to differ
materially from those contained in any such forward-looking statements include
general economic conditions, costs and availability of components and
fluctuations in exchange rates. In addition, the markets for the Company's
products are characterized by significant competition, and the Company's results
may be adversely affected by the actions of existing and future competitors,
including the development of new technologies, the introduction of new products
and the reduction of prices by such competitors to gain or retain market share.
The Company assumes no obligation to publicly release the results of any
revision or updates to these forward-looking statements to reflect future events
or unanticipated occurrences.

14
<PAGE>

Consolidated Statements of Operations
<TABLE>
<CAPTION>

Years ended December 31
------------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Product sales $74,169,582 $60,889,828 $65,332,961
Service fees 22,939,280 17,946,819 14,208,812
----------- ----------- -----------
Total revenue 97,108,862 78,836,647 79,541,773
----------- ----------- -----------
Cost of revenue:
Cost of product sales 25,842,965 17,799,484 23,664,972
Cost of service fees 17,269,005 14,772,744 12,808,784
----------- ----------- -----------
Total cost of revenue 43,111,970 32,572,228 36,473,756
----------- ----------- -----------

Gross profit 53,996,892 46,264,419 43,068,017
----------- ----------- -----------
Operating expenses:
Sales and marketing 30,226,296 21,882,903 20,499,023
Engineering and development 13,995,530 12,718,295 11,347,683
General and administrative 7,103,492 6,736,444 4,968,251
Purchased in-process research and development - - 9,302,212
Write-down of purchased technology 2,720,303 - -
----------- ----------- -----------

Total operating expenses 54,045,621 41,337,642 46,117,169
----------- ----------- -----------

Income (loss) from operations (48,729) 4,926,777 (3,049,152)
----------- ----------- -----------

Other income (expense):
Interest income 1,859,442 1,616,503 629,064
Interest expense (46,230) (59,825) (125,181)
Other, net 259,248 50,993 755,884
----------- ----------- -----------
Other income, net 2,072,460 1,607,671 1,259,767
----------- ----------- -----------

Income (loss) before income taxes 2,023,731 6,534,448 (1,789,385)

Provision for income taxes 664,000 2,512,000 2,925,000
----------- ----------- -----------

Net income (loss) $ 1,359,731 $ 4,022,448 $(4,714,385)
----------- ----------- -----------

Net income (loss) per common and common equivalent share $.06 $.17 $(.21)
----------- ----------- -----------

Weighted average number of common and common
equivalent shares 23,556,717 23,443,137 21,971,983
----------- ----------- -----------

</TABLE>
See accompanying notes to consolidated financial statements.

15
<PAGE>

Consolidated Balance Sheets
<TABLE>
<CAPTION>

December 31
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,847,078 $ 5,959,931
Marketable securities 30,217,791 22,448,987
Receivables, net 18,188,951 18,545,363
Inventories 10,451,290 10,534,152
Deferred tax asset 2,425,000 2,559,000
Other current assets 822,158 1,477,568
----------- -----------
Total current assets 66,952,268 61,525,001
=========== ===========

Property and equipment, net 9,112,591 8,598,666
Field support spares, net 3,835,718 4,406,225
Deferred tax asset 1,052,000 -
Purchased technology, net 134,000 3,534,849
Goodwill, net 641,407 722,167
Other assets 651,001 347,209
----------- -----------
$82,378,985 $79,134,117
=========== ===========

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,833,380 $ 2,578,188
Accrued liabilities 9,063,530 7,410,409
Deferred revenue 5,321,427 7,254,446
----------- -----------
Total current liabilities 18,218,337 17,243,043
----------- -----------
Deferred tax liability - 1,385,000
----------- -----------
Total liabilities 18,218,337 18,628,043
----------- -----------

Shareholders' equity:
Preferred stock, authorized 1,000,000 shares; none issued and outstanding - -
Common stock, $.01 par value; authorized 30,000,000 shares, issued and
outstanding 23,408,064 at December 31, 1996 and
22,929,360 at December 31, 1995 234,081 229,294
Additional paid-in capital 60,372,336 58,150,984
Retained earnings 3,725,543 2,365,812
Cumulative translation adjustment (171,312) (240,016)
----------- -----------
Total shareholders' equity 64,160,648 60,506,074
----------- -----------
$82,378,985 $79,134,117
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.

16
<PAGE>

Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>

Common Stock Additional Retained Cumulative
--------------------- Paid-In Earnings Translation
Shares Amount Capital (Deficit) Adjustment Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 20,998,023 $209,980 $45,742,435 $ 3,057,749 $(460,004) $48,550,160
- ----------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to the
employee stock purchase
plan and exercise of stock
options, net of 1,844 shares
redeemed 376,005 3,760 1,202,383 - - 1,206,143
Shares issued in connection
with the acquisition of Brixton 986,094 9,861 8,501,255 - - 8,511,116
Tax benefits related to
employee stock option
transactions - - 355,000 - - 355,000
Change in cumulative
translation adjustment - - - - 70,836 70,836
Net loss - - - (4,714,385) - (4,714,385)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 22,360,122 223,601 55,801,073 (1,656,636) (389,168) 53,978,870
- ----------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to the
employee stock purchase
plan and exercise of stock
options and warrants, net of
86,308 shares redeemed 569,238 5,693 1,445,911 - - 1,451,604
Tax benefits related to
employee stock option
transactions - - 904,000 - - 904,000
Change in cumulative
translation adjustment - - - - 149,152 149,152
Net income - - - 4,022,448 - 4,022,448
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 22,929,360 229,294 58,150,984 2,365,812 (240,016) 60,506,074
- ----------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to the
employee stock purchase
plan and exercise of stock
options, net of 22,527 shares
redeemed 478,704 4,787 1,929,352 - - 1,934,139
Tax benefits related to
employee stock option
transactions - - 292,000 - - 292,000
Change in cumulative
translation adjustment - - - - 68,704 68,704
Net income - - - 1,359,731 - 1,359,731
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 23,408,064 $234,081 $60,372,336 $ 3,725,543 $(171,312) $64,160,648
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17

</TABLE>
<PAGE>

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

Years Ended December 31
------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 1,359,731 $ 4,022,448 $ (4,714,385)
Depreciation and amortization 7,960,087 7,418,179 6,717,541
Tax benefits related to employee stock option transactions 292,000 904,000 355,000
Write-down of purchased technology 2,720,303 - -
Purchase of in-process research and development - - 9,302,212
Change in deferred taxes (2,303,000) (386,000) (1,392,844)

Changes in operating assets and liabilities, net of the effect of
the purchase of Brixton:
Receivables 356,412 4,906,235 (5,027,197)
Inventories 82,862 (2,473,789) 1,856,000
Other current assets 655,410 (389,404) 587,381
Accounts payable 1,255,192 415,134 (2,666,173)
Accrued liabilities 1,653,121 (800,620) 949,482
Deferred revenue (1,933,019) (209,375) 2,143,449
------------- ------------- ------------
Cash provided by operating activities 12,099,099 13,406,808 8,110,466
------------- ------------- ------------
Investing activities:
Additions to property and equipment (4,922,298) (3,299,233) (4,309,070)
Additions to field support spares (2,219,901) (1,562,608) (4,707,027)
Purchase of Brixton, net of cash acquired - - (5,455,671)
Purchase of marketable securities (50,670,862) (31,639,572) (2,486,234)
Redemption of marketable securities 42,902,058 11,676,819 -
Other (303,792) (106,114) (91,862)
------------- ------------- ------------
Cash used in investing activities (15,214,795) (24,930,708) (17,049,864)
------------- ------------- ------------
Financing activities:
Proceeds from issuance of common stock 1,934,139 1,451,604 1,206,143
Repayments of obligations under capital leases - - (943,892)
------------- ------------- ------------
Cash provided by financing activities 1,934,139 1,451,604 262,251
------------- ------------- ------------
Effects of exchange rate changes 68,704 176,322 80,315
------------- ------------- ------------
Net decrease in cash and cash equivalents (1,112,853) (9,895,974) (8,596,832)

Cash and cash equivalents - beginning of year 5,959,931 15,855,905 24,452,737
------------- ------------- ------------
Cash and cash equivalents - end of year $ 4,847,078 $ 5,959,931 $ 15,855,905
------------- ------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.

18
<PAGE>

Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994

(1) Summary of Significant Accounting Policies

Description of Business

Computer Network Technology Corporation is engaged in the design, marketing and
support of high-performance networking products that integrate traditional
legacy data processing systems with open systems to create enterprise-wide
networks.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Computer Network Technology Corporation and its subsidiaries (together, the
Company). All significant intercompany balances and transactions are eliminated
in consolidation.

Revenue Recognition

Revenue from product sales is generally recognized by the Company upon shipment
or signed customer acceptance depending on the terms of the contract or purchase
order. Revenue from software license agreements with original equipment
manufacturers (OEM) for redistribution to the OEM's customers is recognized when
the OEM reports delivery of the software to their customer. Service fees are
recognized as revenue when earned, which is generally on a straight-line basis
over the contracted service period.

Deferred revenue primarily consists of the unearned portion of service
agreements billed in advance and amounts billed to customers prior to
recognition by the Company of the applicable revenue.

Cash Equivalents

The Company considers investments in highly liquid debt securities having an
initial maturity of three months or less to be cash equivalents.

Marketable Securities

The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 115 "Acccounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115). The Company's marketable securities are classified
as available-for-sale and are carried at fair value in accordance with SFAS No.
115. If significant, unrealized gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate component
of shareholders' equity.

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.

Property and Equipment

Property and equipment owned by the Company is carried at cost and depreciated
using the straight-line method over three to eight years. Leasehold
improvements are amortized using the straight-line method over the terms of the
respective leases. Expenditures for repairs and maintenance are charged to
expense as incurred.

Field Support Spares

Field support spares are carried at cost and depreciated using the straight-line
method over three years.

Purchased Technology

Purchased technology acquired in connection with the acquisition of Brixton
Systems, Inc. (see note 3) is carried at cost less accumulated amortization and
impairment charges and is amortized using the straight-line method over its
estimated useful life. During 1996, the Company evaluated this asset for
impairment due to changing market conditions and evolving customer requirements
for SNA, Internet and open systems gateway products. The evaluation resulted in
a write-down of the purchased technology to its net realizable value and an
impairment charge in 1996 of $2,720,303. The evaluation also resulted in a
reduction in the remaining amortization period for the purchased technology from
seven years to one year based on the factors identified above. At December 31,
1996 and 1995, accumulated amortization and impairment charges were $4,629,796
and $1,228,947, respectively.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over 20 years. Unamortized
goodwill balances are reviewed periodically to determine recoverability. If the
asset is believed to be unrecoverable, the Company recognizes an impairment
charge necessary to reduce the unamortized balance to its net realizable value.
As of December 31, 1996, no impairment charges have been recognized. At
December 31, 1996 and 1995, accumulated amortization was $224,877 and $158,464,
respectively.

19
<PAGE>

Allowance for Returns and Credit Losses

An allowance is made for potential returns and uncollectible accounts based on
current and historical experience. The allowance for returns and credit losses
at December 31, 1996 and 1995 was $898,696 and $1,130,726, respectively.

Engineering and Development

The Company accounts for engineering and development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS No. 86). The
Company has expensed all engineering and development costs to date as such costs
do not meet the criteria for capitalization outlined in SFAS No. 86.

Net Income (Loss) Per Share

For the years ended December 31, 1996 and 1995, net income per common and common
equivalent share was determined by dividing net income by the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares primarily result from dilutive stock options and
warrants. For the year ended December 31, 1994, net loss per common and common
equivalent share was computed using the weighted average number of common shares
outstanding; stock options and warrants were excluded due to their antidilutive
effect.

Foreign Currency

The financial statements of the Company's international subsidiaries have been
translated into U.S. dollars in accordance with the provisions of Statement of
Financial Accounting Standards No. 52 "Foreign Currency Translation" (SFAS No.
52). Under SFAS No. 52, assets and liabilities are translated into U.S. dollars
at year-end exchange rates, while equity accounts are translated at historical
rates. Income and expenses are translated at the average exchange rates during
the year. The resulting traslation adjustments are recorded as a separate
component of shareholder's equity.

Foreign currency transaction gains and losses are included in determining
net income (loss). For the year ended December 31, 1996, the Company recorded a
foreign currency transaction loss of $99,364. For the years ended December 31,
1995 and 1994, the Company recorded foreign currency transaction gains of
$77,037 and $632,133, respectively.

Income Taxes

The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No.
109, deferred tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.

Stock Compensation Plans

The Company accounts for its stock based compensation awards in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB No. 25) and provides the footnote disclosures required by
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123).

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.

(2) Marketable Securities

The Company's investments in marketable securities are summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Corporate debt securities $22,810,360 $16,945,004
U.S. Government and
Agency Securities 7,407,431 5,503,983
-------------------------
$30,217,791 $22,448,987
</TABLE> -------------------------

The amount of gross unrealized gains and losses with respect to the Company's
investments in marketable securities at December 31, 1996 and 1995 were not
significant. The Company realized no significant gains or

20
<PAGE>

losses from the sale of marketable securities during the three-year period ended
December 31, 1996. Proceeds from the sale of marketable securities during 1996
and 1995 were $23,042,231 and $3,518,755, respectively. There were no sales of
marketable securities during 1994. At December 31, 1996, investments in
marketable securities include $19,188,259 with contractual maturities of one
year or less and $11,029,532 with contractual maturities of from one to three
years.

(3) Acquisition

On March 10, 1994, the Company acquired all of the outstanding common and
preferred stock of Brixton Systems, Inc. ("Brixton") in exchange for 986,094
unregistered shares of its common stock valued at $6,515,000, $5,500,000 in
cash, assumption of $1,600,000 in liabilities and the conversion of existing
Brixton employee stock options into stock options of the Company valued at
$1,996,116. The shares exchanged by the Company were valued at fair market
value, reflecting a 33% discount because of their restricted nature. The
acquisition has been accounted for as a purchase and the acquired assets and
liabilities were recorded at their estimated fair market values at the date of
acquisition. The purchase price was allocated to the (i) identifiable tangible
assets acquired based on their estimated fair market values, (ii) purchased
technology in the amount of $4,763,796, and (iii) research and development
activities that were in-process at the time of the acquisition and had not yet
reached technological feasibility. The amount allocated to in-process research
and development of $9,302,212 was charged to expense upon completion of the
acquisition. The Company's consolidated financial statements include the results
of Brixton's operations since March 10, 1994.

(4) Components of Selected Balance Sheet Accounts
<TABLE>
<CAPTION>

December 31 1996 1995
--------------------------
<S> <C> <C>
--------------------------
Inventories:
Components and subassemblies $ 3,768,708 $ 4,471,969
Work in process 2,324,650 1,498,588
Finished goods 4,357,932 4,563,595
-------------------------
$10,451,290 $10,534,152
-------------------------
Property and equipment:
Machinery and equipment $12,429,804 $10,489,189
Office and data processing
equipment 9,959,757 7,443,064
Furniture and fixtures 1,258,465 1,074,412
Leasehold improvements 1,885,535 1,739,304
-------------------------
25,533,561 20,745,969

Less accumulated depreciation
and amortization 16,420,970 12,147,303
-------------------------
$ 9,112,591 $ 8,598,666
-------------------------
Field support spares:
Field support spares $10,490,914 $ 9,577,421
Less accumulated depreciation 6,655,196 5,171,196
-------------------------
$ 3,835,718 $ 4,406,225
-------------------------
Accrued liabilities:
Compensation $ 5,197,279 $ 5,341,660
Other 3,866,251 2,068,749
-------------------------
$ 9,063,530 $ 7,410,409
-------------------------
</TABLE>
(5) Operating Leases

The Company leases all office and manufacturing space and certain equipment
under noncancelable operating leases.

Future minimum operating lease payments, excluding executory costs such as
real estate taxes, insurance and maintenance expense, by year and in the
aggregate are as follows:
<TABLE>
<CAPTION>

Year Ending December 31
<S> <C>
1997 $2,671,959
1998 2,093,119
1999 1,794,480
2000 1,061,512
2001 517,861
Thereafter 5,865
----------
Total minimum lease payments $8,144,796
----------
</TABLE>

Rent expense under noncancelable operating leases, exclusive of executory costs,
for the years ended December 31, 1996, 1995, and 1994, were $2,201,718,
$2,331,876, and $2,350,639, respectively.

21
<PAGE>

(6) Shareholders' Equity

Common Equity Put Option

In connection with a severance agreement entered into with a former officer and
director in 1995, the Company agreed to repurchase up to 280,000 shares of its
common stock on the last trading day of calendar year 1997 for a price of $8.50
per share. During 1995, the Company recorded severance expense relating to this
agreement in the amount of $1,120,000. During 1996, the former officer and
director sold 182,600 common shares on the open market which were subject to the
repurchase obligation. Engineering and development expense was reduced by
$779,000 in 1996 due to the sale of these shares and fluctuations in the market
price of the Company's common stock. At December 31, 1996, the Company's
remaining obligation with respect to the common equity put option is for the
potential repurchase of up to 97,400 shares of its common stock. The obligation
will expire if the former officer and director sells the remaining shares on the
open market prior to the last trading day of calendar year 1997, or, subject to
certain exceptions, if for any five consecutive trading days prior to the last
trading day of calendar year 1997, the closing market price for the Company's
common stock equals or exceeds $8.50 per share. The Company will continue to
adjust expense in future periods to reflect fluctuations in the market price of
its common stock until such time as the Company has no remaining obligation to
repurchase stock from the former officer and director.

Stock Options

The Company's 1992 Stock Award Plan (the Award Plan) provides for the grant of
stock options and performance units to officers, other employees, consultants
and independent contractors as determined by the Compensation Committee of the
Board of Directors. The Award Plan also provides for automatic stock option
grants to nonemployee directors of 50,000 shares upon their initial election or
appointment to the board of directors, and 20,000 shares each year to
nonemployee directors who are elected, re-elected, or are serving an unexpired
term as a director at any annual meeting of shareholders. A maximum of 4,350,000
shares of common stock are issuable under the terms of the Award Plan.

All stock options granted under the Award Plan have an exercise price equal
to fair market value on the date of grant, vest and become exerciseable over
individually defined periods, and expire ten years from the date of grant.
Performance units entitle participants to payments of cash, stock or a
combination thereof and are based upon the achievement of specified performance
targets as determined by the Compensation Committee. As of December 31, 1996, no
performance units have been granted under the terms of the Award Plan.

Prior to implementation of the Award Plan, the Company granted stock
options under other incentive and nonqualified stock options plans. All
remaining shares of common stock which had been available for grant under these
plans have been canceled. In addition, in connection with the acquisition of
Brixton, the Company agreed to convert existing Brixton employee stock options
into stock options of the Company.

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: no dividend yield;
expected volatility of 39.3% and 39.4%; expected option lives of 8.14 years; and
risk-free interest rates of 6.58% and 6.24%.

A summary of the status of the Company's stock option plans and changes
under those plans for each of the years in the three-year period ended December
31, 1996 is presented below:
<TABLE>
<CAPTION>

Weighted-Average
Options Shares Exercise Price
---------------------------
1996
<S> <C> <C>
Outstanding at beginning of year 2,777,963 $ 6.28
Granted 1,983,000 6.06
Exercised (443,775) 3.38
Forfeited (949,125) 7.64
----------
Outstanding at end of year 3,368,063 6.19
==========
Weighted-average fair value of
options granted during the year $ 3.48

1995
Outstanding at beginning of year 2,261,741 $ 5.08
Granted 1,328,500 7.43
Exercised (457,215) 3.16
Forfeited (355,063) 6.49
----------
Outstanding at end of year 2,777,963 6.28
==========
Weighted-average fair value of
options granted during the year $ 4.16

1994
Outstanding at beginning of year 1,972,671 $ 4.51
Granted 747,991 6.14
Exercised (275,224) 2.81
Forfeited (183,697) 6.61
----------
Outstanding at end of year 2,261,741 5.08
==========

</TABLE>

22
<PAGE>

The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>

Options Outstanding Options Exercisable
------------------------------------------------------------- ---------------------------------
Range of Number Weighted-Average Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- -------------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>

$0.25 - 0.50 23,530 7.19 $0.41 12,727 $0.47
3.50 - 4.99 832,410 8.52 4.52 343,408 4.35
5.00 - 7.99 1,999,712 8.37 6.12 821,701 6.25
8.00 - 12.63 512,411 8.14 9.47 208,576 9.63
----------- -----------
3,368,063 1,386,412
=========== ===========
</TABLE>

Employee Stock Purchase Plan

The 1992 Employee Stock Purchase Plan (the Purchase Plan) allows eligible
employees an opportunity to purchase an aggregate of 450,000 shares of the
Company's common stock at a price per share equal to 85% of the lesser of the
fair market value of the Company's common stock at the beginning or the end of
each annual purchase period. Under the terms of the Purchase Plan, no
participant may acquire more than 5,000 shares of the Company's common stock or
more than $5,000 in aggregate fair market value of common stock (as determined
at the beginning of each purchase period) during any annual purchase period.
Common shares sold to employees under the Purchase Plan for the years ended
December 31, 1996, 1995 and 1994 were 57,456, 83,331 and 102,625, respectively.

The fair value of the employees' rights under the Purchase Plan are
estimated at the beginning of each annual purchase period using the Black-
Scholes model with the following assumptions in 1996 and 1995, respectively: no
dividend yield; an expected life of one year; expected volatility of 39.3% and
39.4%; and risk-free interest rates of 6.58% and 6.24%. The fair value of each
purchase right granted for the years ended December 31, 1996 and 1995 were $2.06
and $1.81, respectively.

Stock Compensation

The Company has elected to continue to account for its plans in accordance with
APB No. 25. Accordingly, no compensation cost has been recognized in the
Company's financial statements for stock compensation awards. Had compensation
cost for the Company's stock-based compensation plans been recognized consistent
with the fair value method of SFAS No. 123, the Company's net income (loss) and
net income (loss) per common and common equivalent share would have been reduced
to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>

1996 1995
---------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $1,359,731 $4,022,448
Pro-forma (703,969) 3,093,213
Net income (loss) per
common and common As reported .06 .17
equivalent share Pro-forma (.03) .14
</TABLE>

The pro-forma disclosures presented above do not reflect the full impact of
stock-based compensation on the Company's reported results under the recognition
provisions of SFAS No. 123 because compensation expense is reflected over the
vesting period of the award and compensation expense for awards granted prior to
January 1, 1995 are not considered.

(7) Income Taxes
The components of income (loss) before income taxes and income tax expense for
each of the years in the three-year period ended December 31, 1996 consists of
the following:
<TABLE>
<CAPTION>

1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Income (loss) before
income taxes:
U.S. $2,396,326 $7,398,633 $(2,409,036)
Foreign (372,595) (864,185) 619,651
----------------------------------------
Total $2,023,731 $6,534,448 $(1,789,385)
========================================
Income tax provision:
Current:
U.S. $1,753,000 $2,014,000 $3,570,000
State 376,000 428,000 415,000
Foreign 75,000 243,000 140,000
----------------------------------------
Total current 2,204,000 2,685,000 4,125,000
----------------------------------------
Deferred:
U.S. (1,285,000) (195,000) (1,000,000)
State (255,000) 22,000 (200,000)
----------------------------------------
Total deferred (1,540,000) (173,000) (1,200,000)
----------------------------------------
Total income tax
expense $ 664,000 $2,512,000 $2,925,000
----------------------------------------
</TABLE>

23
<PAGE>

The reconciliation of the statutory federal tax rate and the effective tax rate
for each of the years in the three-year period ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>

1996 1995 1994
----------------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% (34.0%)
Increase (decrease) in taxes
resulting from:
Purchased in-process
research and development - - 176.7
State taxes, net of federal
tax benefit 4.0 4.6 15.3
Foreign sales corporation and
foreign tax rate differential (13.7) (7.1) (6.1)
Reduction in foreign net
operating loss carryforwards 38.6 - -
Change in valuation allowance (31.3) 8.1 10.6
Other 1.2 (1.2) 0.9
--------------------
Total 32.8% 38.4% 163.4%
====================
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax assets and (liabilities) as of December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>

December 31
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Deferred tax assets:

Property and equipment $1,108,000 $ -
Inventory obsolescence and
timing differences 1,126,000 790,000
Reserves for bad debts and sales
returns 310,000 419,000
Accrued compensation 778,000 1,245,000
Foreign net operating loss
carryforwards 194,000 827,000
Federal and state tax credits 193,000 136,000
Other 88,000 190,000
---------- -----------
Total gross deferred tax assets 3,797,000 3,607,000
Valuation allowance (194,000) (827,000)
---------- -----------
Net deferred tax assets 3,603,000 2,780,000
---------- -----------
Deferred tax liabilities:
Purchased technology (55,000) (1,449,000)
Other (71,000) (157,000)
---------- -----------
Total gross deferred tax liabilities (126,000) (1,606,000)
---------- -----------
Net deferred income taxes $3,477,000 $ 1,174,000
========== ===========
</TABLE>

The Company has assessed its taxable earnings history and has determined that it
is more likely than not that its net deferred tax assets will be realized in
future periods. During 1996, the Company's valuation allowance was reduced by
$633,000 due to a decrease in the Company's available foreign net operating loss
carryforwards. During 1995, the Company's valuation allowance increased by
$526,000 due to the nonrecognition of the tax benefit associated with the loss
carryforwards from foreign operations. During 1994, the Company's valuation
allowance was reduced by $1,073,000 in connection with the acquisition of
Brixton based upon the cumulative tax attributes of the combined companies.

(8) Success Sharing Bonus Plan

The Company's Success Sharing Bonus Plan (the Plan) provides a formula for
determination of cash bonus payments to employees. Generally, all regular
employees who do not participate in other incentive compensation plans are
eligible to participate in the Plan starting with the employee's first full
calendar quarter of employment. The Plan provides for employee bonus payments
based on a defined percentage of a participant's eligible base compensation
multiplied by the CNT Performance Factor (CPF). The CPF is derived from a
matrix formulated by the board of directors with axes consisting of defined
levels of revenue growth and pre-tax profit (determined after deducting the cost
of the success sharing bonuses).

The success sharing bonus expense for the years ended December 31, 1996,
1995 and 1994 was $582,128, $325,332, and $562,003, respectively.

(9) 401(k) Salary Savings Plan

Effective January 1, 1991, the Company adopted a 401(k) Salary Savings Plan
(401(k) Plan). Employees who meet the eligibility requirements of the Plan are
eligible to participate and benefits provided under the 401(k) Plan are funded
by a qualified retirement trust managed by an outside trustee. The Company has
not contributed to the 401(k) Plan.

<PAGE>

(10) Financial Information by Geographic Area and
Major Customers

The Company's revenue, income (loss) from operations, and total assets,
summarized by geographic area is as follows:

1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Revenue:
United States
U. S. and Canada $71,887,992 $55,244,707 $ 57,641,718
European export 8,490,808 8,693,053 6,927,614
Pacific Rim export 7,156,223 5,849,359 6,136,794
Other 1,716,367 1,368,156 564,186
------------------------------------------
Total United States 89,251,390 71,155,275 71,270,312
------------------------------------------

Europe subsidiaries 10,291,892 11,363,084 11,595,574
Eliminations (2,434,420) (3,681,712) (3,324,113)
------------------------------------------
Total $97,108,862 $78,836,647 $ 79,541,773
------------------------------------------

Income (loss) from
operations:
United States $ 424,277 $ 5,605,124 $ (4,316,540)
Europe subsidiaries (473,006) (912,466) 34,445
Eliminations _ 234,119 1,232,943
------------------------------------------
Total $ (48,729) $ 4,926,777 $ (3,049,152)
------------------------------------------

Total assets:
United States $81,385,021 $77,963,266 $ 91,478,669
Europe subsidiaries 6,983,903 7,123,604 8,144,664
Eliminations (5,989,939) (5,952,753) (26,474,559)
------------------------------------------
Total $82,378,985 $79,134,117 $ 73,148,774
------------------------------------------
</TABLE>

During 1996, sales to one customer and its multiple divisions accounted for 18%
of the Company's total revenue. No single customer accounted for more than 10%
of the Company's total revenue in either 1995 or 1994.

(11) Noncash Financing and Investing Activities and
Supplemental Cash Flow Information

Cash payments for interest expense for the years ended December 31, 1996, 1995
and 1994 were $45,009, $60,419, and $67,967, respectively.

Tax refunds received, net of payments, for the year ended December 31, 1996
were $303,908. Cash payments for income taxes, net of refunds received, for the
years ended December 31, 1995 and 1994 were $5,305,879 and $1,047,532,
respectively.

During 1994, in connection with the acquisition of Brixton, the Company
acquired non-cash assets and liabilities of approximately $6.4 million and $1.6
million, respectively, in exchange for $5.5 million in cash, common stock valued
at approximately $6.5 million and stock options valued at approximately $2.0
million.

(12) Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair values of
financial instruments:

Cash And Cash Equivalents And
Marketable Securities

The carrying amount approximates fair value because of the short maturity of
those instruments.

Common Equity Put Option

The carrying value of the common equity put option (see note 6) is equal to the
difference between the aggregate exercise price of the option and the current
market value for the underlying shares. The Company believes the carrying value
of the common equity put option approximates its fair value.

(13) Contingencies

(14) Subsequent Event

On March 10, 1997, the Company's Board of Directors authorized the repurchase of
up to 2,000,000 shares of its common stock from time to time in the open market
or otherwise.

25
<PAGE>

Independent Auditors' Report

The Board of Directors and Shareholders
Computer Network Technology Corporation:

We have audited the accompanying consolidated balance sheets of Computer Network
Technology Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Computer
Network Technology Corporation and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 27, 1997,
except as to note 14,
which is as of March 10, 1997

Report of Management

The accompanying consolidated financial statements, including the notes thereto,
and other financial information presented in the Annual Report were prepared by
management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon our best estimates
and judgments.

Computer Network Technology Corporation maintains an effective system of
internal accounting control. We believe this system provides reasonable
assurance that transactions are executed in accordance with management
authorization and are appropriately recorded in order to permit preparation of
financial statements in conformity with generally accepted accounting principles
and to adequately safeguard, verify, and maintain accountability of assets. The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal control should not exceed the benefits derived.

KPMG Peat Marwick LLP, independent certified public accountants, is
retained to audit the Company's financial statements. Their accompanying report
is based on an audit conducted in accordance with generally accepted auditing
standards. The audit includes a review of the internal accounting control
structure to gain a basic understanding of the accounting system in order to
design an effective and efficient audit approach and not for the purpose of
providing assurance on the system of internal control.

The Audit Committee of the Board of Directors is composed of three outside
directors and is responsible for recommending the independent accounting firm to
be retained for the coming year, subject to shareholder approval. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, internal accounting
controls, and financial reporting matters.

/s/ Thomas G. Hudson

Thomas G. Hudson
President, Chief Executive Officer and
Acting Chief Financial Officer

26
<PAGE>

Quarterly Financial Data (unaudited)
(In thousands, except per share data)
First Second Third Fourth
Year Ended December 31 Quarter Quarter Quarter Quarter*
-------------------------------------------
<S> <C> <C> <C> <C>
1996 Revenue $22,357 $25,546 $23,976 $25,230
Income (loss) from operations (378) 1,277 1,055 (2,003)
Net income (loss) 19 1,181 1,076 (916)
Net income (loss) per common and
common equivalent share .00 .05 .05 (.04)

1995 Revenue $18,731 $21,776 $16,587 $21,743
Income (loss) from operations 2,480 3,443 244 (1,240)
Net income (loss) 1,748 2,434 467 (626)
Net income (loss) per common and
common equivalent share .07 .10 .02 (.03)

</TABLE>

*The 1996 fourth quarter includes a charge of $2.7 million, or $.07 per share
after tax, for the write-down of purchased technology. The 1995 fourth quarter
includes a charge of $2.5 million, or $.07 per share after tax, attributable to
a management reorganization.

27
<PAGE>

Investor Information

Principal Outside Counsel
Faegre & Benson LLP
Minneapolis, Minnesota

Independent Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota

Transfer Agent

Shareholder inquiries relating to shareholder records, stock transfer, change of
ownership or change of address should be directed to the Company's transfer
agent:

Chase Mellon Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 288-9541

Form 10-K

A copy of our annual report on Form 10-K, filed with the Securities and Exchange
Commission, will be furnished free of charge to any CNT shareholder upon either
telephone request to (612) 797-6111, e-mail request to
[email protected], or written request to:

Investor Relations

Computer Network Technology Corporation
605 North Highway 169 - Suite 800
Minneapolis, Minnesota 55441

Information on CNT is also available through the World Wide Web at
http://www.cnt.com.

Investor Inquires

Shareholders, securities analysts, portfolio managers and others in the
investment community seeking information about CNT should contact Investor
Relations at (612) 797-6111 or by e-mail at [email protected].

Annual Meeting

Shareholders, employees and friends are invited to attend CNT's annual meeting
on Thursday, May 15, 1997 at 10:00 a.m. at the Radisson Plaza Hotel, 35 South
Seventh Street, Minneapolis, Minnesota.

Price Range of the Company's Common Stock

The following table sets forth the range of high, low and closing sales prices
and volume for the Company's common stock (NASDAQ: CMNT), as reported on the
Nasdaq Stock Market.
<TABLE>
<CAPTION>

Common Stock
------------------------------
High Low Closing Volume
in thousands
------------------------------
<S> <C> <C> <C> <C>
1996:
First Quarter $ 5.88 $4.00 $ 5.63 7,723
Second Quarter 10.50 5.25 7.13 15,221
Third Quarter 8.00 4.75 5.75 5,713
Fourth Quarter 6.75 4.88 5.00 8,966
-------------------------------
1995:
First Quarter $ 9.38 $5.88 $ 8.25 10,149
Second Quarter 11.88 7.63 10.25 10,876
Third Quarter 12.75 4.75 7.00 20,864
Fourth Quarter 7.25 4.25 4.50 9,084
</TABLE>

As of March 24, 1997, there were 1,100 shareholders of record. The Company
estimates that an additional 10,000 shareholders own stock held for their
accounts at brokerage firms and financial institutions.

Dividends

The Company has never paid cash dividends on any of its securities. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future.

28
<PAGE>

Corporate Information

Board of Directors

Thomas G. Hudson
President, Chief Executive Officer and
Acting Chief Financial Officer

Erwin A. Kelen
Private Investor
Kelen Ventures

Lawrence Perlman
Chairman and Chief Executive Officer
Ceridian Corporation

John A. Rollwagen
Chairman of the Board
Private Investor
John A. Rollwagen Company

Executive Officers

Thomas G. Hudson
President and Chief Executive Officer
Acting Chief Financial Officer

Richard E. Carlson
Vice President of Manufacturing

William C. Collette
Vice President of Engineering

Peter Dixon
Vice President of International

Richard G. Helgeson
Vice President of Sales

B. D. (Bill) Johnson
Vice President of Marketing

Mark Knittel
Vice President of Architecture and
Business Development

Scott A. McCourt
Vice President of Brixton Development

Kristine E. Ochu
Vice President of Human Resources

Julie C. Quintal
Vice President of Customer Support

29
<PAGE>

[CNT LOGO]

<TABLE>

Corporate Locations Wholly Owned Subsidiary Sales Offices
<S> <C> <C>
Computer Network Technology CNT International Ltd. USA and Canada

Corporation Langley, Slough 1-800-CNT-0090

605 North Highway 169, Suite 800 United Kingdom

Minneapolis, Minnesota 55441 USA Tel: 44-1753-792400 Outside the USA and Canada

Tel: 612-797-6000 1-612-797-6742

Fax: 612-797-6813 CNT France S.A.

La Garenne Colombes Joint Venture

Computer Network Technology France CNTware Vernetzungssysteme GmbH

Corporation Tel: 33-1-4130-1212 Germany

6500 Wedgwood Road Tel: 49-6074-8227-0

Maple Grove, Minnesota 55311 USA CNT Asia Pacific Pty Ltd.

Tel: 612-550-8000 North Sydney For further information, contact

Fax: 612-550-8800 Australia us at a number listed above, or at

Tel: 61-2-540-5486 http://www.cnt.com on the internet.

Computer Network Technology

Corporation CNT China Limited

1700 West Park Drive Hong Kong

Westborough, Massachusetts 01581 USA Tel: 852-2593-1121

Tel: 508-870-3500

Fax: 508-870-3550

CNT, Channelink, Channelspeed and Brixton are registered trademarks, and the CNT logo, Channelink Integrated Gateway,
Web Integrator, and FileSpeed are trademarks of Computer Network Technology Corporation. All other trademarks identified
herein are the property of their respective owners. CNT is an equal opportunity employer. CNT is ISO9002 certified.

Printed in the USA.
</TABLE>

<PAGE>

Exhibit 21
----------

COMPUTER NETWORK TECHNOLOGY CORPORATION

Subsidiaries of the Registrant

CNT International Ltd.
- ----------------------

. Incorporated under the English Companies Act
. d/b/a CNT International Ltd. and CNTI

CNT France S.A.
- ---------------

. Incorporated under French law
. d/b/a CNT France S.A. and CNTF

Computer Network Technology GmbH
- --------------------------------

. Incorporated under German law

CNTFS Corporation
- -----------------

. Incorporated under Virgin Islands law

CNTware Vernetzungssysteme GmbH (51%)
- -------------------------------

. Incorporated under German law
. d/b/a CNTware

Computer Network Technology (Asia Pacific) Pty. Ltd.
- ----------------------------------------------------

. Incorporated under Australian Law
. d/b/a CNT A/P

CNT China Limited
- -----------------

. Incorporated under Hong Kong Law

<PAGE>

EXHIBIT 23.

Independent Auditors' Consent

The Board of Directors
Computer Network Technology Corporation:

We consent to incorporation by reference in the Registration Statements (No. 33-
6862, 33-28367, 33-42750, 33-41596, 33-48944, 33-48954, 33-68356, 33-
68372, 33-83262, 33-83264, and 33-83266) of Computer Network Technology
Corporation on Form S-8 and the related Reoffer Prospectuses prepared in
accordance with Form S-3 of our reports dated January 27, 1997, except as to
Note 14, which is as of March 10, 1997, relating to the consolidated balance
sheets of Computer Network Technology Corporation and subsidiaries as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, and the related financial statement
schedule, which reports appear, or are incorporated by reference, in the
December 31, 1996 annual report on Form 10-K of Computer Network Technology
Corporation.

/s/ KPMG Peat Marwick LLP

Minneapolis, Minnesota
March 24, 1997

<PAGE>

<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the consolidated balance sheet and statement of operations of Computer Network
Technology Corporation as of and for the year ending December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>

<F1> Amount presented represents engineering and development expense.
</FN>

</TABLE>