COMPUTER NETWORK TECHNOLOGY CORP, 424B5, 2000-09-15

COMPUTER NETWORK TECHNOLOGY CORP
424B5, 2000-09-15
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE> 1

THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE PROSPECTUS SUPPLEMENT IS DELIVERED IN FINAL
FORM. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES
AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 2000

PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 23, 1999)

3,700,000 SHARES

[COMPUTER NETWORK TECHNOLOGY LOGO]

COMPUTER NETWORK TECHNOLOGY CORPORATION
COMMON STOCK
------------------------

We are offering for sale 3,700,000 shares of our common stock. All of the
shares of common stock offered under this prospectus supplement are being
offered by us.

The underwriters have an option to purchase a maximum of 555,000 shares of
common stock from us to cover over-allotments of shares.

Our common stock is quoted on the Nasdaq National Market under the symbol
"CMNT." On September 14, 2000, the last sale price for our common stock was
$23.50 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE S-6 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 4 OF THE ACCOMPANYING PROSPECTUS TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

------------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>

------------------------

The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 2000.

------------------------

BEAR, STEARNS & CO. INC. SG COWEN

WIT SOUNDVIEW

The date of this prospectus supplement is , 2000.
<PAGE> 2

Graphical representation of our storage networking solutions. Written at
the top of the page in larger type are the words "CNT Storage Networking
Solutions." The graphics depict the interplay and connection of the hardware and
equipment that comprises Metro Area Networks, Storage Area Networks and Wide
Area Networks. Our equipment is shown in orange. At the bottom of the page are
the words "Key Applications," under which is written the following:

"- Remote Disk Mirroring
- Remote Tape Vaulting
- Backup and Restore
- Server and Disk Consolidation."
<PAGE> 3

SUMMARY

This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus about our company. This summary may
not contain all of the information that is important to you. To understand the
offering and our business fully, we strongly encourage you to read carefully
this entire prospectus supplement, the accompanying prospectus and the documents
we have filed with the Securities and Exchange Commission. Nothing herein shall
be deemed to be an offering of more than $100,000,000 of shares of our common
stock, including the underwriters' over-allotment option.

COMPUTER NETWORK TECHNOLOGY CORPORATION

OUR BUSINESS

We are a leading provider of hardware and software products and related
professional services in the rapidly growing storage networking market. We focus
primarily on helping our customers design, develop, deploy and manage storage
area networks, or SANs. A SAN is a high speed storage network within a business'
existing computer system that allows the business to manage its expanding data
storage needs with greater efficiency and less disruption to its overall
network. We design, manufacture, market and support a wide range of products for
critical SAN applications such as remote disk mirroring, or the real-time backup
of data to remotely located disks, and remote tape vaulting, or the backup of
data to remotely archived tapes. Revenue from our SAN products were $6.6
million, $31.9 million and $53.6 million for the years ended December 31, 1997,
1998 and 1999, respectively, and $37.5 million for the first six months of
fiscal 2000.

Our storage networking products enable businesses to cost-effectively
manage their increasing storage requirements, connect geographically dispersed
SANs, provide continuous availability to greater amounts of data and protect
increasing amounts of data more efficiently. We market our storage networking
products directly to customers through our sales force, worldwide distributors
and original equipment manufacturers, or OEMs. Our distribution and OEM
relationships include Compaq, Hewlett Packard and StorageTek. We also have
strategic marketing partnerships with leading storage industry and fibre
switching companies, including Brocade, EMC, Hitachi Data Systems, IBM, Legato
and SCH Technologies.

We were the first to develop, and remain a leader in, the following storage
networking applications:

- SANs over wide area networks, or WANs -- Our SAN over WAN products enable
businesses to manage and protect data across remote locations, in real
time if necessary, through applications such as remote disk mirroring and
remote tape vaulting. Wide area networks, or WANs, are networks dispersed
over long distances that communicate by traditional or fiber optic
third-party telecommunication lines.

- Fibre Channel-based SANs over WANs -- In October 1999, we introduced our
first Fibre Channel-based SAN over WAN product. Fibre Channel is a
recently developed technology that dramatically improves the speed of
data input and output, or I/O, between existing SAN storage devices and
the ability to connect additional devices to SANs. We believe our Fibre
Channel-based SAN over WAN products offer significant growth prospects.
These products uniquely address constraints in distance, connectivity and
data transmission speeds inherent in the Fibre Channel standard. We
believe Fibre Channel technology combined with our products will enable
businesses to efficiently consolidate, cluster and share data from
multiple storage devices on SANs.

- SANs over IP-based networks -- In February 2000, we introduced the first
products to allow storage networking applications, such as remote disk
mirroring, to be deployed over private networks that are based on
Internet protocol, or IP, the standard method for data transmission over
the Internet. Our products were the first to extend the Fibre Channel,
SCSI and ESCON standards to IP-based networks, and we are the only
company currently providing such products. SCSI and ESCON are older,
widely used standards for communicating between computers. These products
uniquely enable businesses that use virtual private IP-based networks,
including many Web-based businesses, to build SAN over WAN applications.

S-1
<PAGE> 4

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

We believe the recent introduction of our products that enable SAN
applications over IP-based networks will benefit existing customers and expand
our reach into the rapidly growing Internet market. This product extends the
"bandwidth on demand" advantages of IP-based networks into storage applications
and allows customers to access telecommunications capacity only as needed
through a general connection, as opposed to leasing expensive dedicated lines.
By deploying SANs over IP-based networks, companies can leverage their existing
under-utilized bandwidth, and can rely on their existing IP network knowledge.
We believe that these cost savings, along with the generally expected decreasing
costs of telecommunications capacity, will create high-growth opportunities for
us in remote disk mirroring, remote tape vaulting and future SAN applications we
enable. Current customers using our SAN over IP-based network solutions include
EchoStar, [email protected], Neoforma.com, USA.NET and Worldcom.

Historically, we have operated through two vertically integrated divisions.
We have and continue to market our storage networking products through our
continuing operations, which we have historically referred to as our Networking
Solutions Division, which represent our core business. Our SAN products consist
primarily of our UltraNet(R) and Channelink(R) families of products. Our
continuing operations also market our established channel networking products,
which enable computers to transmit data over unlimited distances. Our
discontinued operations, which we have historically referred to as our
Enterprise Integration Solutions Division, develop and sell our enterprise
application integration, or EAI, software that automates the integration of
computer software applications and business workflow processes, as well as our
traditional server gateways and tools, which enable multiple desktop computers
and mainframe terminals to communicate with one another. We have announced our
intention to divest our Enterprise Integration Solutions Division in order to
focus all of our resources on our SAN products and other storage networking
products.

OUR MARKET OPPORTUNITIES

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

- The volume of enterprise data is increasing significantly due to the
proliferation of Internet and Web-based content, digital media, e-mail,
e-commerce and data warehousing. As a result, the demand for storage
capacity is growing rapidly.

- Actual and expected declines in telecommunications costs and the
introduction of new, cost-effective technologies such as Fibre Channel
switching and fiber optic transmission capabilities will make remote disk
mirroring and remote tape backup applications more cost effective for our
customers. We also believe the total cost of ownership for storage may be
increasing, due to labor, management and other costs required to
implement shared storage across the enterprise. The decrease in
telecommunications costs, coupled with an overall increase in the cost of
ownership, contributes to a trend of consolidating and connecting storage
across many servers and many locations, which drives demand for our
products.

- SAN applications over IP-based networks will further expand the type and
amount of data our customers will backup and disk mirror to remote
locations, and also bring Web-based and storage service provider
companies into our customer base.

S-2
<PAGE> 5

billion in 2003, a compound annual growth rate of 66%. Another indication of a
strong demand for our storage networking products is the growth of the Fibre
Channel market. IDC estimates the revenue for Fibre Channel hubs and switches
will grow from $0.4 billion in 1999 to $4.2 billion in 2003, which reflects a
compound annual growth rate of 76%. These increasing volumes of data are
encouraging businesses to implement systems that allow users to share, access
and protect information across the enterprise.

SELECTED RECENT DEVELOPMENTS

Divestiture of Enterprise Integration Solutions Division. Our board of
directors has determined to sell or spin-off our Enterprise Integration
Solutions Division in order to focus all of our resources on our SAN and other
storage networking products. The board has set January 31, 2001 as a target date
for completing any sale or a decision to proceed with a spin-off. Accordingly,
the financial information for this division has been accounted for as
discontinued operations.

SAN applications over IP-based networks. We recently introduced products to
allow storage networking applications, such as remote disk mirroring using EMC's
software based Symmetrix Remote Data Facility, or SRDF, and remote tape vaulting
to be deployed over standard IP-based networks. We anticipate expanding our
product offerings to support additional SAN applications from other vendors. The
recent expansion of support for IP includes what we believe is the only working
capability to extend Fibre Channel technology and the SCSI interface over
IP-based networks.

Strategic Alliance with Iron Mountain to Provide Storage Services. We
recently entered into a strategic alliance with Iron Mountain to provide
outsourced electronic tape vaulting services. Iron Mountain's Arcus Data
Security Division provides tape management expertise and well-established secure
off-site vaulting facilities. We will bundle our storage networking products and
expertise with Iron Mountain's facilities to provide a complete outsourced
remote tape vaulting service.

Partnership with Nortel Networks. We are working with Nortel Networks to
design and develop storage networking technologies using IP-based and optical
networks to meet the needs of storage and application service providers.

THE OFFERING

The following information, and, unless otherwise indicated, all per share
information set forth in this prospectus supplement, is based on 24,151,231
shares of our common stock outstanding on July 31, 2000. This information:

- excludes 5,465,710 shares of our common stock issuable upon exercise of
options outstanding on such date, with a weighted average exercise price
$11.74 per share;

- assumes an offering price of $23.50 per share; and

- assumes no exercise of the underwriters' over-allotment option.

References in this prospectus supplement and the accompanying prospectus to
"common stock" include the associated preferred share purchase right which
becomes exercisable upon the acquisition of 20% of our outstanding common stock
by certain persons.

Common stock offered.......... 3,700,000 shares

Common stock outstanding after
this offering................. 27,851,231 shares

Use of proceeds............... Working capital and general corporate purposes
and potential complementary SAN-related
acquisitions. See "Use of Proceeds."

Nasdaq National Market
symbol........................ CMNT

S-3
<PAGE> 6

CORPORATE INFORMATION

We are a Minnesota corporation. Our principal executive offices are located
at 6000 Nathan Lane North, Plymouth, Minnesota 55442, and our telephone number
is (763) 268-6000. Our website address is http://www.cnt.com. Information
contained in our website is specifically not incorporated in this prospectus
supplement or the accompanying prospectus by reference or otherwise.

The CNT logo, CNT(R), UltraNet(R) and Channelink(R) are our registered
trademarks. This prospectus supplement and the accompanying prospectus contain
other trademarks and trade names owned by us or other entities.

S-4
<PAGE> 7

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------
------------------------------- JUNE 30, JULY 31,
1997 1998 1999 1999 2000(1)
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
SAN products......................... $ 6,615 $ 31,850 $ 53,602 $25,416 $37,461
Other products....................... 49,512 43,119 35,646 17,172 21,579
Service fees......................... 24,068 28,052 36,741 17,149 23,908
------- -------- -------- ------- -------
Total revenue................ 80,195 103,021 125,989 59,737 82,948
------- -------- -------- ------- -------
Cost of revenue........................ 36,002 45,616 58,209 26,228 38,525
------- -------- -------- ------- -------
Gross profit........................... 44,193 57,405 67,780 33,509 44,423
------- -------- -------- ------- -------
Operating expenses:
Sales and marketing.................. 27,504 32,255 34,626 17,238 20,051
Engineering and development.......... 12,384 14,236 18,456 8,838 11,475
General and administrative........... 4,944 6,252 6,922 3,467 4,309
Abandoned facility................... -- -- 1,331 -- --
------- -------- -------- ------- -------
Total operating expenses..... 44,832 52,743 61,335 29,543 35,835
------- -------- -------- ------- -------
Income (loss) from operations.......... (639) 4,662 6,445 3,966 8,588
------- -------- -------- ------- -------
Other income (expense), net............ 1,400 427 110 (108) 221
------- -------- -------- ------- -------
Income from continuing operations
before income taxes.................. 761 5,089 6,555 3,858 8,809
Provision for income taxes............. 312 1,730 2,229 1,312 2,907
------- -------- -------- ------- -------
Income from continuing operations...... 449 3,359 4,326 2,546 5,902
------- -------- -------- ------- -------
Income (loss) from discontinued
operations, net of tax............... (2,763) 1,370 329 1,937 (2,019)
------- -------- -------- ------- -------
Net income (loss)...................... $(2,314) $ 4,729 $ 4,655 $ 4,483 $ 3,883
======= ======== ======== ======= =======
Diluted income (loss) per share:
Continuing operations................ $ .02 $ .15 $ .17 $ .10 $ .23
======= ======== ======== ======= =======
Discontinued operations.............. $ (.12) $ .06 $ .01 $ .08 $ (.08)
======= ======== ======== ======= =======
Net income (loss).................... $ (.10) $ .21 $ .18 $ .17 $ .15
======= ======== ======== ======= =======
Diluted shares......................... 22,702 22,572 25,818 25,649 26,152
======= ======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF JULY 31, 2000
--------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and marketable securities......... $ 29,580 $111,222
Working capital........................................... 48,784 130,426
Total assets.............................................. 124,398 206,040
Long-term obligations..................................... 2,366 2,366
Total shareholders' equity................................ 80,889 162,531
</TABLE>

-------------------------
(1) On January 12, 2000, we changed our fiscal year to end on January 31, rather
than December 31.

(2) As adjusted to reflect the receipt of the estimated net proceeds from the
sale of 3,700,000 shares of common stock, after deducting underwriting
discounts and estimated offering expenses.

S-5
<PAGE> 8

RISK FACTORS

You should carefully consider the following risk factors as well as the
risk factors beginning on page 4 of the accompanying prospectus, in addition to
the other information contained in this prospectus supplement and the
accompanying prospectus, before purchasing shares of our common stock. Investing
in our common stock involves a high degree of risk. If any of the events
described in the following risk factors or the risk factors described in the
accompanying prospectus occur, our business, operating results and financial
condition could be seriously harmed. In addition, the trading price of our
common stock could decline due to the occurrence of any of such events, and you
may lose all or part of your investment. The following risk factors update and
modify some of the risk factors set forth in the accompanying prospectus.

WE RECENTLY INCURRED LOSSES AND MAY NOT BE ABLE TO MAINTAIN PROFITABILITY

We experienced losses of $2.3 million for the year ended December 31, 1997,
and $2.6 million in the fourth quarter of 1999. In addition, our discontinued
operations lost $2.0 million during the six months ended July 31, 2000 and
experienced declining revenues. Although we were profitable in 1999, taken as a
whole, we cannot be certain that we will be able to sustain historical or
projected growth rates with respect to our storage networking products. Also, we
are depending on our new SAN products for a significant portion of future
revenue, especially since we have decided to divest our Enterprise Integration
Solutions Division and as revenue from our traditional channel networking
products continue to decline. Our SAN revenue will have to increase
significantly to maintain current revenue levels and to offset overhead costs
that were previously shared by our two divisions. We expect to incur significant
product development, sales and marketing and administrative expenses in
connection with the introduction of new products, and, as a result, we will need
to generate significant revenue increases to achieve and maintain profitability.
We may not be able to sustain or increase profitability.

OUR FUTURE REVENUE AND OPERATING RESULTS ARE DIFFICULT TO PREDICT BECAUSE OF OUR
LIMITED OPERATING EXPERIENCE IN OUR PRESENT MARKETS

We have recently expanded into the storage networking market. In addition,
we expect that a significant portion of our future revenue will be derived from
our SAN products. Our limited operating experience, combined with the evolving
nature of the markets in which we sell our products, reduces our ability to
accurately forecast our quarterly and annual revenue. Our revenue base has also
become less diversified and could be subject to increased volatility since we
have decided to divest our Enterprise Integration Solutions Division. Moreover,
we plan our operating expenses based in part on our revenue projections. Because
most of our expenses are fixed in the short-term or incurred in advance of
anticipated revenue, we may not be able to decrease our expenses in a timely
manner to offset any unexpected shortfall in revenue.

NEW ACCOUNTING RULES COULD AVERSELY EFFECT OUR FINANCIAL STATEMENTS

We are currently aware of Staff Accounting Bulletin entitled SAB 101
"Revenue Recognition in Financial Statements" ("SAB 101"), which was issued in
December 1999 by the SEC. SAB 101 will be applicable to us during the quarter
ended January 31, 2001. SAB 101 summarizes the SEC's staff's view in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are currently analyzing whether SAB 101 will have any impact on
our financial statements. If SAB 101 is implemented and if its implementation is
contrary to our current practice, it may have an adverse effect on our financial
statements.

WE HAVE LIMITED PRODUCT OFFERINGS AND DEPEND ON THE WIDESPREAD MARKET ACCEPTANCE
OF OUR EXISTING AND NEW PRODUCTS

We derive a substantial portion of our revenue from a limited number of
existing products. Specifically, we derived approximately 60% and 63% of our
product revenue from our SAN products for

S-6
<PAGE> 9

the year ended December 31, 1999 and the six months ended July 31, 2000,
respectively. We expect that revenue from our SAN products will account for a
substantial and growing portion of our total revenue for the foreseeable future.
We are also substantially more dependent on SAN product revenue since we have
decided to divest our Enterprise Integration Solutions Division. Further, we
expect revenue from our channel networking products to continue to decline. As a
result, for the foreseeable future, we will continue to be subject to the risk
of a dramatic decrease in revenue if there is a decrease in demand for our SAN
products. Therefore, widespread market acceptance of these products is critical
to our future success. These products have been recently introduced.
Accordingly, the demand for, and market acceptance of, these products is
uncertain.

Factors that may affect the market acceptance of our products, some of
which are beyond our control, include the following:

- growth of storage networking product markets;

- performance, quality, price and total cost of ownership of our existing
products;

- continued development of technologies that allow our SAN products to
function over WANs and over IP-based networks;

- availability, price, quality and performance of competing products and
technologies; and

- successful development of our relationships with new and existing
customers and strategic partners.

WE MAY EXPERIENCE DIFFICULTIES AND COSTS IN DIVESTING OUR ENTERPRISE INTEGRATION
SOLUTIONS DIVISION

Our board of directors has decided to sell or spin-off our Enterprise
Integration Solutions Division in order to focus all of our resources on our SAN
and other storage networking products. The board of directors has set January
31, 2001 as a target date for completing any sale or a decision to proceed with
a spin-off. We do not currently have any binding contracts related to a
divestiture of the division and no assurance can be given as to whether
acceptable terms for such a divestiture can be reached or whether it will be
necessary to recognize further losses prior to or in connection with the
divestiture. We may also divest our server gateways and tools assets, which are
part of the Enterprise Integration Solutions Division, in a separate
transaction. In addition, we are subject to the following risks related to a
divestiture:

- The Enterprise Integration Solutions Division lost $2.0 million during
the six months ended July 31, 2000 and experienced declining revenue. The
Enterprise Integration Solution Division may incur further losses prior
to any divestiture and the divestiture process may discourage its
customers from purchasing products from the division, causing further
declines in the operating results of the division. We may also lose key
employees of the division while a divestiture is pending.

- Our management may be distracted by the divestiture process, which could
have an adverse impact on our operating results and our SAN product
revenue.

- We may have difficulties in obtaining contractual and governmental
consents in connection with a divestiture.

- A spin-off transaction could result in our being subject to a corporate
level tax if we were to engage in significant business combinations
during a two-year period following the spin-off. Accordingly, the
potential adverse tax consequences of a spin-off may effectively prohibit
subsequent transactions that could be advantageous to our shareholders.

Two employees who were former shareholders of IntelliFrame Corporation, a
company we acquired, are eligible for aggregate bonus payments of up to $10.0
million through December 31, 2001 if future revenue from specified products of
the Enterprise Integration Solutions Division exceed defined targets or if
certain products are sold in a transaction that does not constitute a change of
control. The potential bonus payments increase to a maximum of $12.0 million if
we engage in certain divestitures of specified products of the division in
calendar year 2000. The employees may also be entitled to bonus payments of up
to an aggregate of $8.0 million (offset by bonuses previously paid) upon certain
failures to market

S-7
<PAGE> 10

specified products of the division prior to December 31, 2001. To date, no bonus
payments have been made under these agreements. We do not know if any bonus
payments will become due under these agreements as a result of the divestiture
of the Enterprise Integration Solutions Division, as no transaction has yet been
structured.

OUR CHANGE OF FISCAL YEAR MAY NOT RESULT IN MORE PREDICTABLE QUARTERLY EARNINGS

Historically, our quarterly operating results have depended on our
performance in the latter part of each quarter, when a large percentage of our
product shipments typically occur. This fluctuation has made consistent
quarter-to-quarter performance and revenue forecasting difficult. We have
adopted a number of measures to address this issue, including changing our
fiscal year end to January 31, rather than December 31. We cannot be certain
that changing our fiscal year or adopting other measures will result in product
shipments occurring more evenly during each quarter, resulting in consistent
quarter-to-quarter performance or improving revenue forecasts.

OUR SUCCESS DEPENDS ON THE DEMAND FOR OUR SAN PRODUCTS

We depend on the demand for and success of our products. Potential
customers who have invested substantial resources in their existing data storage
and management systems may be reluctant or slow to adopt a new approach, like
SANs. Our success in generating revenue in these areas will depend on, among
other things, our ability to:

- educate potential customers, strategic partners and end users about the
benefits of our products and related technologies;

- maintain and enhance our relationships with leading strategic partners;
and

- predict and base our products on standards that ultimately become
industry standards.

In addition, the continued growth of the market for storage networking and
related SAN products may depend in part on the continued decrease in the price
of related services and components, such as telecommunication lines and
switches. Any increase in the price of these related services and components
would likely cause this market to grow at a reduced rate. Further, SANs are
often implemented in connection with deployment of new storage systems and
servers. Accordingly, our future success is also substantially dependent on the
market for new storage systems and servers. We are substantially more dependent
on our SAN revenue since we have decided to divest our Enterprise Integration
Solutions Division as discontinued operations.

S-8
<PAGE> 11

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 3,700,000 shares of
common stock we are offering will be approximately $81.6 million, or
approximately $94.0 million if the underwriters exercise their over-allotment
option in full, after deducting underwriting discounts and commissions, and
after deducting our estimated offering expenses. We currently expect the net
proceeds of the offering will be used as follows:

- working capital and general corporate purposes, including expenditures
for research and development of new products and services, distribution
channel development and other corporate purposes; and

- to acquire SAN products and businesses complementary to ours.

Although we are not currently subject to any agreement or letter of intent
with respect to potential acquisitions or the divestiture of the Enterprise
Integration Solutions Division, we may from time to time have discussions with
other parties. Pending the uses set forth above, we will invest the net proceeds
of this offering in investment grade, interest-bearing securities.

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
1998
First Quarter............................................. $ 5.00 $ 3.69
Second Quarter............................................ 5.88 3.88
Third Quarter............................................. 6.50 3.50
Fourth Quarter............................................ 14.25 3.75
1999
First Quarter............................................. $17.56 $ 9.75
Second Quarter............................................ 30.63 13.00
Third Quarter............................................. 23.25 9.19
Fourth Quarter............................................ 27.63 7.38
2000
January................................................... $22.63 $12.13
First Quarter............................................. 27.00 11.50
Second Quarter............................................ 19.88 11.56
Third Quarter (through September 14, 2000)................ 15.25 23.75
</TABLE>

On September 14, 2000, the last reported sale price for our common stock
was $23.50 per share, and there were approximately 1,000 holders of record of
our common stock.

DIVIDEND POLICY

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

S-9
<PAGE> 12

CAPITALIZATION

The following table sets forth cash, cash equivalents and marketable
securities and our capitalization as of July 31, 2000:

- on an actual basis; and

- as adjusted to give effect to the receipt of the estimated net proceeds
from the sale of 3,700,000 shares of common stock offered by us in this
offering, after deducting underwriting commissions and discounts and
estimated offering expenses.

See Note 5 to our consolidated financial statements for a description of
our capital lease obligations.

<TABLE>
<CAPTION>
AS OF
JULY 31, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $29,580 $111,222
======= ========
Obligations under capital lease, less current
installments.............................................. 2,366 2,366
------- --------
Shareholders' equity........................................
Common stock, $.01 par value; authorized 100,000 shares;
24,151 shares issued and outstanding, actual; 27,851
shares issued and outstanding, as adjusted............. 242 279
Additional paid-in capital................................ 71,554 153,159
Unearned compensation..................................... (924) (924)
Retained earnings......................................... 11,054 11,054
Accumulated other comprehensive income -- foreign currency
translation adjustment................................. (1,037) (1,037)
------- --------
Total shareholders' equity........................ 80,889 162,531
------- --------
Total capitalization......................... $83,255 $164,897
======= ========
</TABLE>

S-10
<PAGE> 13

SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus supplement. The selected
consolidated financial data set forth below as of December 31, 1997, 1998 and
1999 and for each of the years in the three-year period ended December 31, 1999,
are derived from, and are qualified in their entirety by reference to, our
consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants, and together with their report
thereon, are included elsewhere in this prospectus supplement. The selected
consolidated financial data set forth below as of December 31, 1995 and 1996,
and for the years ended December 31, 1995 and 1996, are derived from audited
financial statements not included in this prospectus supplement or the
accompanying prospectus. The consolidated balance sheet data as of July 31, 2000
and the consolidated statements of operations data for the six months ended June
30, 1999 and July 31, 2000 are derived from unaudited financial statements
included elsewhere in this prospectus supplement or accompanying prospectus and
include all adjustments, consisting only of normal recurring adjustments, which
we consider necessary for a fair presentation of the information set forth
therein. Operating results for the six months ended July 31, 2000 are not
necessarily indicative of results that may be expected for the year ending
January 31, 2001 or future results.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------
----------------------------------------------------- JUNE 30, JULY 31,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue:
Product sales......................... $50,250 $61,412 $56,127 $ 74,969 $ 89,248 $42,588 $59,040
Service fees.......................... 17,068 20,667 24,068 28,052 36,741 17,149 23,908
------- ------- ------- -------- -------- ------- -------
Total revenue................... 67,318 82,079 80,195 103,021 125,989 59,737 82,948
------- ------- ------- -------- -------- ------- -------
Cost of revenue......................... 30,682 38,111 36,002 45,616 56,795 26,228 38,525
Cost of revenue -- special charges...... -- -- -- -- 1,414(3) -- --
------- ------- ------- -------- -------- ------- -------
Total cost of revenue........... 30,682 38,111 36,002 45,616 58,209 26,228 38,525
------- ------- ------- -------- -------- ------- -------
Gross profit............................ 36,636 43,968 44,193 57,405 67,780 33,509 44,423
------- ------- ------- -------- -------- ------- -------
OPERATING EXPENSES:
Sales and marketing................... 16,694 22,370 27,504 32,255 34,626 17,238 20,051
Engineering and development........... 7,735 10,963 12,384 14,236 18,456 8,838 11,475
General and administrative............ 5,894 5,137 4,944 6,252 6,922 3,467 4,309
Special charges....................... 2,500(1) (779)(2) -- -- 1,331(3) -- --
------- ------- ------- -------- -------- ------- -------
Total operating expenses........ 32,823 37,691 44,832 52,743 61,335 29,543 35,835
------- ------- ------- -------- -------- ------- -------
Income (loss) from operations........... 3,813 6,277 (639) 4,662 6,445 3,966 8,588
------- ------- ------- -------- -------- ------- -------
Other income (expense), net............. 1,608 2,072 1,400 427 110 (108) 221
------- ------- ------- -------- -------- ------- -------
Income from continuing operations before
income taxes.......................... 5,421 8,349 761 5,089 6,555 3,858 8,809
Provision for income taxes.............. 2,060 3,173 312 1,730 2,229 1,312 2,907
------- ------- ------- -------- -------- ------- -------
Income from continuing operations....... 3,361 5,176 449 3,359 4,326 2,546 5,902
------- ------- ------- -------- -------- ------- -------
Income (loss) from discontinued
operations, net of tax................ 662 (3,816) (2,763) 1,370 329 1,937 (2,019)
------- ------- ------- -------- -------- ------- -------
Net income (loss)....................... $ 4,023 $ 1,360 $(2,314) $ 4,729 $ 4,655 $ 4,483 $ 3,883
======= ======= ======= ======== ======== ======= =======
Diluted income (loss) per share:
Continuing operations................. $ .14 $ .22 $ .02 $ .15 $ .17 $ .10 $ .23
======= ======= ======= ======== ======== ======= =======
Discontinued operations............... $ .03 $ (.16) $ (.12) $ .06 $ .01 $ .08 $ (.08)
======= ======= ======= ======== ======== ======= =======
Net income (loss)..................... $ .17 $ .06 $ (.10) $ .21 $ .18 $ .17 $ .15
======= ======= ======= ======== ======== ======= =======
Diluted shares.......................... 23,443 23,557 22,702 22,572 25,818 25,649 26,152
======= ======= ======= ======== ======== ======= =======
</TABLE>

---------------
(1) Reflects a special charge in 1995 of $2.5 million for a management
reorganization.

(2) Reflects a $779,000 reversal of a portion of the 1995 management
reorganization charge.

(3) Reflects special charges in the fourth quarter of 1999 of $1.4 million for
the write-off of non-SAN-related products and $1.3 million for an abandoned
facility.

S-11
<PAGE> 14

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JULY 31, 2000
------------------------------------------------ ------------------------
1995 1996 1997 1998 1999 ACTUAL AS ADJUSTED
------- ------- ------- ------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and
marketable securities.... $28,409 $35,065 $10,824 $12,362 $ 26,895 $ 29,580 $111,222
Working capital............ 44,282 48,192 30,380 35,587 50,715 48,784 130,426
Total assets............... 79,134 81,561 78,950 87,596 110,654 124,398 206,040
Long-term obligations...... -- -- 701 1,816 1,780 2,366 2,366
Total shareholders'
equity................... 60,506 64,161 55,607 60,558 78,472 80,889 162,531
</TABLE>

The foregoing as adjusted information reflects the proceeds from the sale
of 3,700,000 shares offered in this prospectus supplement hereby and assumes
deduction of underwriting discounts and estimated offering expenses.

S-12
<PAGE> 15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus supplement. The results described below are not necessarily
indicative of the results to be expected in any future period. Certain
statements in the following discussion are considered forward-looking under the
federal securities laws. These forward-looking statements are subject to various
risks and uncertainties that could cause actual results to differ substantially
from historical results or our predictions. See "Special Note Regarding
Forward-Looking Statements" in the accompanying prospectus.

OVERVIEW

We are a leading provider of hardware and software products and related
professional services in the rapidly growing storage networking market. We focus
primarily on helping our clients design, develop, deploy and manage SANs. Our
storage networking products represent our core business and account for a
substantial majority of our revenue and profit. Our SAN products consist
primarily of our UltraNet(R) and Channelink(R) families of products. We also
market our established channel networking products, which enable computers to
transmit data over unlimited distances.

On January 12, 2000, we changed our fiscal year end to January 31, from
December 31. References in this prospectus and prospectus supplement to the
first half of 2000 represent the six months ended July 31, 2000. References in
this prospectus and prospectus supplement to the first half of 1999 represent
the six months ended June 30, 1999. We have not submitted financial information
for the six months ended July 31, 1999 in this prospectus and prospectus
supplement because the information is not practical or cost beneficial to
prepare. We believe that the six months ended June 30, 1999 provide a meaningful
comparison to the first half of fiscal 2000. There are no factors, of which we
are aware, seasonal or otherwise, that would impact the comparability of
information or trends, if results for the six months ended July 31, 1999 were
presented in lieu of results for the six months ended June 30, 1999.

DISCONTINUED OPERATIONS -- DIVESTITURE OF ENTERPRISE INTEGRATION SOLUTIONS
DIVISION

Our discontinued operations, which we have historically referred to as our
Enterprise Integration Solutions Division, develops and sells our EAI software
that automates the integration of computer applications and business workflow
processes, as well as our traditional server gateways and tools which enable
multiple desktop computers and mainframe terminals to communicate with one
another. Our board of directors has determined to sell or spin off our
Enterprise Integration Solutions Division in order to focus all of our resources
on our SAN and other storage networking products. The board has set January 31,
2001 as a target date for completing any sale or a decision to proceed with a
spin-off. As a result of this decision, the Enterprise Integration Solutions
Division is shown as a discontinued operation in our consolidated statements of
operations, meaning that the division's revenues, costs and expenses are not
shown and its net income (loss) for all periods are included under the
"Discontinued Operations" caption. For additional information regarding the
results of operations of the Enterprise Integration Solutions Division, see note
4, "Discontinued Operations" to the consolidated financial statements. Certain
general and administrative, facility and information technology infrastructure
costs that had previously been allocated to and reported in the operating
results of the Enterprise Integration Solutions Division have been reallocated
and reported in the results for continuing operations.

S-13
<PAGE> 16

RESULTS OF CONTINUING OPERATIONS

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------- ------------------------------
1997 1998 1999 JUNE 30, 1999 JULY 31, 2000
------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales........................... 70.0% 72.8% 70.8% 71.3% 71.2%
Service fees............................ 30.0 27.2 29.2 28.7 28.8
----- ----- ----- ----- -----
Total revenue................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Gross profit:
Product sales........................... 63.8 63.4 57.0 60.9 58.7
Service fees............................ 34.9 35.2 46.1 44.2 40.9
----- ----- ----- ----- -----
Total gross profit.............. 55.1 55.7 53.8 56.1 53.6
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing..................... 34.3 31.3 27.5 28.9 24.2
Engineering and development............. 15.4 13.8 14.6 14.8 13.8
General and administrative.............. 6.2 6.1 5.5 5.8 5.2
Abandoned facility...................... -- -- 1.1 -- --
----- ----- ----- ----- -----
Total operating expenses........ 55.9 51.2 48.7 49.5 43.2
----- ----- ----- ----- -----
Income (loss) from operations............. (0.8) 4.5 5.1 6.6 10.4
Other income (expense), net............... 1.7 .4 .1 (.2) .3
----- ----- ----- ----- -----
Income from continuing operations before
income taxes............................ 0.9 4.9 5.2 6.4 10.7
----- ----- ----- ----- -----
Provision for income taxes................ 0.3 1.7 1.8 2.2 3.5
Income from continuing operations......... 0.6 3.2 3.4 4.2 7.2
----- ----- ----- ----- -----
Income (loss) from discontinued
operations, net of tax.................. (3.4) 1.4 .3 3.2 (2.4)
----- ----- ----- ----- -----
Net income (loss)......................... (2.8)% 4.6% 3.7% 7.4% 4.8%
===== ===== ===== ===== =====
</TABLE>

REVENUE

Six Months Ended July 31, 2000 and June 30, 1999

Revenue from products for the first half of 2000 totaled $59.0 million, an
increase of 39%, when compared to the first half of 1999. SAN applications for
both open systems and mainframes continued to drive our new product revenue. SAN
related product revenue for the first half of 2000 totaled $37.5 million, an
increase of 47%, when compared to the first half of 1999. Sales of channel
extension product applications for the first half of 2000 totaled $21.6 million,
an increase of 26%, when compared to the first half of 1999.

During the fourth quarter of 1999, we introduced the first product for
remote disk mirroring over IP-based networks. During the first half of 2000 we
recorded $2.4 million of IP-related product revenue. Our partner relationships
with STK and Compaq have also generated significant product revenue. During the
first half of 2000, sales of the DXE product to STK contributed $5.3 million of
product revenue, while our OEM relationship with Compaq contributed $2.1 million
of product revenue.

Service revenue for the first half of 2000 totaled $23.9 million, an
increase of 39% when compared to the first half of 1999. Professional service
revenue for the first half of 2000 totaled $4.1 million, an increase

S-14
<PAGE> 17

of 88%, when compared to the first half of 1999 as a result of increased demand
for our new professional service offerings. Traditional maintenance services
accounted for the remaining increase in revenue due to the growing installed
base of customers using our networking products.

Years Ended December 31, 1999 and 1998

Revenue from products increased 19% in 1999 to $89.2 million compared to
1998. SAN applications for both open systems and mainframes continued to drive
new product revenue during 1999. SAN product sales increased 68% in 1999 to
$53.6 million compared to 1998. Channel extension product applications declined
17% in 1999 to $35.6 million compared to 1998. We anticipate that sales of
channel extension products will continue to decline in the future, due to
product maturation.

Service revenue increased 31% in 1999 to $36.7 million, due to the growing
installed base of customers using our products. In addition, the sale of
professional services increased 203% in 1999 to $4.6 million.

Years Ended December 31, 1998 and 1997

Revenue from products increased 34% in 1998 to $75.0 million compared to
1997. SAN revenue for both open systems and mainframes continued to drive new
product revenue in 1998. SAN product applications increased 381% in 1998 to
$31.9 million from $6.6 million in 1997. Channel extension product applications
declined 13% in 1998 to $43.1 million from $49.5 million in 1997.

Service revenue increased by 17% in 1998 to $28.1 million compared to 1997,
due to the growing installed base of customers using our products. In addition,
the sale of professional services generated $1.5 million of new incremental
revenue in 1998.

General

Revenue generated from the sale of products and services outside the United
States for the six months ended July 31, 2000 totaled $21.7 million, a decrease
of 1% when compared to the same period of 1999.

Revenue from the sale of products and services outside the United States
increased in 1999 and 1998 by $10.1 million, or 30%, and $9.9 million, or 42%,
respectively, when compared to the prior year. We derived 35%, 32% and 29% of
our revenue outside the United States in 1999, 1998 and 1997, respectively. The
increase in revenue generated outside the United States is primarily
attributable to growing customer demand for SAN-related product applications.

No single customer accounted for more than 10% of our revenue during the
first six months of fiscal 2000 or during 1999, 1998 or 1997. Revenue increases
in 1999 and 1998 were attributable to increases in sales of SAN products and
additional services. Price increases for our products and services did not have
a significant impact on revenue in the first half of 2000, 1999 or 1998.

During the six months ended July 31, 2000, approximately 26%, 4% and 8% of
our product revenue was derived from businesses in the financial services,
telecommunications and information outsourcing industries, respectively. During
the year ended December 31, 1999, approximately 27%, 11% and 7% of our product
revenue was derived from businesses in the financial services,
telecommunications, and information outsourcing industries, respectively.

We derive an increasingly significant portion of our revenue from sales of
our storage networking products. As a result of product maturation, revenue
derived from traditional channel networking declined in 1999. We expect that
revenue from traditional channel networking products will continue to decline in
the future as we continue to focus more of our resources on our SAN products.

We primarily sell our storage networking products directly to end-user
customers in connection with joint marketing activities with our business
partners and OEMs. OEMs combine our products with their own products and sell
the combined products to their customers. For a new customer, the initial sales
and
S-15
<PAGE> 18

design cycle, from first contact through shipment, can vary from 90 days to 12
months or more. We expect that this cycle will continue.

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

GROSS PROFIT MARGIN

Six Months Ended July 31, 2000 and June 30, 1999

Gross profit margin from the sale of products for the first half of 2000
was 59%, compared to 61% for the first half of 1999. The decrease in the gross
margin was due to our sale of the DXE product to STK, and the UltraNet(R)
Gateway product to Compaq, both of which carry lower gross margin, but
comparable operating margin, than our Channelink(R) and UltraNet(R) products
sold through direct channels.

Gross profit margin from services for the first half of 2000 was 41%,
compared to 44%, for the first half of 1999. The decrease in gross margin was
due to new professional services employees who have been added over the past
nine months, in anticipation of future growth in professional services.

Years Ended December 31, 1999 and 1998

Gross profit margin from the sale of products was 57% in 1999, compared to
63% in 1998. The decrease in gross profit margin in 1999 compared to 1998 is
attributable to the write-off of non-SAN-related products totaling $1.4 million.
Excluding this charge, gross profit margin from the sale of products would have
been 59% in 1999. The remaining decrease in gross profit margin in 1999 is due
to an increase in UltraNet(R) product sales, which have a slightly lower gross
margin than our traditional Channelink(R) products.

Gross profit margin from service revenues in 1999 and 1998 was 46% and 35%,
respectively. The improvement in gross profit margin in 1999 compared to 1998 is
attributable to economies of scale resulting from the steadily increasing base
of our customers contracting for services and new incremental revenue from
professional services, which offers a higher gross margin than our traditional
service business.

Years Ended December 31, 1998 and 1997

Gross profit margin from the sale of products was 63% in 1998, compared to
64% in 1997. This decrease in gross profit margin was due to an increase in
UltraNet(R) product sales, which have a slightly lower gross margin than our
traditional Channelink(R) products.

Gross profit margin from service revenue was 35% in both 1998 and 1997.

OPERATING EXPENSES

Six Months Ended July 31, 2000 and June 30, 1999

Sales and marketing expense for the first half of 2000 increased by $2.8
million, or 16%, when compared to the first half of 1999. The increase in
expense resulted from higher commissions and additional headcount required to
generate the increase in revenue.

Engineering and development expense for the first half of 2000 increased by
$2.6 million, or 30%, when compared to the first half of 1999. The increase was
primarily due to continued development of our UltraNet(R) family of products
that provide customers with additional applications to satisfy their growing SAN
capabilities. During the first half of 2000, we announced SAN over standard IP
solutions, including SCSI and Fibre Channel over IP to strengthen our presence
in the IP solutions market.

S-16
<PAGE> 19

General and administrative expense for the first half of 2000 increased by
$842,000, or 24%, when compared to the first half of 1999. The increases were
due to higher costs for wages, insurance and professional fees.

Years Ended December 31, 1999 and 1998

Sales and marketing expense increased in 1999 by $2.4 million, or 7%,
compared to 1998. The increase in expense resulted from higher commissions and
additional headcount required to generate the increase in product revenue in
1999 of 19%.

Engineering and development expense increased in 1999 by $4.2 million, or
30%, compared to 1998. This increase was due to the continued development of our
UltraNet(R) family of products that provide customers with additional
applications to satisfy their growing need for SAN capabilities. Revenue related
to shipments of UltraNet(R) products increased 111% to $37.5 million in 1999
from $17.7 million in 1998.

General and administrative expense increased in 1999 by $670,000, or 11%,
compared to 1998 due to increases in insurance costs and professional fees.

Years Ended December 31, 1998 and 1997

Sales and marketing expense increased in 1998 by $4.8 million, or 17%,
compared to 1997. The increase in expense resulted from increases in headcount
and sales commissions necessary to generate increased product revenue in 1998 of
34%.

Engineering and development expense increased in 1998 by $1.9 million, or
15%, compared to 1997 due to the continued development of our UltraNet(R) family
of products. Revenues related to shipments of UltraNet(R) products increased
222% to $17.7 million in 1998 compared to $5.5 million in 1997.

General and administrative expense increased in 1998 by $1.3 million, or
26%, compared to 1997 due to increases in wages and professional fees.

SPECIAL CHARGES

Years Ended December 31, 1999, 1998 and 1997

During the fourth quarter of 1999, we recorded a $1.3 million charge for
the future costs associated with a facility that was abandoned prior to the
expiration of the lease term and a $1.4 million charge for the write-off of
non-SAN related products.

OTHER

Six Months Ended July 31, 2000 and June 30, 1999

Other income for the first half of 2000 increased by $329,000 when compared
to the first half of 1999, due to an increase in interest income resulting from
higher balances of cash and marketable securities available for investment.

We recorded a provision for income taxes for the first half of 2000 at an
effective income tax rate of 33%, compared to 34%, for the first half of 1999.
Fluctuations in our effective income tax rate are primarily due to the amount of
nondeductible foreign losses and fluctuations in the level of benefit from our
foreign sales corporation. Based on an assessment of our taxable earnings
history and prospective future taxable income, we have determined it to be more
likely than not that our net deferred tax asset will be realized in future
periods. We may be required to provide a valuation allowance for this asset in
the future if we do not generate sufficient taxable income as planned.

Years Ended December 31, 1999, 1998 and 1997

Interest income increased in 1999 by $351,000 and decreased in 1998 by $1.2
million due to fluctuations in the balances of cash and marketable securities
available for investment.

S-17
<PAGE> 20

Interest expense increased to $264,000 in 1999 from $79,000 and $57,000, in
1998 and 1997, respectively, due to an increase in capital lease obligations.

We recorded a provision for income taxes in 1999 and 1998 at an effective
rate of 34%, and in 1997 at an effective rate of 41%.

DISCONTINUED OPERATIONS

Six months Ended July 31, 2000 and June 30, 1999

Discontinued operations consisting of our Enterprise Integration Solutions
Division generated a loss after income taxes of $2.0 million in the first half
of 2000, compared to income after income taxes of $1.9 million in the first half
of 1999. The decrease in profitability is primarily attributed to a 69% decline
in revenue from sales of server gateways and tools products in the first half of
2000 to $2.1 million from $6.9 million in the first half of 1999. In addition,
maintenance revenue from our traditional server gateways and tools products
declined in the first half of 2000 to $1.8 million, from $2.7 million in the
first half of 1999, due to a drop off in the installed base of customers using
our traditional server gateways and tools products.

Years Ended December 31, 1999 and 1998

Discontinued operations generated income after income taxes of $329,000 in
1999 compared to income after income taxes of $1.4 million in 1998. The decrease
in profitability can be attributed to a 40% decline in revenue from sales of our
server gateways and tools products in 1999 to $9.7 million from $16.1 million in
1998. In addition, traditional maintenance revenue declined to $6.3 million in
1999 from $7.6 million in 1998.

Years Ended December 31, 1998 and 1997

Discontinued operations generated income after income taxes of $1.4 million
in 1998 compared to a loss after income taxes of $2.8 million in 1997. The
increase in profitability was due a 73% increase in revenue to $30.5 million in
1998 from $17.6 million in 1997, due to the acquisition of the Internet
Solutions Division of Apertus in October 1997.

Acquisitions

On December 3, 1998, we acquired, for $2.0 million, all of the outstanding
stock of IntelliFrame, a start-up software and services company that develops
technology for integrating legacy systems with client/ server systems and the
Internet. Two employees who were former shareholders of IntelliFrame are
eligible for aggregate bonus payments of up to $10.0 million through December
31, 2001 if future revenue from specified products of the Enterprise Integration
Solutions Division exceed defined targets or if certain products are sold in a
transaction that does not constitute a change of control. The potential bonus
payments increase to a maximum of $12.0 million if we engage in certain
divestitures of specified products of the division in calendar year 2000. The
employees may also be entitled to bonus payments of up to an aggregate of $8.0
million (offset by bonuses previously paid) upon certain failures to market
specified products of the division prior to December 31, 2001. To date, no bonus
payments have been made under these agreements. We do not know if any bonus
payments will become due under these agreements as a result of the divestiture
of the Enterprise Integration Solutions Division, as a transaction has not yet
been structured.

On October 24, 1997, we acquired substantially all of the assets, including
in-process research and development, of the Internet Solutions Divisions of
Apertus, a provider of EAI and server gateways and tools. The purchase price of
$16.4 million included a cash payment of $11.4 million at closing and assumption
by us of $5.0 million of liabilities and related acquisition costs. The assets
we acquired from IntelliFrame and Apertus are part of the Enterprise Integration
Solutions Division.

S-18
<PAGE> 21

Options

We have issued options for the purchase of approximately 2.8 million shares
of common stock in RealLegacy.com, Inc., our wholly owned subsidiary including
our EAI business, to our directors and the employees and officers of
RealLegacy.com, Inc. The options have an exercise price of $2.00 per share,
equal to their estimated fair market value on the date of grant, and have
individually defined terms and vesting periods.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash, cash equivalents and marketable securities at July 31, 2000 totaled
$29.6 million, an increase of $13.0 million since January 31, 2000. Operations
and proceeds from the exercise of stock options provided cash for the first half
of 2000 of $20.6 million and $2.2 million, respectively. Uses of cash for the
first half of 2000 included the purchase of property and equipment and field
support spares totaling $8.3 million.

Cash, cash equivalents and marketable securities at December 31, 1999,
totaled $26.9 million, an increase of $14.5 million over 1998. Operations and
proceeds from the exercise of stock options and shares issued under the employee
stock purchase plan contributed cash in 1999 of $18.8 million and $8.6 million,
respectively. Uses of cash in 1999 included the purchase of property and
equipment and field support spares totaling $11.0 million.

Expenditures for capital equipment and field support spares have been, and
will likely continue to be, a significant capital requirement. We believe that
our current balances of cash, cash equivalents and marketable securities, when
combined with anticipated cash flows from operations, will be adequate to fund
our operating plans and meet our current anticipated aggregate capital
requirements, at least through fiscal 2000.

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

MARKET RISK

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

At July 31, 2000, our marketable securities include a $582,000 investment
in a Standard and Poors 500 stock price index fund and a $104,000 investment in
a NASDAQ 100 index tracking stock. These investments were purchased to directly
offset any investment gains or losses owed to participants under our executive
deferred compensation plan which has been established for selected key
employees.

We are exposed to market risks related to fluctuations in foreign exchange
rates because some sales transactions, and the assets and liabilities of our
foreign subsidiaries, are denominated in foreign currencies, primarily French
francs, the euro and British pounds sterling. As of July 31, 2000, we have
hedged a portion of our risk by purchasing forward exchange contracts for 1.2
million British pounds sterling that settle at various times through January 31,
2001.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), effective for us
on February 1, 2001, establishes new standards for recognizing all derivatives
as either assets or liabilities and measuring those instruments at fair value.
Currently, we do not anticipate that SFAS No. 133 will have a material impact on
our financial position or results of operations.

S-19
<PAGE> 22

In December 1999, the SEC staff issued SAB 101, "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We are currently analyzing whether SAB 101 will have any
impact on our financial statements. SAB 101 will become effective for us during
the quarter ending January 31, 2001.

CHANGE IN FISCAL YEAR

On January 12, 2000, we changed our fiscal year end to January 31, rather
than December 31. Our January 2000 results were reported in our Report on Form
10-Q for the three month period ended April 30, 2000. Our summary January 2000
results are as follows: revenues $4.3 million; gross profit $1.3 million;
operating expenses $5.3 million; net loss from continuing operations $2.6
million; net loss from discontinued operations $1.0 million; and net loss $3.6
million. We typically incur significant losses in the first month following the
completion of a quarter because our revenue is significantly less than the
average monthly revenues we generate in any quarterly or annual period.

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BUSINESS

OVERVIEW

We are a leading provider of hardware and software products and related
professional services in the rapidly growing storage networking market. We focus
primarily on helping our customers design, develop, deploy and manage SANs. We
design, manufacture, market and support a wide range of products for critical
SAN applications such as remote disk mirroring and remote tape vaulting. Revenue
from our SAN products were $6.6 million, $31.9 million and $53.6 million for the
years ended December 31, 1997, 1998 and 1999, respectively and $37.5 million for
the six months ended July 31, 2000.

Our storage networking products enable businesses to cost-effectively
manage their increasing storage requirements, connect geographically dispersed
SANs, provide continuous availability to greater amounts of data, and protect
their increasing amounts of data more efficiently. Our SAN products consist
primarily of our UltraNet(R) and Channelink(R) families of products. We market
our SAN products directly to customers through our sales force, worldwide
distributors and OEMs. Our distributors and OEM relationships include Compaq,
Hewlett Packard, and StorageTek. We also have strategic marketing partnerships
with leading storage industry and fibre switching companies, including Brocade,
EMC, Hitachi Data Systems, IBM, Legato and SCH Technologies.

Historically, we have operated through two vertically integrated divisions.
We have and continue to market our storage networking products through our
continuing operations, which we have historically referred to as our Networking
Solutions Division, which represent our core business. Our continuing operations
also market our established channel networking products, which enable computers
to transmit data over unlimited distances. Our discontinued operations, which we
have historically referred to as our Enterprise Integration Solutions Division,
develops and sells our enterprise application integration, or EAI, software that
automates the integration of computer software applications and business
workflow processes, as well as our traditional server gateways and tools, which
enable multiple desktop computers and mainframe terminals to communicate with
one another.

SELECTED RECENT DEVELOPMENTS

SAN applications over IP-based networks. In February 2000, we introduced
the first products to allow storage networking applications, such as remote disk
mirroring using EMC's SRDF software, and remote tape vaulting to be deployed
over standard IP-based networks. We anticipate expanding our product offerings
to support additional SAN applications from other vendors. The recent expansion
of support of IP includes what we believe is the only working capability to
extend Fibre Channel technology and the SCSI interface over IP-based networks.

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STORAGE NETWORKING INDUSTRY BACKGROUND

Growth in Enterprise Data

The volume of enterprise data is increasing significantly due to the
proliferation of Internet and Web-based content distribution, digital media,
e-commerce, e-mail and data warehousing. Furthermore, the proliferation of the
Internet has created new industries in Web hosting and data caching, which has
led to an increase in the volume of enterprise data needed to be tracked and
stored.

As a result of the foregoing and other factors, International Data
Corporation, or IDC, estimates that the worldwide revenue for SAN-attached disk
storage systems will grow from $1.4 billion in 1999 to $10.9 billion in 2003, a
compound annual growth rate of 66%. Another indication of a strong demand for
our storage networking products is the growth of the Fibre Channel market. IDC
estimates the revenue for Fibre Channel hubs and switches will grow from $0.4
billion in 1999 to $4.2 billion in 2003, which reflects a compound annual growth
rate of 76%.

Limitations of Traditional Storage Solutions

The rapid escalation of the size and amount of data stored has presented
organizations with significant data management challenges and increased storage
related costs. As the volume of data stored, and the number of users that
require access to the data continue to increase, storage systems and servers are
burdened by an increased number of input/output, or I/O, transactions they must
perform. However, traditional storage architecture has inherent speed, distance,
capacity and performance constraints. For example, depending on the standards
and protocols used, the following constraints may exist:

- bandwidth, or the data transmission rate, is generally fixed at 15, 40 or
80 megabytes per second;

- distance between devices is limited to 12 to 150 meters;

- connectivity is limited to 15 storage devices;

- the lack of data management capability in SCSI devices places the burden
for management tasks on servers, thereby degrading network performance;

- if the server to which the data storage device is connected fails, the
data cannot be accessed; and

- LAN performance can be significantly degraded while the LAN is being used
for storage backup applications.

Advent of Fibre Channel

In response to the speed, distance, capacity and performance limitations of
traditional storage architectures, the Fibre Channel interface was developed in
the mid-1990s as an open standard technology specifically for high performance,
data intensive environments. Fibre Channel products offer over one gigabit per
second of bandwidth and enable the inter-connectivity of millions of storage
devices and servers. Fibre Channel also offers distance connectivity of up to 10
kilometers, a single interface for networking and I/O applications, technology
that supports a variety of traditional I/O and LAN protocols and interfaces and
the ability to support simultaneous two-way communications, which effectively
doubles bandwidth. The introduction of the Fibre Channel interface means that
SANs are becoming a viable alternative to traditional data storage architecture.

However, Fibre Channel-based SANs do not provide complete solutions for
managing large amounts of data in a distributed environment. Consequently,
solutions are required that address the following Fibre Channel limitations:

- Distance -- Customers require products that support transfers over
unlimited distances. Fibre Channel supports a maximum connection distance
of 10 kilometers. Transmission across third-party telecommunications
lines is not supported by Fibre Channel.

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- Connectivity -- Customers want their existing computing systems to
communicate with one another and share data. Mainframe systems have
interface channels using the ESCON or bus and tag protocols, and open
systems use SCSI or LAN standards known as TCP/IP, or Transmission
Control Protocol/Internet Protocol. Fibre Channel switches cannot
communicate with non-Fibre Channel switches, requiring further
connectivity solutions. Protocols are a set of rules for communicating
between computers. Standards are specifications for hardware or software
that are widely used and accepted. An interface is the connection and
interaction between hardware, software and the user.

- Application availability -- Customers need to keep applications online
and running during infrastructure changes, backup, testing and unplanned
outages to remain competitive in today's business economy. Fibre Channel
by itself does not provide continuous application availability.

- Bandwidth on demand -- Dedicated high capacity telecommunications lines
that have traditionally been used with SANs, namely T1, T3 and ATM lines,
are expensive and permit remote backup of only the most mission critical
data. Customers require SAN solutions that utilize less expensive
IP-based networks in order to remotely backup greater amounts of
information and make greater use of SAN advantages. Fibre Channel does
not provide the inherent ability to transmit data over IP-based networks.

OUR STORAGE NETWORKING SOLUTIONS

Our storage networking products address the limitations of traditional
storage architecture and Fibre Channel technology in the following ways:

- SANs over unlimited distance -- Our products enable organizations to
create secure SANs without any distance limitations. This allows the
creation of SAN over WAN environments in such critical applications as
remote disk mirroring and remote tape vaulting.

- Any-to-any connectivity -- Our products are protocol independent -- they
can connect devices that use Fibre Channel, SCSI, ESCON, and bus and tag
protocols. These devices can be connected and extended over
telecommunications links including T1/E1, T3/E3 and ATM, or WAN protocols
like IP, Fibre Channel and fiber optics. We believe our products connect
with substantially all storage vendors.

- Infrastructure options -- Our products enable the use of IP, ATM, Fibre
Channel and fiber optics for expanded use of a SAN infrastructure. This
supports the growing amounts of storage created by applications like
e-commerce and increases due to user demands to access applications in a
continuous mode.

- IP-based networking solutions -- We enable remote disk mirroring using
EMC's SRDF software and tape vaulting over standard IP-based networks.
Our solutions allow our customers to capitalize on inexpensive bandwidth
on demand capabilities of IP-based networks and use under-utilized,
existing IP bandwidth, especially at low traffic times of the day, and
rely on existing IP network knowledge. We anticipate expanding SAN
application support with products from other vendors.

Our SAN solutions are used for immediate, or real-time, backup and
recovery, and support a technology known as remote disk mirroring. Disk
mirroring avoids the serious threat to businesses posed by the loss of data
between data system backups by simultaneously creating up-to-the-minute images
of business-critical data on multiple backup storage disks. Our remote disk
mirroring technology permits the backups to be transmitted to a geographically
separated location, thereby reducing the risk of natural and site-wide
disasters. This technique also permits rapid recovery of data when needed, as it
is not necessary to reload tapes.

We also enhance continuous business operations. Traditional LAN-based
storage management requires manual handling and transportation of storage to an
off-site location. While this ensures a physically-separated copy of valuable
corporate data, it requires additional time and expense for handling and
transportation. In addition, finding the right tape in a timely manner can be
difficult. By bridging the SAN over the WAN, backups can be instantly made to
remote locations on disk media, including by disk

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mirroring, or on tape, known as electronic tape vaulting. The benefit is secure
archiving and timely retrieval of the correct business-critical data.

OUR STORAGE NETWORKING STRATEGY

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

Extend SAN Leadership

We intend to extend our SAN leadership by continuing to broaden our product
and service offerings and by expanding our SAN solutions into new markets. An
example of this strategy is our recent introduction of Fibre Channel over ATM
WANs. We intend to build market share by continuing to focus on areas which make
storage networks more useful and accessible, such as SAN over WAN applications,
any-to-any connectivity, and IP-based network solutions. To achieve leadership,
we intend to capitalize on the remote disk mirroring and remote tape vaulting
capabilities of our products.

Expand IP-Based Network Solutions

Currently, our IP-based network solutions enable remote disk mirroring, in
conjunction with EMC's SRDF software products, and remote tape vaulting over
IP-based networks. We are currently developing solutions which will operate in
conjunction with SAN applications of other storage networking vendors.

Partner with Storage Networking Industry Leaders

We have established relationships with leaders in the storage networking
market, including storage vendors, storage management software providers and
Fibre Channel switch manufacturers. Our strategic partners include companies
such as Brocade, Compaq, EMC, Hewlett Packard, Hitachi Data Systems, IBM,
Legato, Nortel, SCH Technologies and StorageTek. We intend to strengthen our
relationships with existing strategic partners and develop relationships with
new strategic partners that offer complementary products and services. We
believe that current and future strategic relationships will facilitate the
integration of our products with our strategic partners, thereby increasing our
market share and reducing the length of our sales cycle.

Focus on Professional Services

Our professional services help customers evaluate, analyze, design, install
and manage storage networks. We believe this value-added professional service
assists customers in designing SANs, integrating SAN components and implementing
SANs better than they could on their own. Our integration services eliminate the
complexity of implementing a SAN that is scalable and compatible with customer
resources. These services bolster sales of our products and allow us to generate
high margin revenues.

Explore Additional Outsourcing Services

We offer outsourced storage networking services that complement our current
storage networking products. Our data migration service helps our customers
migrate large amounts of data from one data center or storage facility to
another during consolidation or expansion of data centers. This is a turnkey
service including personnel, equipment, software and support. We intend to
provide an outsourced electronic tape vaulting service in conjunction with Iron
Mountain. We anticipate adding other outsourced services that help drive demand
for our storage networking products.

OUR STORAGE NETWORKING PRODUCTS

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

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UltraNet(R) Storage Director is a high performance switching product that
operates at the center of the SAN. It enables SANs to establish a direct
connection between storage elements and servers and share data among diverse
servers and storage systems, and networks that are local and geographically
dispersed. The switch provides connectivity among SCSI, ESCON, Fibre Channel and
WANs. Two sizes are offered -- with 6 or 12 expansion slots.

UltraNet(R) Storage Gateway provides much of the same functionality and
performance of the UltraNet(R) Storage Director at a lower entry price. The
product is targeted at small SAN applications.

UltraNet(R) Fibre Channel Switch enhances our ability to provide open
systems solutions for Fibre Channel only configurations as well as mixed
environments. Mixed environments can include SCSI server and storage systems
that require access to Fibre Channel solutions. Brocade manufactures this switch
and we resell it alone or with our SAN system solutions. This switch is
available in 8 and 16 expansion slot models.

UltraNet(R) Wave Optimizer and UltraNet(R) Wave Multiplexer increase the
bandwidth available from fiber optic lines by carrying multiple signals over a
single cable using different wave lengths (colors of light) or time slots.
Pandatel manufactures these DWDM, or dense wave division multiplexing, and TDM,
or time dimension multiplexing products.

Channelink(R) offers connectivity over unlimited distances and is used for
remote disk mirroring and remote tape vaulting in environments using older
protocols.

OUR STORAGE NETWORKING PARTNERS

Offering customers effective storage networking solutions requires
integrating diverse components, including disk and tape storage devices, storage
management software, network management products and Fibre Channel products. The
optimal package of goods and services allows a customer to reduce storage
management costs by consolidating data centers and centralizing data management.
We work with our business partners to provide customers with those benefits. Our
storage networking alliances include those with key storage vendors, storage
management software providers and manufacturers of Fibre Channel and optical
networking products. We market our SAN products directly and through worldwide
distributors and OEMs, including Compaq, Hewlett Packard and StorageTek. We also
have strategic marketing partnerships with leading storage industry and fibre
switching companies, including Brocade, EMC, Hewlett Packard, Hitachi Data
Systems, IBM, Legato and SCH Technologies. Benefits of our alliances include:

- The working relationship provides us with visibility regarding market
trends and technology requirements and allows us to contact customers
earlier in the sales cycle and ascertain their needs.

- Sales of storage systems for disk mirroring provides a ready market for
our remote disk mirroring applications.

- A platform to demonstrate our interoperability with various platforms and
integrate heterogeneous components allowing us to gain preferred provider
status with key vendors.

- The resulting customer base provides us with strong reference accounts to
further increase market penetration.

EMC

We have established a relationship with EMC for remote disk mirroring
applications. This existing relationship was recently enhanced by an agreement
to provide an exclusive package of remote disk mirroring hardware, software and
implementation service. We are offering an exclusive package of our hardware,
software and implementation services to EMC's customers. Together with EMC, we
offer complementary professional services and linked customer support
organizations. We work with EMC to provide our mutual customers with timely,
effective service. For the six months ended July 31, 2000, sales of our storage
networking products to customers using EMC's disk mirroring systems accounted
for 26% of our total product revenue. In the year ended December 31, 1999, sales
of our storage networking products to customers using EMC's disk mirroring
systems accounted for 35% of our total product revenue. We also

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market our remote disk mirroring applications with other vendors, including
Hitachi Data Systems and IBM.

IBM

IBM is one of our oldest strategic partners. We coordinate local market
activities with IBM, provide mutual assistance and prepare combined proposals.
We also partner with IBM to provide customers with outsourced disaster avoidance
and recovery capability and remote disk mirroring applications.

StorageTek

In November 1999, we entered into a three-year agreement with StorageTek
under which it resells our SAN over WAN products. In addition, we purchased
StorageTek's DXE/RDE product line for $2.5 million in cash and assumed ongoing
manufacturing and engineering responsibilities for this product line. This
acquisition will provide us with access to StorageTek's large installed base of
customers for cross-selling our SAN products. We plan to discontinue the DXE/RDE
product line in March 2001, and transition the customer base to our UltraNet(R)
and Channelink(R) products. We have certified StorageTek's tape drives with our
UltraNet(R) product and work closely with them to ensure interoperability.

Compaq

Compaq has entered into a multi-million dollar commitment to resell our SAN
products. Compaq is packaging our Fibre Channel-based SAN over WAN solutions
with their product offerings. Our UltraNet(R) Open Systems Gateway product
supports Compaq's StorageWorks Data Replication Manager over long distances. The
relationship with Compaq is significant because we believe Compaq is the largest
provider of storage today.

Brocade

Our UltraNet(R) Fibre Channel Switch, which is manufactured by Brocade,
became generally available in June 1999. We believe the combination of our
UltraNet(R) storage networking solutions and UltraNet(R) family of Fibre Channel
switches offers customers an attractive architecture for developing SAN
solutions. The industry expects complete interoperability for Fibre Channel
devices, and we believe our SAN solutions are a step in that direction.

OTHER STORAGE NETWORKING PRODUCTS

We also offer channel extension products, which are certified for use with
over 250 different devices. These products offer connectivity over unlimited
distances, free of limitations imposed by traditional standards and protocols.
These products are used for the following applications:

- Data Center Consolidation -- The consolidation of data centers in
different locations to one location; often useful after mergers or
acquisitions.

- Remote Printing/Imaging -- High-speed digital printing or imaging at
remote locations.

- Data Center Load Balancing -- Operating two or more data centers from one
site. The application is transparent to the systems and servers that are
interconnected as well as to data users, meaning users do not know that
the data is not located centrally.

Under our agreement with StorageTek, we have also assumed ongoing
manufacturing and continuing engineering responsibility for StorageTek's DXE/RDE
product line. This product line is used for similar applications as our
Channelink(R) product line and substantially all sales of such products are to
StorageTek. We plan to discontinue the DXE/RDE product line in March 2001 and
transition the customer base to our UltraNet(R) and Channelink(R) products.

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PROFESSIONAL SERVICES

SAN Assessment Services

Our SAN assessment analyzes a company's storage needs, determines a SAN
solution to meet those needs, and assists in development of a business case to
justify the SAN solution. With a SAN assessment, we assist our customers in
making their existing networks more flexible and easier to manage. This thorough
assessment assists information technology managers and corporate executives
responsible for planning and funding computer resources in making sound data
management and storage decisions.

Our reliable, repeatable SAN assessment process includes the following
phases. These phases are designed for efficient evaluation and recommendation of
an appropriate SAN infrastructure for storage.

- SAN audit -- the audit contains a summary of business needs and an
inventory of a customer's network components and a storage capability.

- SAN analysis -- the analysis includes a profile of a customer's current
environment compared to its competitors, capacity planning, and a
projection of a customer's future needs.

- SAN recommendation -- this phase develops a detailed summary report
containing one to three recommended SAN solutions.

SAN Integration Services

Our professional services help companies implement storage networking
solutions. Implementation includes project planning, designing and documenting a
detailed network, installing SAN components, integrating SAN components, and
testing the functionality of the implemented SAN solution. Our storage
networking products are at the heart of our SAN implementations, and our
long-standing partnerships with well-known and successful storage equipment and
software manufacturers place us at the forefront of SAN technology.

PRODUCT SUPPORT

We offer standard maintenance contracts for our storage networking
products. The contracts generally have a one-year term and provide for advance
payment. Customers are offered a variety of contracts to choose from to suit
their particular needs. For instance, current options allow a customer to choose
support seven days a week, 24 hours per day, or five days per week, 11 hours a
day. Other options offer the customer the choice to select air shipment or
replacement parts, with the part being installed by the customer's staff, or on
site support with spare parts and service being provided by a local parts
distributor.

SALES AND MARKETING

We market our storage networking products in the United States through a
direct sales force. We have established representative offices in Canada, the
United Kingdom, France, Germany, Australia, Hong Kong, Japan, The Netherlands,
Brazil and Mexico. We also market the products in the United States and
throughout the world through OEMs, systems integrators and dependent
distributors.

We maintain our own marketing staff and direct sales force. On July 31,
2000, we had approximately 200 persons in our marketing and sales organization
for continuing operations.

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CUSTOMERS

Our customers include:

<TABLE>
<S> <C> <C>
FINANCIAL SERVICES TELECOMMUNICATIONS INFORMATION OUTSOURCING
American Express AT&T Technologies Comdisco Disaster Recovery Services
Bank of America British Telecom Computer Sciences Company Ltd
Barclays Sprint Electronic Data Systems
Chase Worldcom IBM Global Services
Citibank Integrated Systems Solutions Corp.
Merrill Lynch
Rabo Bank
</TABLE>

RESEARCH AND DEVELOPMENT

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

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

- increase the compatibility of our products with the products made by
others;

- emphasize the flexible and modular architecture of our products to permit
the introduction of new and improved products within existing systems;

- continue to focus on providing sophisticated diagnostic support tools to
help deliver high network availability and, in the event of failure,
rapid return to service; and

- develop new products based on customer feedback and market trends.

Research and development expenses were equal to 14% of our total revenue
during the six months ended July 31, 2000, compared to 15%, 14% and 15% of total
revenue in 1997, 1998 and 1999, respectively. We intend to continue to apply a
significant portion of resources to product enhancements and new product
development for the foreseeable future. We cannot assure you that our research
and development activities will be successful.

MANUFACTURING AND SUPPLIERS

In-house manufacturing activities for our products primarily involve
quality assurance testing of subassemblies and final system assembly,
integration and quality assurance testing. We became ISO 9001 certified in 1999
and have been ISO 9002 certified since 1993.

We manufacture our products based on forecasted orders. Forecasting orders
is difficult as most shipments occur at the end of each quarter. Our customers
generally place orders for immediate delivery, not in advance of need. Customers
may generally cancel or reschedule orders without penalties. Accordingly, we
believe that backlog is generally not meaningful for purposes of predicting our
revenue for any fiscal period.

Some of our products, including Fibre Channel switches, time division
multiplexers and wave division multiplexers, are manufactured by OEMs for sale
by us. We manufacture our other products from subassemblies, parts and
components, such as integrated circuits, printed circuit boards, power supplies
and metal parts, each manufactured by others. Some items manufactured by
suppliers are made to our specific design criteria.

At December 31, 1999, we held $1.7 million of inventory for parts that our
vendors no longer manufacture. Products in which those parts are included
accounted for approximately $80.9 million of sales in 1999. We expect that this
inventory will be used in the ordinary course of our business over the next six
years. Relevant parts will have to be redesigned after the inventory is used.

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

COMPETITION

Our products are sold in markets where other market participants have
significantly greater revenues and internationally known brand names. Many of
those market participants do not currently sell products similar to ours.
However, such market participants may do so in the future, and new products we
develop may compete with products sold by well-known market participants. Our
competitors in channel networking and SAN include storage system vendors and
others including Crossroads, Gadzoox, InRange, McData, Network Systems, QLogic,
StorageTek and Vixel. In addition, Cisco Systems recently acquired a company
which is developing IP-based network solutions which may have functionality
similar to our product offerings.

The markets in which we operate are characterized by rapidly changing
technology and evolving industry standards, resulting in rapid product
obsolescence and frequent product and feature introductions and improvements. We
compete with several companies that have greater engineering and development
resources, marketing resources, financial resources, manufacturing capability,
customer support resources and name recognition. As a result, our competitors
may have greater credibility with existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. These competitive
pressures may materially harm our business.

The competitive environments of markets in which our storage networking
products are sold are not yet fully developed. Accordingly, we are not in a
position to prepare long range plans in response to unknown competitive
pressures. As these markets grow, we anticipate other companies will enter with
competing products. In addition, customers and business partners could possibly
develop and introduce competing products. We anticipate the markets will be
highly competitive.

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

The principal competitive factors affecting our products include 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 our
markets.

INTELLECTUAL PROPERTY RIGHTS

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

We currently own three patents and have eight patent applications filed or
in the process of being filed in the United States with respect to our
continuing operations. Our pending patent applications, however, may not be
issued. We have not applied for patent protection in any foreign countries. Not
all of our unique products are patented. Our issued patents may not adequately
protect our technology from infringement or prevent others from claiming that
our technology infringes that of third parties. Failure to protect our
intellectual property could materially harm our business. We believe that patent
and copyright

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protection are less significant to our competitive position because of the rapid
pace of technological change in the markets in which our products are sold and
because of the effectiveness and quality of our support services, the knowledge,
experience and ability of our employees and the frequency of our enhancements.

We rely upon a patent license agreement to manufacture our Channelink(R)
and UltraNet(R) products that use ESCON. This license was recently renewed and
expires on December 31, 2004.

We have from time to time received, and may in the future receive,
communications from third parties asserting that our products infringe on their
patents. We believe that we possess or license all required proprietary rights
to the technology involved in our products and that our products, trademarks and
other intellectual property rights do not infringe upon the proprietary rights
of others. However, there can be no assurance that others will not claim a
proprietary interest in all or a part of the technology we use or assert claims
of infringement. Any such claim, regardless of its merits, could involve us in
costly litigation and materially harm our business.

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

EMPLOYEES

As of July 31, 2000, we had 745 full-time employees for both divisions. On
that date, 137 full-time employees provided services to both divisions and are
members of our administrative and manufacturing departments. On that date, our
continuing operations had 486 employees in addition to those who provide
services to both divisions. We consider our ability to attract and retain
qualified employees and to motivate such employees to be essential to our future
success. Competition for highly skilled personnel is particularly intense in the
computer and data communications industry, and we cannot assure that we will
continue to attract and retain qualified employees.

LEGAL PROCEEDINGS

We are currently not a party to any legal proceedings that could materially
harm our business.

FACILITIES AND PROPERTIES

Our principal administrative, manufacturing, engineering and development
functions are located in leased facilities in the Minneapolis, Minnesota suburb
of Plymouth. We lease space for our continuing operations in Atlanta, Georgia
for development of certain products. In addition, we lease office space in
England, France, Germany, Australia, Japan, The Netherlands, Brazil and Mexico.
We also lease space for sales offices for our direct sales staff and systems
consultants in a number of locations throughout the United States and Canada. We
believe our facilities are adequate to meet our current needs. In August 2000,
we terminated a lease on surplus space in a Minneapolis suburb in exchange for a
cash payment which will be made to the landlord in the amount of $547,000 when
certain conditions have been met. The payment has been accrued on the July 31,
2000 balance sheet.

DISCONTINUED OPERATIONS -- ENTERPRISE INTEGRATION SOLUTIONS DIVISION

Our board of directors has determined to sell or spin-off our Enterprise
Integration Solutions Division in order to focus all of our resources on our SAN
and other storage networking products. The board of directors has set
January 31, 2001 as a target date for completing any sale or a decision to
proceed with a spin-off. Accordingly, the financial information for this
division has been accounted for as discontinued operations.

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OUR ENTERPRISE INTEGRATION SOLUTION

Our EAI solutions help organizations integrate legacy applications with
powerful new business applications that improve customer productivity and
customer satisfaction. Our EAI solutions preserve our customers' investment in
their computer systems, allow enterprise-wide real-time access to data, are
flexible and highly scalable. In addition to integrating existing systems, our
EAI solutions are particularly suited for developing new applications, such as:

- CRM applications -- CRM applications facilitate integration of
information collected in different areas of a company that affect
customer relations. CRM applications can instantly pull together customer
information from multiple databases.

- E-commerce applications -- Customer data integrated from a variety of
legacy environments can enhance a company's ability to interact with
suppliers and partners, sell products and provide customer service over
the Internet. Our solutions filter legacy data, translate and format it
so that it can be used with Sun Microsystem's NetDynamics and Lotus'
Domino products and other Internet tools to build effective
Internet-based sales and service applications in less time.

Further, InVista(TM), a technology we acquired as part of our acquisition
of IntelliFrame, includes new tools that provide business logic, rules and
process workflow management for improved development and deployment of large
e-commerce and CRM applications. With InVista(TM), our EAI solution is able to
do more than just display information -- it is able to suggest alternative
courses of action. For instance, InVista(TM) can recommend whether a customer
should use funds in an account to pay a credit card bill, or transfer funds to a
more favorable interest bearing account. A beta version of our InVista(TM)
product became available during the second quarter of 2000. The product will be
sold both on a standalone basis and with Enterprise/Access.

Our EAI products are marketed through a direct sales staff and through our
business partner program. An alliance with Siebel provides a comprehensive
solution to established call centers and for sales force applications. Alliances
with Cap Gemini, Deloitte Consulting and PricewaterhouseCoopers provide a
platform for each business partner to introduce our EAI products to customers by
trained specialists.

OUR ENTERPRISE INTEGRATION SOLUTIONS PRODUCTS

Enterprise/Access is a development tool that permits legacy applications to
be linked real-time with new business applications. The product is used with our
InVista(TM) offering. Enterprise/Access uses a "zero coding" approach, i.e., it
captures application screens, analyzes the interaction between the legacy system
and the user, builds a model of the legacy application, and establishes all of
the necessary data paths, transformations and logic for integrating the legacy
application with the new front-end application. As a result of "zero coding,"
Enterprise/Access provides one of the fastest ways to e-commerce by enabling the
easy reuse of existing legacy application programs. Key features of
Enterprise/Access include:

- no changes to our customers' existing applications software environment;

- a graphical user interface, which promotes rapid implementation;

- three-tier architecture for mainframe, server and client workstations,
which enhance scalability and transparency; and

- centralized management to administer, monitor and troubleshoot
large-scale deployments.

Enterprise/Connect uses TCP/IP to connect existing systems to open systems
and to implement solutions for connecting mainframes to the Internet. This
product is a complete package of applications providing mainframe connectivity
via standard Web browsers, which are the standard interface on Internet
applications. The browsers, based on the Java programming language, function as
the universal window for access to mainframe terminal, file transfer and print
services. We may divest our server gateways and tools assets, including
Enterprise/Connect, in a transaction separate from the divestiture of our other
EAI assets.

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MANAGEMENT

Our directors, executive officers and key employees are as follows:

<TABLE>
<CAPTION>
NAME POSITION SERVED AGE
---- ------------------------------------------------- ---
<S> <C> <C>
Thomas G. Hudson.................. Chairman of the Board, President and Chief 53
Executive Officer
Gregory T. Barnum................. Chief Financial Officer, Vice President of 45
Finance and Corporate Secretary
Jeffrey A. Bertelsen.............. Corporate Controller and Treasurer 38
William C. Collette............... Chief Technology Officer and Vice President of 56
Advanced Technology
Peter Dixon....................... Vice President of Worldwide Strategic Business 50
Development and Solutions
Nick V. Ganio..................... Group Vice President of Worldwide Sales, 40
Marketing and Services
Mark R. Knittel................... Group Vice President of Worldwide Product 45
Operations
Patrick W. Gross.................. Director 55
Erwin A. Kelen.................... Director 64
Lawrence Perlman.................. Director 61
John A. Rollwagen................. Director 59
</TABLE>

Thomas G. Hudson has served as President and Chief Executive Officer since
June 1996, as a director since August 1996 and Chairman of the Board since May
1999. Mr. Hudson has also served as acting general manager of the Enterprise
Integration Solutions Division since November 1999. From 1993 to June 1996, Mr.
Hudson served as Senior Vice President of McGraw Hill Companies, a leading
information services provider, serving as General Manager of its F.W. Dodge
Division, and as Senior Vice President, Corporate Development. From 1968 to
1993, Mr. Hudson served in a number of management positions at IBM Corporation,
most recently as Vice President Services Sector Division. Mr. Hudson's IBM
career included varied product development, marketing and strategic
responsibilities for IBM's financial services customers and extensive
international and large systems experience. Mr. Hudson is a graduate of the
University of Notre Dame and New York University. Mr. Hudson attended the
Harvard Advanced Management Program in 1990.

Gregory T. Barnum was appointed Vice President of Finance, Chief Financial
Officer and Corporate Secretary in July 1997. From September 1992 to July 1997,
Mr. Barnum served as Senior Vice President of Finance and Administration, Chief
Financial Officer and Corporate Secretary at Tricord Systems, Inc., a
manufacturer of enterprise servers. From May 1988 to September 1992, Mr. Barnum
served as the Executive Vice President, Finance, Chief Financial Officer,
Treasurer and Corporate Secretary for Cray Computer Corporation, a development
stage company engaged in the design of supercomputers. Prior to that time, Mr.
Barnum served in various accounting and financial management capacities for Cray
Research, Inc., a manufacturer of supercomputers. Mr. Barnum is a graduate of
the University of St. Thomas.

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

William C. Collette was appointed Chief Technology Officer in December 1998
and Vice President of Advanced Technology in October 1999. Mr. Collette served
as our Vice President of Engineering from December 1995 to October 1999, and as
our Director of Future Software Development and as a Software Development
Manager from June 1993 to December 1995. From 1990 to 1993, Mr. Collette was
employed by SuperComputer Systems, Inc. as a Senior Software Engineer, where he
worked with Steve Chen to design the networking for the SS1 Supercomputer. Mr.
Collette holds a bachelors degree in business management from Metro State
University.
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<PAGE> 35

Peter Dixon was appointed Vice President Worldwide Strategic Business
Development and Solutions Marketing in March 2000. From January 1989 to March
2000, Mr. Dixon has served in various capacities as Vice President. In addition,
Mr. Dixon also served 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.

Nick V. Ganio was appointed Group Vice President of Worldwide Sales,
Marketing and Services in October 1999. From November 1998 to October 1999, Mr.
Ganio served as Vice President of Worldwide Sales and also as Vice President of
Direct Sales Worldwide from April 1998 to November 1998. From September 1996 to
February 1998, Mr. Ganio served as Vice President of Worldwide Sales and
Marketing for Xyplex, Inc. From March 1987 to September 1996, Mr. Ganio held
various high-level positions with Digital Equipment Corporation, including Vice
President of Operations in Japan, Vice President and General Manager of the
Americas Networks Product business and Vice President and Executive Assistant to
the Office of President. Mr. Ganio held various sales positions with IBM from
May 1981 to February 1987. Mr. Ganio holds a bachelors degree, magna cum laude
from Bernard Baruch College.

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

Patrick W. Gross has been a director since July 1997. Mr. Gross founded
American Management Systems, Inc. in 1970 where he serves as Chairman of the
Executive Committee and Principal Executive Officer. American Management is a
management consulting and systems integration firm applying information
technology to business and management in both the public and private sectors.
Between July 1968 and May 1970, Mr. Gross served on the staff of the U.S.
Secretary of Defense in the Office of Systems Analysis. Mr. Gross is Chairman of
Baker & Taylor Holdings, Inc., a private company, and serves as a director of
American Management Systems, Inc., Capital One Financial Corporation, Capital
One FSB, Landmark Systems Corporation and Net2000 Communications, a public
NASDAQ company. Mr. Gross is a graduate of Rensselaer Polytechnic Institute,
University of Michigan and Stanford University.

Erwin A. Kelen has been a director since June 1988. Mr. Kelen is President
of Kelen Ventures and a partner of Camir Investments, both private investment
entities. Mr. Kelen is a private investor active in venture capital investments,
investment management and helping small companies grow. From 1984 to 1990, Mr.
Kelen was President and Chief Executive Officer of DataMyte Corporation, a
wholly owned subsidiary of Allen Bradley Co. Mr. Kelen is also a director of
Printronix, Inc., Insignia Systems, Inc., and CyberOptics Corporation. Mr. Kelen
is a graduate of the Technical University of Budapest and the University of
Minnesota Graduate School.

Lawrence Perlman has been a director since June 1988. From January 1990 to
December 1999, Mr. Perlman served as Chief Executive Officer of Ceridian
Corporation, retiring as of December 31, 1999. Ceridian Corporation is a leading
information services and defense electronics company that serves the human
resources, electronic media, transportation, gaming and government markets. Mr.
Perlman also serves as a director of Carlson Companies, Inc., Valspar
Corporation and Amdocs Ltd. and as Chairman and a director of Seagate
Technology, Inc. Mr. Perlman is a graduate of Carleton College and Harvard Law
School.

John A. Rollwagen has been a director since June 1993 and served as
Chairman of the Board from December 1995 to May 1999. Mr. Rollwagen is a private
investor and venture partner with St. Paul Venture Capital, a venture capital
firm. From January 1993 to May 1993, Mr. Rollwagen served as U.S. Department of
Commerce Deputy Secretary-Designate. Beginning in 1975, Mr. Rollwagen served in
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<PAGE> 36

executive capacities with Cray Research, Inc. Mr. Rollwagen served as Chairman
and Chief Executive Officer of Cray Research, Inc. from 1981 to January 1993.
Mr. Rollwagen serves as a director of Lexar Media, Inc and of several private
companies. Mr. Rollwagen is a graduate of The Massachusetts Institute of
Technology and Harvard Graduate School of Business Administration.

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<PAGE> 37

PRINCIPAL SHAREHOLDERS

COMPUTER NETWORK TECHNOLOGY CORPORATION

Except as otherwise noted, the following table sets forth the beneficial
ownership of our common stock as of July 31, 2000 and as adjusted to reflect the
sale of the shares of common stock in this offering by:

- each person or entity known by us to own beneficially more than 5% of our
common stock;

- each of our directors;

- each of our executive officers; and

- all directors and executive officers as a group.

The beneficial ownership is calculated based on 24,151,231 shares of our
common stock outstanding as of July 31, 2000 and 27,851,231 shares outstanding
immediately following the offering. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Unless
otherwise indicated, each person or entity named in the table have sole voting
and investment power, or shares voting and investment power with his or her
spouse, with respect to all shares of stock listed as owned by such person.
Shares issuable upon the exercise of options that are currently exercisable or
become exercisable within 60 days of July 31, 2000 are considered outstanding
for the purpose of calculating the percentage of outstanding shares of our
common stock held by the individual or entity, but not for the purpose of
computing percentage ownership of any other person. The information set forth
below excludes any shares purchased in the offering by the respective beneficial
owner.

Unless otherwise noted, the address for each entity and person listed below
is 6000 Nathan Lane North, Plymouth, Minnesota 55442.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED OUTSTANDING
------------------------ ------------ ---------------------------------
BEFORE OFFERING AFTER OFFERING
--------------- --------------
<S> <C> <C> <C>
LeRoy C. Kopp and Kopp Investment Advisors, Inc.
7701 France Avenue South, Suite 500
Edina, MN 55345..................................... 4,776,453 19.78% 17.15%
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116.................................... 2,816,064 11.66% 10.11%
Thomas G. Hudson...................................... 574,713 2.33% 2.02%
Erwin A. Kelen........................................ 539,577 2.21% 1.92%
John A. Rollwagen..................................... 265,000 1.09% *
Lawrence Perlman...................................... 213,333 * *
Patrick A. Gross...................................... 128,334 * *
Mark R. Knittel....................................... 60,601 * *
Nick V. Ganio......................................... 63,061 * *
William C. Collette................................... 35,225 * *
Gregory T. Barnum..................................... 34,598 * *
Peter Dixon........................................... 14,791 * *
Jeffrey A. Bertelsen.................................. 11,000 * *
All executive officers and directors as a group (11
persons)............................................ 1,940,233 7.55% 6.60%
</TABLE>

---------------
* Represents beneficial ownership of less than 1% of the outstanding common
stock.

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<PAGE> 38

According to a Schedule 13F dated June 30, 2000, Leroy C. Kopp and Kopp
Investment Advisors, Inc. are deemed to have beneficial ownership of 4,776,453
shares of our common stock.

According to a Schedule 13F dated June 30, 2000, Massachusetts Financial
Services Company, a registered investment adviser, is deemed to have beneficial
ownership of 2,816,064 shares of our common stock.

The beneficial ownership for Messrs. Kelen, Rollwagen, Perlman and Gross
include 246,667, 260,000, 213,333 and 128,334 shares of common stock,
respectively, issuable upon exercise of outstanding options.

Mr. Hudson's beneficial ownership includes 4,206 shares held by Connecticut
General Trust Company as trustee of our 401(k) Plan and 534,046 shares of common
stock issuable upon exercise of outstanding options.

Mr. Knittel's beneficial ownership includes 22,500 shares of common stock
issuable upon the exercise of outstanding options.

Mr. Ganio's beneficial ownership includes 62,500 shares of our common stock
issuable upon the exercise of outstanding options.

Mr. Collette's beneficial ownership includes 31,000 shares issuable upon
the exercise of outstanding options.

Mr. Barnum's beneficial ownership includes 28,750 shares of common stock
issuable upon the exercise of outstanding options.

Mr. Dixon's beneficial ownership includes 4,375 shares of common stock
issuable upon the exercise of outstanding options.

Mr. Bertelsen's beneficial ownership includes 8,000 shares of common stock
issuable upon the exercise of outstanding options.

The total for executive officers and directors as a group includes
1,539,505 shares that may be acquired upon exercise of options. Includes only
executive officers and directors as of July 31, 2000.

OPTIONS IN SUBSIDIARY

We have granted options in a subsidiary which holds certain assets of the
Enterprise Integration Solutions Division. The subsidiary has 25,000,000 shares
of stock outstanding. Our executive officers and directors as a group hold
options to acquire 580,000 shares as of July 31, 2000, none of which are
presently exercisable or will become exercisable in the next six months, unless
a divestiture of the Enterprise Integration Solutions Division is completed. The
options held by the executive officers and directors are generally exercisable
at $2.00 per share, which represents estimated fair market value on the date of
grant, and become exercisable upon a spin-off of the Enterprise Integration
Solutions Division. In addition to the foregoing, options to acquire 2.2 million
shares have been granted to employees of the Enterprise Integration Solutions
Division. Those options, subject to exceptions, are generally exercisable at
$2.00 per share, which represents estimated fair market value on the date of
grant, and vest over a four year period, but are not exercisable until a
spin-off of the Enterprise Integration Solutions Division has occurred.

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<PAGE> 39

UNDERWRITING

Subject to the terms and conditions of an underwriting agreement between us
and the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation and Wit SoundView Corporation, the
underwriters have severally agreed to purchase from us the following respective
number of shares of common stock less the underwriting discounts and commissions
set forth on the cover page of this prospectus supplement.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
SG Cowen Securities Corporation.............................
Wit SoundView Corporation ..................................
---------
Total............................................. 3,700,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the continuing correctness of our
representations to them and no occurrence of an event that would significantly
harm our business. The underwriters are obligated to purchase and accept
delivery of all the shares, other than those covered by the over-allotment
option described below, if they purchase any of the shares.

We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, and, where such indemnification
is unavailable, to contribute to payments that the underwriters may be required
to make in respect of such liabilities.

The underwriters propose to offer the shares of common stock directly to
the public at the offering price set forth on the cover page of this prospectus
supplement and to selected dealers at such price less a concession not to exceed
$ per share. The underwriters may allow, and such selected dealers may
reallow, a concession not to exceed $ per share, and after the
commencement of this offering, the offering price and the concessions may be
changed.

We have granted to the underwriters an option to purchase up to 555,000
additional shares to be sold in this offering at the offering price less the
underwriting discount set forth on the cover page of this prospectus supplement.
The underwriters may exercise this option solely to cover over-allotments, if
any. The option may be exercised in whole or in part at any time within 30 days
after the date of this prospectus supplement. To the extent the option is
exercised, the underwriters will be severally committed, subject to several
conditions, including the approval of legal matters by their counsel, to
purchase the additional shares of common stock in proportion to their respective
commitments as indicated in the preceding table.

The underwriting fee is equal to the offering price per share of common
stock less the amount paid by the underwriters to us per share of common stock.
The following table shows the discounts to be paid to the underwriters by us.
Such amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------------- ----------------------
WITHOUT WITH WITHOUT WITH
OVER- OVER- OVER- OVER-
ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions payable by us... $ $ $ $

</TABLE>

We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $525,000 and will be paid by
us. The offering of the shares is made for

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<PAGE> 40

delivery, when, as and if accepted by the underwriters and subject to prior sale
and to withdrawal, cancellation or modification of the offering without notice.
The underwriters reserve the right to reject an order for purchase of shares in
whole or in part.

We and our executive officers and directors have agreed not to, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase, pledge
or otherwise dispose of (or announce any of the foregoing), or, in any manner,
transfer all or a portion of the economic consequences associated with the
ownership of any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock beneficially owned during the
90-day period following the date of this prospectus supplement, subject to
limited exceptions, without the prior written consent of Bear, Stearns & Co.
Inc.

In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock.

The underwriters may over-allot shares of our common stock in connection
with this offering, thus creating a short position for their own account. Short
sales involve the sale by the underwriters of a greater number of shares than
they are committed to purchase in the offering. A short position may involve
either "covered" short sales or "naked" short sales. Covered short sales are
sales made in an amount not greater than the underwriters' over-allotment option
to purchase additional shares in the offering described above. The underwriters
may close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market. In determining
the source of shares to close the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.

Accordingly, to cover these short sales positions or to stabilize the
market price of our common stock, the underwriters may bid for, and purchase,
shares of our common stock in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise. Additionally, the
representatives, on behalf of the underwriters, may also reclaim selling
concessions allowed to an underwriter or dealer. Similar to other purchase
transactions, the underwriters' purchases to cover the syndicate short sales or
to stabilize the market price of our common stock may have the effect of raising
or maintaining the market price of our common stock or preventing or mitigating
a decline in the market price of our common stock. As a result, the price of the
shares of our common stock may be higher than the price that might otherwise
exist in the open market. No representation is made as to the magnitude or
effect of any such stabilization or other activities. The underwriters are not
required to engage in these activities and, if commenced, may end any of these
activities at any time.

A prospectus in electronic format is being made available on an Internet
website maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on websites
maintained by each of these dealers. Other than the prospectus supplement and
the accompanying prospectus in electronic format, the information on any such
website and any information contained on any other website maintained by such
persons is not part of this prospectus supplement or the accompanying
prospectus, has not been approved and/or endorsed by us or any underwriter in
its capacity as underwriter and should not be relied upon by investors.

From time to time, some of the underwriters or their affiliates have
provided, and may continue to provide in the future, investment banking, general
financing and banking services to us and our affiliates, for which they have
received, and expect to receive, customary compensation.

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<PAGE> 41

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon by Leonard, Street and Deinard Professional Association, Minneapolis,
Minnesota, counsel for Computer Network Technology. Various legal matters in
connection with the offering will be passed upon for the underwriters by
Morrison & Foerster LLP, San Francisco, California.

EXPERTS

The consolidated balance sheets as of December 31, 1998 and 1999 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999 included in this prospectus supplement have been
included in reliance on the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon their authority as experts in
auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy the registration statement as well as reports, proxy statements and other
information we have filed with the SEC at the public reference room maintained
by the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You can obtain
copies from the public reference room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549 upon payment of various fees. You can call the SEC at
1-800-732-0330 for further information about the public reference room. We are
also required to file electronic versions of these documents with the SEC, which
may be accessed through the SEC's website at http://www.sec.gov. Our common
stock is quoted on the Nasdaq National Market System under the symbol "CMNT."

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The SEC allows us to "incorporate by reference" certain of our
publicly-filed documents into this prospectus supplement and the accompany
prospectus, which means that information included in these documents is
considered part of this prospectus supplement and the accompany prospectus. The
information incorporated by reference is considered to be part of the prospectus
supplement and the accompany prospectus, and information that we subsequently
file with the SEC will automatically update and supersede this information. This
prospectus supplement and the accompany prospectus do not include all the
information in the registration statement and documents incorporated by
reference. You should refer to the documents and to the exhibits to the
registration statement for a more complete understanding of the matter involved.
We hereby incorporate by reference the documents listed below and any future
filings made with the SEC prior to the termination of the offering under
sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934.

The following documents filed with the SEC are incorporated by reference in
this prospectus:

1. Our Annual Report on Form 10-K for the year ended December 31,
1999 (File No. 0-13994).

2. Our Proxy Statement dated April 13, 2000, filed in connection with
our May 25, 2000 Annual Meeting of Shareholders.

3. Our Quarterly Reports on Form 10-Q for the quarters ended April
30, 2000 and July 31, 2000.

4. The description of our common stock included in registration
statements filed on Form 8-A effective November 15, 1985 and July 29, 1998,
including any amendments or reports filed for the purpose of updating that
description.

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<PAGE> 42

We will furnish you without charge, on written or oral request, a copy of
any or all of the documents incorporated by reference. You should direct any
requests for documents to Sue Nelson, Investor Relations, Computer Network
Technology Corporation, 6000 Nathan Lane North, Plymouth, Minnesota 55442;
telephone number: (763) 298-6000; e-mail: [email protected].

You should rely only on the information contained or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We will sell the offered securities only in states where the offer
or sale is permitted. You should assume that the information appearing in this
prospectus supplement or the accompanying prospectus or incorporated by
reference is accurate only as of the date on the front of these documents. Our
business and financial condition may have changed since that date.

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<PAGE> 43

COMPUTER NETWORK TECHNOLOGY CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999, and July 31, 2000 (unaudited)....................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 (unaudited) and July 31, 2000 (unaudited)... F-4
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended December 31,
1997, 1998 and 1999, the one month transition period ended
January 31, 2000 (unaudited) and the six months ended July
31, 2000 (unaudited)...................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 (unaudited) and July 31, 2000
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 44

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, 1998 and
1999, and the related consolidated statements of operations, shareholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1999. 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, 1998 and
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.

KPMG LLP

Minneapolis, Minnesota
January 21, 2000, except as to the
effect of matters discussed in note
4, which is as of September 12,
2000.

F-2
<PAGE> 45

COMPUTER NETWORK TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31
------------------ JULY 31,
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $11,786 $ 16,184 $ 18,191
Marketable securities..................................... 576 10,711 11,389
Receivables, net.......................................... 23,678 29,517 33,977
Inventories............................................... 17,914 14,425 18,389
Net current assets of discontinued operations............. 3,555 5,089 1,910
Deferred tax asset........................................ 2,328 3,415 3,415
Other current assets...................................... 972 1,776 2,656
------- -------- --------
Total current assets............................... 60,809 81,117 89,927
------- -------- --------
Property and equipment, net................................. 14,815 17,529 23,001
Field support spares, net................................... 3,310 3,879 3,939
Deferred tax asset.......................................... 1,221 2,070 2,070
Goodwill and other intangibles, net......................... 1,948 1,222 1,015
Net non-current assets of discontinued operations........... 5,298 4,645 3,659
Other assets................................................ 195 192 787
------- -------- --------
$87,596 $110,654 $124,398
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,136 $ 11,408 $ 11,474
Accrued liabilities....................................... 12,100 10,010 15,817
Deferred revenue.......................................... 5,660 8,296 12,573
Current installments of obligations under capital lease... 326 688 1,279
------- -------- --------
Total current liabilities.......................... 25,222 30,402 41,143
------- -------- --------
Obligations under capital lease, less current
installments.............................................. 1,816 1,780 2,366
------- -------- --------
Total liabilities.................................. 27,038 32,182 43,509
------- -------- --------
Shareholders' equity:
Undesignated preferred stock, authorized 965 shares; none
issued and outstanding.................................. -- -- --
Series A Junior Participating Preferred Stock, authorized
35 shares; none issued and outstanding.................. -- -- --
Common stock, $.01 par value; authorized 100,000 shares;
issued and outstanding 22,254 at December 31, 1998,
23,792 at December 31, 1999 and 24,151 at July 31,
2000.................................................... 223 238 242
Additional paid-in capital................................ 54,921 68,927 71,554
Unearned compensation..................................... (355) (838) (924)
Retained earnings......................................... 6,141 10,796 11,054
Accumulated other comprehensive income-foreign currency
translation adjustment.................................. (372) (651) (1,037)
------- -------- --------
Total shareholders' equity......................... 60,558 78,472 80,889
------- -------- --------
$87,596 $110,654 $124,398
======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE> 46

COMPUTER NETWORK TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 --------------------
------------------------------- JUNE 30, JULY 31,
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Product sales.............................. $56,127 $ 74,969 $ 89,248 $42,588 $59,040
Service fees............................... 24,068 28,052 36,741 17,149 23,908
------- -------- -------- ------- -------
Total revenue...................... 80,195 103,021 125,989 59,737 82,948
------- -------- -------- ------- -------
COST OF REVENUE:
Cost of product sales...................... 20,344 27,441 38,411 16,661 24,407
Cost of service fees....................... 15,658 18,175 19,798 9,567 14,118
------- -------- -------- ------- -------
Total cost of revenue.............. 36,002 45,616 58,209 26,228 38,525
------- -------- -------- ------- -------
GROSS PROFIT................................. 44,193 57,405 67,780 33,509 44,423
------- -------- -------- ------- -------
OPERATING EXPENSES:
Sales and marketing........................ 27,504 32,255 34,626 17,238 20,051
Engineering and development................ 12,384 14,236 18,456 8,838 11,475
General and administrative................. 4,944 6,252 6,922 3,467 4,309
Abandoned facility......................... -- -- 1,331 -- --
------- -------- -------- ------- -------
Total operating expenses........... 44,832 52,743 61,335 29,543 35,835
------- -------- -------- ------- -------
INCOME (LOSS) FROM OPERATIONS................ (639) 4,662 6,445 3,966 8,588
------- -------- -------- ------- -------
OTHER INCOME (EXPENSE):
Interest income............................ 1,553 393 744 226 667
Interest expense........................... (57) (79) (264) (102) (175)
Other, net................................. (96) 113 (370) (232) (271)
------- -------- -------- ------- -------
Other income (expense), net........ 1,400 427 110 (108) 221
------- -------- -------- ------- -------
Income from continuing operations before
income taxes............................... 761 5,089 6,555 3,858 8,809
Provision for income taxes................... 312 1,730 2,229 1,312 2,907
------- -------- -------- ------- -------
Income from continuing operations............ 449 3,359 4,326 2,546 5,902
------- -------- -------- ------- -------
Income (loss) from discontinued operations,
net of tax................................. (2,763) 1,370 329 1,937 (2,019)
------- -------- -------- ------- -------
NET INCOME (LOSS)............................ $(2,314) $ 4,729 $ 4,655 $ 4,483 $ 3,883
======= ======== ======== ======= =======
BASIC INCOME (LOSS) PER SHARE:
Continuing operations...................... $ .02 $ .15 $ .19 $ .11 $ .25
======= ======== ======== ======= =======
Discontinued operations.................... $ (.12) $ .06 $ .01 $ .09 $ (.08)
======= ======== ======== ======= =======
Net income (loss).......................... $ (.10) $ .21 $ .20 $ .20 $ .16
======= ======== ======== ======= =======
Shares..................................... 22,702 22,095 23,137 22,773 24,020
======= ======== ======== ======= =======
DILUTED INCOME (LOSS) PER SHARE:
Continuing operations...................... $ .02 $ .15 $ .17 $ .10 $ .23
======= ======== ======== ======= =======
Discontinued operations.................... $ (.12) $ .06 $ .01 $ .08 $ (.08)
======= ======== ======== ======= =======
Net income (loss).......................... $ (.10) $ .21 $ .18 $ .17 $ .15
======= ======== ======== ======= =======
Shares..................................... 22,702 22,572 25,818 25,649 26,152
======= ======== ======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements
F-4
<PAGE> 47

COMPUTER NETWORK TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN UNEARNED RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS INCOME TOTAL
------- ------ ---------- ------------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................... 23,408 $234 $60,372 $ -- $ 3,726 $ (171) $64,161
------- ---- ------- ------- ------- ------- -------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options.................... 192 2 741 (42) -- -- 701
Repurchase of common stock.................... (1,405) (14) (6,674) -- -- -- (6,688)
Compensation expense.......................... -- -- -- 7 -- -- 7
Comprehensive loss:
Net loss..................................... -- -- -- -- (2,314) -- (2,314)
Translation adjustment, net of tax effect of
$0......................................... -- -- -- -- -- (260) (260)
-------
Total comprehensive loss...................... -- -- -- -- -- -- (2,574)
------- ---- ------- ------- ------- ------- -------
Balance, December 31, 1997.................... 22,195 $222 $54,439 $ (35) $ 1,412 $ (431) $55,607
------- ---- ------- ------- ------- ------- -------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options.................... 454 5 2,041 (401) -- -- 1,645
Tax benefits from employee stock
transactions................................. -- -- 195 -- -- -- 195
Repurchase of common stock.................... (395) (4) (1,754) -- -- -- (1,758)
Compensation expense.......................... -- -- -- 81 -- -- 81
Comprehensive income:
Net income................................... -- -- -- -- 4,729 -- 4,729
Translation adjustment, net of tax effect of
$0......................................... -- -- -- -- -- 59 59
-------
Total comprehensive income.................... -- -- -- -- -- -- 4,788
------- ---- ------- ------- ------- ------- -------
Balance, December 31, 1998.................... 22,254 $223 $54,921 $ (355) $ 6,141 $ (372) $60,558
------- ---- ------- ------- ------- ------- -------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options.................... 1,538 15 9,354 (799) -- -- 8,570
Tax benefits from employee stock
transactions................................. -- -- 4,652 -- -- -- 4,652
Compensation expense.......................... -- -- -- 316 -- -- 316
Comprehensive income:
Net income................................... -- -- -- -- 4,655 -- 4,655
Translation adjustment, net of tax effect of
$0......................................... -- -- -- -- -- (279) (279)
-------
Total comprehensive income.................... -- -- -- -- -- -- 4,376
------- ---- ------- ------- ------- ------- -------
Balance, December 31, 1999.................... 23,792 $238 $68,927 $ (838) $10,796 $ (651) $78,472
------- ---- ------- ------- ------- ------- -------
(unaudited)
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options.................... 33 -- 507 (341) -- -- 166
Tax benefits from employee stock
transactions................................. -- -- -- -- -- -- --
Compensation expense.......................... -- -- -- 49 -- -- 49
Comprehensive income:
Net loss..................................... -- -- -- -- (3,625) -- (3,625)
Translation adjustment, net of tax effect of
$0......................................... -- -- -- -- -- 49 49
-------
Total comprehensive loss...................... -- -- -- -- -- -- (3,576)
------- ---- ------- ------- ------- ------- -------
Balance, January 31, 2000..................... 23,825 $238 $69,434 $(1,130) $ 7,171 $ (602) $75,111
------- ---- ------- ------- ------- ------- -------
(unaudited)
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options.................... 326 4 2,120 111 -- -- 2,235
Tax benefits from employee stock
transactions................................. -- -- -- -- -- -- --
Compensation expense.......................... -- -- -- 95 -- -- 95
Comprehensive income:
Net income................................... -- -- -- -- 3,883 -- 3,883
Translation adjustment, net of tax effect of
$0......................................... -- -- -- -- -- (435) (435)
-------
Total comprehensive income.................... -- -- -- -- -- -- 3,448
------- ---- ------- ------- ------- ------- -------
Balance, July 31, 2000........................ 24,151 $242 $71,554 $ (924) $11,054 $(1,037) $80,889
======= ==== ======= ======= ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE> 48

COMPUTER NETWORK TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31 --------------------
-------------------------------- JUNE 30, JULY 31,
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................ $ (2,314) $ 4,729 $ 4,655 $ 4,483 $ 3,883
Discontinued operations.................. 2,763 (1,370) (329) (1,937) 2,019
Depreciation and amortization............ 6,200 7,414 9,083 4,370 5,216
Compensation expense..................... -- 58 219 106 25
Change in deferred taxes................. (452) 506 (1,936) -- --
Changes in operating assets and
liabilities:
Receivables........................... (6,772) 872 (5,872) 2,233 (5,197)
Inventories........................... (1,219) (6,815) 3,489 2,559 341
Other current assets.................. (265) 127 (804) (769) (875)
Accounts payable...................... 3,347 (78) 4,272 980 2,217
Accrued liabilities................... (777) 4,179 2,563 (1,862) 9,685
Deferred revenue...................... 2,492 (1,528) 2,636 2,229 2,653
-------- -------- -------- ------- --------
Net cash provided by continuing
operations.......................... 3,003 8,094 17,976 12,392 19,967
Net cash provided by (used in)
discontinued operations............. (1,200) 2,829 789 (1,887) 613
-------- -------- -------- ------- --------
Cash provided by operating
activities..................... 1,803 10,923 18,765 10,505 20,580
-------- -------- -------- ------- --------
INVESTING ACTIVITIES:
Additions to property and equipment...... (6,650) (6,345) (8,262) (4,249) (7,500)
Additions to field support spares........ (1,693) (2,198) (2,727) (1,089) (847)
Additions to purchased technology........ (1,550) (185) -- -- --
Discontinued operations -- acquisition of
business.............................. (11,412) 169 -- -- --
Discontinued operations -- proceeds from
sale of vision product line........... 2,000 -- -- -- --
Discontinued operations -- additions to
long-term assets...................... (1,237) (547) (507) (91) (110)
Purchase of marketable securities........ (12,190) (18,054) (15,421) (97) (2,748)
Redemption of marketable securities...... 36,374 23,512 5,286 -- --
Other.................................... 652 6 327 89 (599)
-------- -------- -------- ------- --------
Cash provided by (used in)
investing activities........... 4,294 (3,642) (21,304) (5,437) (11,804)
-------- -------- -------- ------- --------
FINANCING ACTIVITIES:
Payments for repurchases of common
stock................................. (6,688) (1,758) -- -- --
Discontinued operations -- repayment of
debt.................................. -- -- (1,000) (1,000) --
Proceeds from issuance of common stock... 701 1,645 8,570 6,218 2,235
Repayments of obligations under capital
leases................................ (107) (181) (327) (69) (549)
-------- -------- -------- ------- --------
Cash provided by (used in)
financing activities........... (6,094) (294) 7,243 5,149 1,686
-------- -------- -------- ------- --------
Effects of exchange rate changes........... (60) 9 (306) (341) (245)
-------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (57) 6,996 4,398 9,876 10,217
Cash and cash equivalents -- beginning of
period................................... 4,847 4,790 11,786 11,786 7,974
-------- -------- -------- ------- --------
Cash and cash equivalents -- end of
period................................... $ 4,790 $ 11,786 $ 16,184 $21,662 $ 18,191
======== ======== ======== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements

F-6
<PAGE> 49

COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
(INFORMATION AS OF JULY 31, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND JULY 31, 2000 IS UNAUDITED)
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Computer Network Technology Corporation is a leading worldwide provider of
high-performance Storage Area Networking (SAN) solutions, Enterprise Application
Integration (EAI) tools, and world class services.

DISCONTINUED OPERATIONS

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.

INTERIM FINANCIAL STATEMENTS

The accompanying unaudited financial statements as of July 31, 2000 and for
the six months ended June 30, 1999 and July 31, 2000 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal, recurring
accruals) considered necessary for a fair presentation have been included.
Results for the interim period are not necessarily indicative of results for an
entire year.

On January 12, 2000, the Company changed its fiscal year end to January 31,
from December 31. The Company believes that the six months ended June 30, 1999
provide a meaningful comparison to the first half of fiscal 2000. There are no
factors, of which the Company is aware, seasonal or otherwise, that would impact
the comparability of information or trends, if results for the six months ended
July 31, 1999 were presented in lieu of results for the six months ended June
30, 1999.

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 sales is recognized in accordance with
American Institute of Certified Public Accountants Statement of Position (SOP)
97-2, "Software Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition With Respect to Certain Transactions". 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 to customers.

In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes
certain of the SEC staff's view in applying

F-7
<PAGE> 50
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently analyzing whether SAB 101 will have any
impact on its financial statements. SAB 101 is effective for the Company for the
quarter ending January 31, 2001.

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

If significant, unrealized gains and losses on available-for-sale
securities are excluded from earnings and are reflected as a separate component
of shareholders' equity. Unrealized gains and losses on trading securities are
included in earnings.

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.

GOODWILL AND OTHER INTANGIBLES

Goodwill represents the excess of purchase price over the fair value of net
assets acquired and is amortized using the straight-line method over periods
ranging from five to twenty years. Purchased technology and other identifiable
intangible assets are carried at cost and amortized using the straight-line
method over periods ranging from two to seven years.

The Company assesses the potential impairment of its goodwill and other
intangible assets based on anticipated cash flows from operations.

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, 1998 and 1999 was $1,225,000 and $959,000, 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
costs which meet the capitalization criteria outlined in SFAS No. 86 have not
been significant.

F-8
<PAGE> 51
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 translation adjustments are recorded as a separate
component of shareholders' equity.

The Company is exposed to market risks related to fluctuations in foreign
exchange rates because some sales transactions, and the assets and liabilities
of its foreign subsidiaries, are denominated in foreign currencies. As of
December 31, 1999, the Company has hedged a portion of its risk by purchasing
forward exchange contracts for 950,000 British pounds sterling that settle at
various times through February 15, 2000. Gains and losses from transactions
denominated in foreign currencies and forward exchange contracts are included in
net income (loss).

The Company recognized foreign currency transaction losses in 1997 and 1999
of $45,000 and $196,000, respectively. The Company recognized a foreign currency
transaction gain in 1998 of $110,000.

INCOME TAXES

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.

NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed based on the weighted average
number of common shares outstanding, while diluted net income (loss) per share
is computed based on the weighted average number of common shares outstanding
plus potential dilutive shares of common stock. Potential dilutive shares of
common stock include stock options which have been granted to employees and
directors and awards under the employee stock purchase plan.

F-9
<PAGE> 52
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPREHENSIVE INCOME

Comprehensive income consists of the Company's net income (loss) and
foreign currency translation adjustment and is presented in the consolidated
statement of shareholders' equity and comprehensive income.

(2) COMPONENTS OF SELECTED BALANCE SHEET ACCOUNTS

<TABLE>
<CAPTION>
DECEMBER 31
------------------ JULY 31,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Components and subassemblies.............................. $ 9,125 $ 8,661 $ 11,486
Work in process........................................... 3,984 3,109 3,301
Finished goods............................................ 4,805 2,655 3,602
------- ------- --------
$17,914 $14,425 $ 18,389
======= ======= ========
Property and equipment:
Machinery and equipment................................... $20,909 $25,415 $ 29,662
Office and data processing equipment...................... 15,136 18,761 22,073
Furniture and fixtures.................................... 1,547 2,221 3,283
Leasehold improvements.................................... 2,090 2,264 1,398
------- ------- --------
39,682 48,661 56,416
Less accumulated depreciation and amortization............ 24,867 31,132 33,415
------- ------- --------
$14,815 $17,529 $ 23,001
======= ======= ========
Field support spares:
Field support spares...................................... $13,584 $16,311 $ 18,264
Less accumulated depreciation............................. 10,274 12,432 14,325
------- ------- --------
$ 3,310 $ 3,879 $ 3,939
======= ======= ========
Goodwill and other intangibles:
Purchased technology...................................... $ 1,665 $ 1,665 $ 1,665
Goodwill.................................................. 866 866 866
------- ------- --------
2,531 2,531 2,531
Less accumulated amortization............................. 583 1,309 1,516
------- ------- --------
$ 1,948 $ 1,222 $ 1,015
======= ======= ========
Accrued liabilities:
Compensation.............................................. $ 5,889 $ 5,949 $ 8,426
Income taxes.............................................. 3,725 1,049 2,550
Abandoned facility........................................ -- 1,331 937
Other..................................................... 2,486 1,681 3,904
------- ------- --------
$12,100 $10,010 $ 15,817
======= ======= ========
</TABLE>

F-10
<PAGE> 53
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) MARKETABLE SECURITIES

The Company's investments in marketable securities are summarized as
follows:

<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1999
------- -------
<S> <C> <C>
Corporate debt securities......................... $ -- $10,319
Standard & Poors 500 stock price index fund....... 576 392
------- -------
$ 576 $10,711
======= =======
</TABLE>

At December 31, 1998 and 1999, available-for-sale securities consist of
investments in corporate debt securities of $0 and $10,319,000, respectively.
The amount of gross unrealized gains and losses with respect to investments in
available-for-sale securities at December 31, 1998 and 1999 was not significant.
The Company realized no significant gains or losses with respect to
available-for-sale securities during the three-year period ended December 31,
1999. Proceeds from the sale of available-for-sale securities in 1997, 1998 and
1999 were $26,252,000, $8,093,000 and $984,000, respectively. At December 31,
1999, the Company's investments in available for sale securities have
contractual maturities of six months or less.

The Company's trading securities consist of a mutual fund investment that
seeks to provide a return corresponding to the Standard & Poors 500 stock price
index. The Company intends to use any gain or loss from this investment to
directly offset the investment gain or loss owed to participants under the
Company's executive deferred compensation plan. The amount of unrealized holding
gains (losses) with respect to trading securities included in net income (loss)
for 1997, 1998 and 1999 was $0, $0 and $112,000, respectively.

(4) DISCONTINUED OPERATIONS

The Company has determined that it will proceed with a divestiture of its
Enterprise Integration Solutions Division. Accordingly, the Enterprise
Integration Solutions Division has been accounted for as a discontinued
operation in the accompanying financial statements. The Enterprise Integration
Solutions Division develops and sells EAI software that automates the
integration of computer software applications, and business workflow processes,
as well as our traditional server gateways and tools, which enable multiple
desktop computers and mainframe terminals to communicate with one another.
Management estimates that the disposition of this business segment will not
result in a loss. Summary financial information for the discontinued operations
was as follows:

Condensed Consolidated Statements of Operations of Discontinued Operations:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED
--------------------------- -------------------
JUNE 30, JULY 31,
1997 1998 1999 1999 2000
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................................ $17,646 $30,514 $25,704 $15,032 $ 8,065
======= ======= ======= ======= =======
Income (loss) before income taxes.............. $(4,654) $ 2,550 $ 498 $ 2,934 $(3,014)
Provision (benefit) for income taxes........... (1,891) 1,180 169 997 (995)
------- ------- ------- ------- -------
Net income (loss) from discontinued
operations................................... $(2,763) $ 1,370 $ 329 $ 1,937 $(2,019)
======= ======= ======= ======= =======
</TABLE>

Certain general and administrative, facility and information technology
infrastructure costs that had previously been allocated to and reported in the
operating results of the Enterprise Integration Solutions Division have been
reallocated to continuing operations.

F-11
<PAGE> 54
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Condensed Consolidated Statements of Net Assets of Discontinued Operations:

<TABLE>
<CAPTION>
DECEMBER 31
----------------- JULY 31,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Receivables, net............................................ $ 6,547 $ 7,330 $ 4,633
Other current assets........................................ 2,439 1,775 1,379
Goodwill and other intangibles, net......................... 2,789 2,205 1,791
Other long-term assets...................................... 3,509 2,440 1,869
------- ------- -------
Total assets........................................... 15,284 13,750 9,672
------- ------- -------
Debt........................................................ 2,000 1,000 --
All other liabilities....................................... 4,431 3,016 4,103
------- ------- -------
Net assets of discontinued operations.................. $ 8,853 $ 9,734 $ 5,569
======= ======= =======
</TABLE>

APERTUS - DISCONTINUED OPERATIONS

Effective October 24, 1997, the Company acquired substantially all of the
assets (including in-process research and development) and assumed certain
liabilities of the Internet Solutions Division of Apertus Technologies
Incorporated (Apertus), a provider of Internet-to-mainframe connectivity
products and Web access to legacy applications. The purchase price totaled
$16,429,000 including a cash payment of $11,412,000 and assumption of $5,017,000
of liabilities and related acquisition costs. The acquisition was accounted for
as a purchase and the consolidated financial statements of the Company include,
as part of discontinued operations, the results of Apertus since October 24,
1997. The purchase price was allocated to the fair value of the assets and
liabilities acquired as follows:

<TABLE>
<S> <C>
Current assets.............................................. $10,488
Property and equipment...................................... 1,000
Other assets................................................ 672
Identifiable intangibles and goodwill....................... 1,519
In-process research and development......................... 2,750
Current liabilities......................................... (5,017)
-------
Cash paid................................................... $11,412
=======
</TABLE>

INTELLIFRAME - DISCONTINUED OPERATIONS

Effective December 3, 1998, the Company acquired all of the outstanding
stock of IntelliFrame Corporation (IntelliFrame), a start-up software and
services company which develops technology for legacy systems integration with
client/server and Internet technologies. The purchase price of $2,000,000 was
paid in two installments of $1,000,000 each in January 1999 and 2000. The
acquisition was accounted for as a purchase and the consolidated financial
statements of the Company include, as part of discontinued operations, the
results of IntelliFrame since December 3, 1998. The purchase price was allocated
to the fair value of the assets and liabilities acquired as follows:

<TABLE>
<S> <C>
Net tangible assets......................................... $ 148
Identifiable intangibles and goodwill....................... 1,295
In-process research and development......................... 927
Deferred tax liability...................................... (370)
------
Cash paid................................................... $2,000
======
</TABLE>

F-12
<PAGE> 55
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Two employees, who were former shareholders of IntelliFrame, a company we
acquired, will be eligible for aggregate bonus payments of up to $10,000,000
through December 31, 2001 if future revenue from specified products of the
Enterprise Integration Solutions Division exceed defined targets or if certain
products are sold in a transaction that does not constitute a change in control.
The potential bonus payments increase to a maximum of $12,000,000 if the Company
were to divest certain specified products of the division in calendar year 2000.
The employees may also be entitled to bonus payments of up to an aggregate of
$8.0 million (offset by bonuses previously paid) upon certain failures to market
specified products of the division prior to December 31, 2001. No bonus payments
were made in 1998 or 1999 in connection with this agreement.

INTEGRATION ACTIVITIES -- DISCONTINUED OPERATIONS

Subsequent to the acquisition of Apertus in 1997, the Company decided to
consolidate certain operations and recorded a charge of $2,184,000 for costs
incurred to integrate existing businesses, including accruals for severance,
facility closures and infrastructure integration. During the three months ended
December 31, 1999, the Company determined that it would not complete a
previously planned consolidation of facilities in the United Kingdom. As a
result, the remaining accrual for integration activities of $430,000 was
reversed and included in results from discontinued operations in the
accompanying 1999 consolidated statement of operations.

In December 1997, the Company sold the assets and technologies relating to
the vision line of products acquired from Apertus for $2,000,000 in cash, plus
additional payments ranging from $1,500,000 to $2,000,000, depending upon the
vision product line achieving a defined future revenue target. The Company did
not recognize any gain or loss upon receipt of the initial $2,000,000 cash
payment. During the six months ended June 30, 1999 and July 31, 2000, the
Company received additional payments, from the sale of the vision product line
of $667,000 and $1,210,000, respectively, which were recognized as income and
included in results from discontinued operations. There are no additional
payments to be received from the sale of the vision product line.

(5) LEASES

The Company leases all office and manufacturing space and certain equipment
under noncancelable capital and operating leases. Building leases have terms
ranging from one to 16 years. At December 31, 1998 and 1999, leased capital
assets included in property and equipment were as follows:

<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT: 1998 1999
----------------------- ------ ------
<S> <C> <C>
Office and data processing equipment........................ $2,430 $3,027
Less accumulated amortization............................... 481 1,098
------ ------
$1,949 $1,929
====== ======
</TABLE>

F-13
<PAGE> 56
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum 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>
MINIMUM LEASE
COMMITMENTS
--------------------
YEAR ENDING DECEMBER 31 CAPITAL OPERATING
----------------------- ------- ---------
<S> <C> <C>
2000....................................................... $ 878 $ 4,618
2001....................................................... 878 3,792
2002....................................................... 715 2,659
2003....................................................... 405 2,387
2004....................................................... -- 2,370
Thereafter................................................. -- 13,920
------ -------
Total minimum lease payments............................... 2,876 29,746
Less minimum sublease income............................... -- 849
------ -------
Net minimum lease payments................................. 2,876 $28,897
=======
Less amounts representing interest at rates ranging from
5.69% to 9.77%........................................... 408
------
Present value of minimum capital lease payments............ 2,468
Less current installments.................................. 688
------
Obligations under capital lease, less current
installments............................................. $1,780
======
</TABLE>

Rent expense under noncancelable operating leases, exclusive of executory
costs, for 1997, 1998, and 1999, was $2,765,000, $3,122,000 and $3,970,000,
respectively. The Company recently moved into a new leased facility for its
principal office and manufacturing operations. During the three months ended
December 31, 1999, the Company recognized a $1,331,000 charge for the future
costs associated with a facility that was abandoned prior to expiration of the
lease term.

(6) SHAREHOLDERS' EQUITY

COMMON STOCK REPURCHASE

On March 10, 1997 the Company's board of directors authorized the
repurchase of up to 2,000,000 shares of the Company's common stock. During 1997
and 1998, the Company repurchased 1,799,900 shares of its common stock for
$8,446,000 pursuant to this authorization. No shares were repurchased in 1999.

RIGHTS PLAN

On July 24, 1998 the Company's board of directors adopted a shareholders
rights plan pursuant to which rights were distributed as a dividend at the rate
of one preferred share purchase right for each outstanding share of common stock
of the Company. The rights will expire on July 23, 2008 unless extended, earlier
redeemed or exchanged by the Company.

STOCK OPTIONS AND RESTRICTED STOCK

The Company maintains stock option and restricted stock plans (the Plans)
which provide for the grant of stock options, restricted stock and stock based
awards to officers, other employees, consultants, and independent contractors as
determined by the compensation committee of the board of directors. A maximum of
7,430,000 shares of common stock are issuable under the terms of the Plans, of
which no more than 930,000 shares may be issued as restricted stock or other
stock based awards. As of

F-14
<PAGE> 57
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1999, there were 673,659 shares of common stock available for
future grants under these plans.

Restricted stock issued under the Plans is recorded at fair market value on
the date of grant and generally vest over a two to four year period. Vesting for
some grants may be accelerated if certain performance criteria are achieved.
Compensation expense is recognized over the applicable vesting period. During
1997, 1998 and 1999, the Company issued 8,000, 81,000 and 90,250 restricted
shares, respectively, having an aggregate weighted fair market value per share
of $5.16, $4.81 and $16.25, respectively. Compensation expense recognized for
restricted shares in 1997, 1998 and 1999 was $7,000, $81,000 and $316,000,
respectively.

All stock options granted under the Plans have an exercise price equal to
fair market value on the date of grant, vest and become exercisable over
individually defined periods, generally four years, and expire ten years from
the date of grant. During 1999, stock options for 800,000 shares were granted at
an exercise price of $21.88 that vest and become exercisable after six years,
except that vesting with respect to 50% of the options will accelerate in the
event the average closing sales price of the Company's common stock exceeds 150%
of the exercise price for a period of sixty consecutive trading days. Vesting
with respect to 100% of the options will accelerate if the average closing sales
price of the Company's common stock exceeds 200% of the exercise price for a
period of sixty consecutive trading days.

A summary of the status of the Company's outstanding stock options and
related changes for each of the years in the three year period ended December
31, 1999 is presented below:

<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 3,368 $6.19 4,321 $5.42 4,972 $ 5.63
Granted................................. 1,689 4.85 1,269 6.08 1,689 18.40
Reissued................................ 310 4.94 -- -- -- --
Exercised............................... (20) 3.80 (219) 4.66 (1,540) 5.54
Canceled................................ (1,026) 6.91 (399) 5.33 (443) 10.79
------ ----- ------
Outstanding at end of year.............. 4,321 $5.42 4,972 $5.63 4,678 $ 9.76
====== ===== ======
Exercisable at end of year.............. 1,707 $5.90 2,388 $5.71 1,901 $ 6.31
====== ===== ======
Weighted-average fair value of grants
during the year....................... $2.77 $4.48 $12.68
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.50 - $ 4.99.......................... 1,487 7.0 $ 4.56 774 $ 4.56
$ 5.00 - $ 7.99.......................... 1,363 6.7 $ 5.88 915 $ 5.92
$ 8.00 - $14.99.......................... 937 8.5 $12.40 132 $ 9.84
$15.00 - $26.00.......................... 891 9.4 $21.60 80 $21.88
----- -----
4,678 1,901
===== =====
</TABLE>

F-15
<PAGE> 58
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REALLEGACY.COM, INC. STOCK OPTIONS (UNAUDITED)

We have issued options for the purchase of approximately 2.8 million shares
of common stock in RealLegacy.com, Inc., our wholly owned subsidiary including
our EAI business, to our directors and the employees and officers of
RealLegacy.com, Inc. The options have an exercise price of $2.00 per share equal
to their estimated fair market value on the date of grant, and have individually
defined terms and vesting periods.

EMPLOYEE STOCK PURCHASE PLAN

The 1992 Employee Stock Purchase Plan (the Purchase Plan) allows eligible
employees an opportunity to purchase an aggregate of 1,100,000 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 six month 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 $2,500 in aggregate fair market value of common stock (as defined)
during any six month purchase period. Common shares sold to employees under the
Purchase Plan in 1997, 1998 and 1999 were 163,637, 153,163 and 86,972,
respectively.

The fair value of each purchase right granted in 1997, 1998 and 1999 was
$1.66, $1.57 and $6.38, respectively.

STOCK COMPENSATION

The Company has elected to continue to account for its plans in accordance
with APB No. 25. Accordingly, no compensation cost related to stock option
grants or shares sold to employees under the Employee Stock Purchase Plan has
been recognized in the Company's financial statements. 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 basic and diluted share would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $(2,314) $4,729 $4,655
Pro forma........................................ $(3,826) $2,580 $ (795)
Net income (loss) per share:
As reported
Basic......................................... $ (.10) $ .21 $ .20
Diluted....................................... $ (.10) $ .21 $ .18
Pro forma
Basic......................................... $ (.17) $ .12 $ (.03)
Diluted....................................... $ (.17) $ .11 $ (.03)
</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.

In determining the compensation cost of stock option grants and shares sold
to employees under the employee stock purchase plan, as specified by SFAS No.
123, the fair value of each award has been

F-16
<PAGE> 59
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimated on the date of grant using the Black-Scholes option pricing model. The
weighted average assumptions used in these calculations are summarized below:

<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Risk free interest rate............................. 6.42% 5.26% 5.64%
Expected life....................................... 8.14 8.41 5.23
Expected volatility................................. 39.30% 67.50% 79.66%
</TABLE>

(7) NET INCOME (LOSS) PER SHARE

The components of net income (loss) per basic and diluted share are as
follows:

<TABLE>
<CAPTION>
WEIGHTED
NET INCOME AVERAGE SHARES PER SHARE
(LOSS) OUTSTANDING AMOUNT
---------- -------------- ---------
<S> <C> <C> <C>
1997:
Basic.................................... $(2,314) 22,702 $(.10)
Dilutive effect of employee stock
purchase awards and options........... -- -- --
------- ------ -----
Diluted.................................. $(2,314) 22,702 $(.10)
======= ====== =====
1998:
Basic.................................... $ 4,729 22,095 $ .21
Dilutive effect of employee stock
purchase awards and options........... -- 477 --
------- ------ -----
Diluted.................................. $ 4,729 22,572 $ .21
======= ====== =====
1999:
Basic.................................... $ 4,655 23,137 $ .20
Dilutive effect of employee stock
purchase awards and options........... -- 2,681 (.02)
------- ------ -----
Diluted.................................. $ 4,655 25,818 $ .18
======= ====== =====
</TABLE>

F-17
<PAGE> 60
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) INCOME TAXES

The components of income from continuing operations before income taxes and
income tax expense (benefit) for each of the years in the three-year period
ended December 31, 1999 consists of the following:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Income from continuing operations before income
taxes:
U.S. ........................................ $ 763 $4,251 $ 6,356
Foreign...................................... (2) 838 199
------- ------ -------
Total................................... $ 761 $5,089 $ 6,555
======= ====== =======
Income tax provision:
Current:
U.S. ..................................... $ 685 $ 693 $ 3,356
Foreign................................... -- 277 60
State..................................... 79 254 749
------- ------ -------
Total current........................... 764 1,224 4,165
------- ------ -------
Deferred:
U.S. ..................................... (358) 453 (1,525)
State..................................... (94) 53 (411)
------- ------ -------
Total deferred.......................... (452) 506 (1,936)
------- ------ -------
Total income tax expense....................... $ 312 $1,730 $ 2,229
======= ====== =======
</TABLE>

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, 1999 is
as follows:

<TABLE>
<CAPTION>
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
Statutory tax rate.................................... 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State taxes, net of federal tax benefit............. 1.3 4.0 3.4
Foreign sales corporation........................... (35.0) (6.3) (5.3)
Meals and entertainment............................. 11.8 1.2 1.1
Change in valuation allowance....................... 28.1 -- --
Other............................................... .8 1.1 .8
----- ---- ----
Total................................................. 41.0% 34.0% 34.0%
===== ==== ====
</TABLE>

F-18
<PAGE> 61
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1998 and 1999 was as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1999
------ -------
<S> <C> <C>
Deferred tax assets:
Inventory............................................... $ 993 $ 1,556
Accrued compensation.................................... 808 847
Property and equipment.................................. 848 869
Reserves for bad debts and sales returns................ 258 135
Foreign net operating loss carryforwards................ 410 410
Federal and state tax credits........................... 373 1,083
Federal and state net operating loss carryforwards...... -- 118
Abandoned facility...................................... -- 512
Other................................................... 491 648
------ -------
Total gross deferred tax assets......................... 4,181 6,178
Valuation allowance..................................... (410) (410)
------ -------
Net deferred tax assets......................... 3,771 5,768
------ -------
Deferred tax liabilities:
Other................................................... (222) (283)
------ -------
Total gross deferred tax liabilities.................... (222) (283)
------ -------
Net deferred tax assets......................... $3,549 $ 5,485
====== =======
</TABLE>

The Company recorded a valuation allowance at December 31, 1998 and 1999 of
$410,000 for the tax benefits associated with certain losses incurred from
foreign operations. At December 31, 1999, the Company had net operating loss and
credit carryforwards available for federal tax purposes of approximately
$1,558,000 and $483,000, respectively, which will expire during the years 2001
through 2019.

The Company has assessed its taxable earnings history and prospective
future taxable income. Based on this assessment, management has determined that
it is more likely than not that its net deferred tax assets will be realized in
future periods. The Company may be required to provide a valuation allowance for
this asset in the future if it does not generate sufficient taxable income as
planned.

(9) SUCCESS SHARING BONUS PLAN

The Company's Success Sharing Bonus Plan provides a formula for
determination of cash bonus payments to eligible employees based on a defined
percentage of a participant's qualifying 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.

The success sharing bonus expense for 1997, 1998, and 1999 was $43,000,
$1,673,000, and $420,000 respectively.

(10) 401(k) AND DEFERRED COMPENSATION PLANS

The Company has a 401(k) salary savings plan which covers substantially all
of its employees. The Company matches 100% of a participant's annual plan
contributions up to an annual maximum per participant of $1,500 which vests over
a four year period.

F-19
<PAGE> 62
COMPUTER NETWORK TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has also established an executive deferred compensation plan
for selected key employees which allows participants to defer a substantial
portion of their compensation each year. The Company matches 20% of a
participant's annual plan contributions up to an annual maximum per participant
of $10,000. Matching contributions vest over a four year period from the later
of July 1, 1997 or the participant's date of hire. In addition, the Company
provides participants with an annual earnings credit based on the investment
indexes selected by the participant prior to the start of each plan year.

The Company's expense under the 401(k) and deferred compensation plans for
1997, 1998 and 1999 was $380,000, $570,000 and $470,000, respectively.

(11) SEGMENT INFORMATION

Information with respect to the Company's foreign operations is summarized
as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenue:
United States............................................. $56,750 $ 69,655 $ 82,494
United Kingdom............................................ 6,243 9,596 13,402
France.................................................... 1,763 5,479 4,348
Other..................................................... 15,439 18,291 25,745
------- -------- --------
Total............................................. $80,195 $103,021 $125,989
======= ======== ========
Long -- Lived Assets (end of year):
United States............................................. $16,272 $ 18,454 21,464
United Kingdom............................................ 781 1,049 901
Other..................................................... 265 570 265
------- -------- --------
Total............................................. $17,318 $ 20,073 $ 22,630
======= ======== ========
</TABLE>

Revenue has been attributed to the country where the end-user customer is
located.

No single customer accounted for more than 10% of the Company's total
revenue in 1997, 1998 or 1999.

(12) NONCASH FINANCING AND INVESTING ACTIVITIES AND SUPPLEMENTAL CASH FLOW
INFORMATION

Cash payments for interest expense in 1997, 1998, and 1999 were $57,000,
$79,000, and $222,000, respectively.

Cash payments for income taxes, net of refunds received, in 1997, 1998 and
1999 were $986,000, $331,000 and $2,116,000, respectively.

During 1997, 1998, and 1999, the Company entered into capital lease
obligations for equipment valued at $989,000, $1,441,000 and $653,000,
respectively.

(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The carrying amount for cash and cash equivalents, marketable securities,
accounts receivable and long-term obligations approximates fair value because of
the short maturity of those instruments.

F-20
<PAGE> 63

PROSPECTUS

$100,000,000

[COMPUTER NETWORK TECHNOLOGY LOGO]

COMMON STOCK AND
CONVERTIBLE SUBORDINATED NOTES
------------------------
By this prospectus, we may offer, from time to time, in one or more series
or classes the following securities:

- shares of our common stock, and

- our notes, which are convertible subordinated notes.

The aggregate initial offering price of these "offered securities" that we
may issue will not exceed $100,000,000. If we issue convertible subordinated
notes at a discount from their original principal stated amount, then, for
purposes of calculating the aggregate initial offering price of the offered
securities, we will treat the initial offering price of the convertible
subordinated notes as the total original principal amount of the convertible
subordinated notes.

Our common stock is quoted on the Nasdaq National Market under the symbol
"CMNT." On August 20, 1999, the last reported sale price of our common stock was
$13.94 per share.

We may offer the offered securities in amounts, at prices and on terms
determined at the time of the offering. We will provide you with specific terms
of the applicable offered securities in supplements to this prospectus.

You should read this prospectus and any prospectus supplement carefully
before you decide to invest. This prospectus may not be used to consummate sales
of the offered securities unless it is accompanied by a prospectus supplement
describing the method and terms of the offering of those offered securities.

SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING THE OFFERED SECURITIES.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE OFFERED SECURITIES OR DETERMINED IF
THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS TRUTHFUL AND COMPLETE. IT IS
ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.

------------------------

The date of this prospectus is August 23, 1999.
<PAGE> 64

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, any prospectus supplement and other documents we have
filed with the Securities and Exchange Commission contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which may include statements about our:

- anticipated receipt of orders;

- business strategy;

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

- enhancements of existing products or services;

- plans for hiring additional personnel;

- entering into strategic partnerships; and

- other plans, objectives, expectations and intentions contained in this
prospectus or any prospectus supplement that are not historical facts.

When used in this prospectus and any prospectus supplement, the words
"may," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "intend," "potential" or "continue" and similar expressions are
generally intended to identify forward-looking statements. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of reasons, including those discussed under "Risk
Factors" and elsewhere in this prospectus and any prospectus supplement. We
assume no obligation to update any forward-looking statements. These statements
are only predictions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process under the Securities Act of 1933 (the
"Securities Act"). Under the shelf process, we may, from time to time, sell any
combination of the offered securities described in this prospectus in one or
more offerings up to a total dollar amount of $100,000,000.

This prospectus and any accompanying prospectus supplement do not contain
all of the information included in the registration statement. We have omitted
parts of the registration statement as permitted by the rules and regulations of
the SEC. For further information, we refer you to the registration statement on
Form S-3, including its exhibits. Statements contained in this prospectus and
any accompanying prospectus supplement about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that any agreement or document be filed as an exhibit to the
registration statement, you should refer to that agreement or document for a
complete description of these matters. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.

This prospectus provides you with a general description of the offered
securities. Each time we sell offered securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change any
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information described
under the heading "Where You Can Find More Information."

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can inspect and copy the registration statement as
well as reports, proxy statements and other

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information we have filed with the SEC at the public reference room maintained
by the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You can obtain
copies from the public reference room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549 upon payment of various fees. You can call the SEC at
1-800-732-0330 for further information about the public reference room. We are
also required to file electronic versions of these documents with the SEC, which
may be accessed through the SEC's World Wide Website at http://www.sec.gov. Our
common stock is quoted on the Nasdaq National Market System.

The SEC allows us to "incorporate by reference" certain of our
publicly-filed documents into this prospectus, which means that information
included in these documents is considered part of this prospectus. Information
that we file with the SEC with this prospectus or subsequent to the date of this
prospectus will automatically update and supersede this information. This
prospectus does not include all the information in the registration statement
and documents incorporated by reference. You should refer to the documents and
to the exhibits to the registration statement for a more complete understanding
of the matter involved. We hereby incorporate by reference the documents listed
below and any future filings made with the SEC prior to the termination of the
offering under sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934.

The following documents filed with the SEC are incorporated by reference in
this prospectus:

1. Our Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 0-13994).

2. Our Proxy Statement dated April 1, 1999, filed in connection with
our May 13, 1999 Annual Meeting of Shareholders.

3. Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999 and June 30, 1999 (File No. 0-13994).

4. Our Current Report on Form 8-K, filed with the SEC on May 25, 1999
(File No. 0-13994).

5. The description of our common stock included in registration
statements filed on Form 8-A effective November 15, 1985, and July 29,
1998, including any amendments or reports filed for the purpose of updating
that description.

We will furnish without charge to you, on written or oral request, a copy
of any or all of the documents incorporated by reference. You should direct any
requests for documents to Sue Nelson, Investor Relations, Computer Network
Technology Corporation, 6000 Nathan Lane North, Plymouth, Minnesota 55442, phone
(763) 298-6000, e-mail investor [email protected].

You should rely only on the information contained or incorporated by
reference in this prospectus or the applicable prospectus supplement. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We will only sell the offered securities in states where the offer
or sale is permitted. You should assume that the information appearing in this
prospectus or the applicable prospectus supplement or incorporated by reference
is accurate only as of the date on the front of these documents. Our business
and financial condition may have changed since that date.

ABOUT COMPUTER NETWORK TECHNOLOGY CORPORATION

We design, manufacture, market and support a wide range of computer
hardware and software products for business-critical, or important, storage
networks. We also design, manufacture, market and support products that
integrate existing computer applications. We operate as two separate
divisions -- the Networking Solutions Division and the Enterprise Integration
Solutions Division. Our Networking Solutions Division sells storage area
networking, or SAN, products and our established channel networking products,
which enable computers to transmit data over unlimited distances. Our Enterprise
Integration Solutions Division develops and sells enterprise application
integration, or EAI, software that automates the integration of computer
software applications, as well as our traditional server gateways and tools,

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which enable multiple desktop computers and mainframe terminals to communicate
with one another. Both divisions offer professional consulting and support
services.

Our Networking Solutions Division is a leading provider of hardware and
software products that enable our customers to build and manage SANs. A SAN is a
high-speed network within a business' existing computer network that allows the
business to manage and backup its expanding storage needs with greater
efficiency and less disruption to its network operations. Customers can create
SANs within both local area networks, or LANs, which are networks confined to
limited geographical areas, and wide area networks, or WANs, which are networks
dispersed over long distances that communicate by third party telephone systems.
Our SAN products enable companies to cost effectively manage their increasing
storage requirements, flexibly add to and reconfigure their existing SANs,
provide faster access to greater amounts of data and protect their data more
efficiently. We market our SAN products directly and through strategic
partnerships with leading storage industry companies.

Our Enterprise Integration Solutions Division develops and markets our EAI
software products. EAI refers to the process of integrating existing networks
and applications, which are frequently based on mainframe platforms, with new
networks and applications, which are usually open systems, so that users can
easily access information on all of a business' disparate computer systems.
Mainframes are computer systems with high processing power that have
traditionally been used by large businesses for storing and processing large
amounts of data. Open systems are newer systems that are easy to scale, or
expand, and use hardware and software standards that are not proprietary to any
vendor. Our EAI products offer automated integration, without line-by-line
coding, that allows easy, real-time access to a business' entire database, no
matter what type of system any given data resides upon. Our solutions are
flexible and scalable in that they can accommodate a virtually unlimited number
of users into an integrated system.

Our EAI products are targeted primarily for customer relationship
management, or CRM, and electronic-commerce, or e-commerce, applications. CRM
affords our clients' customer service representatives easy, real-time access to
all of the organization's information about a given customer. E-commerce
applications enhance our clients' ability to sell products and conduct business
over the Internet. We market our EAI products directly and in conjunction with
leading industry partners.
-------------------------

As used in this prospectus, "CNT" means Computer Network Technology
Corporation. We are a Minnesota corporation. Our principal executive offices are
located at 600 Nathan Lane North, Plymouth, Minnesota 55442, and our telephone
number is (763) 298-6000. Our World Wide Website is http://www.cnt.com.
Information contained in our website is specifically not incorporated herein by
reference or otherwise.
------------------------

The CNT logo, CNT(R), UltraNet(R) and Channelink(R) are our registered
trademarks. Enterprise/Access and Enterprise/Connect are also our trademarks.
This prospectus contains other trademarks and trade names owned by us or other
entities. References in this prospectus to "common stock" include the associated
preferred share purchase right.

RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth our consolidated ratios of earnings to fixed
charges for the periods shown.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.................... -- 8.81 3.59 -- 7.82 9.29
</TABLE>

We had net losses for the years ended December 31, 1994 and 1997.
Consequently, our earnings were insufficient to cover fixed charges in those
years by approximately $1.8 million and $3.9 million, respectively.

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The ratio of earnings to fixed charges is computed as earnings (loss)
before provision for income taxes and fixed charges. Fixed charges consist of
interest expense plus such portion of rental expense as is representative of the
interest factor.

USE OF PROCEEDS

Unless otherwise indicated in the applicable prospectus supplement, we
anticipate that any net proceeds from the sale of offered securities will be
used to fund expansion of our business, including for:

- additional working capital;

- capital expenditures;

- repayment of debt;

- funding net losses;

- acquisitions; and

- general corporate purposes.

When we offer a particular series of offered securities, the prospectus
supplement relating to that offering will set forth the intended use of the net
proceeds received from that offering. Pending the application of the net
proceeds, we expect to invest the proceeds from the sale of offered securities
in short-term, interest-bearing instruments or other investment-grade debt
securities.

RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus and any prospectus supplement before
purchasing any offered securities. Investing in the offered securities involves
a high degree of risk.

WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A
NUMBER OF REASONS, WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE

Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect our quarterly financial performance include the
following:

- fluctuations in demand for our products and services;

- the timing of customer orders, which are often grouped toward the end of
a quarter, particularly large orders from our significant customers and
whether any orders are cancelled;

- product mix among our SAN, channel networking, EAI and server gateway and
tools products;

- our traditionally long sales cycle, which can range from 90 days to 12
months or more;

- our ability to develop, introduce, ship and support new products and
product enhancements;

- the fact that our products are usually only part of an overall solution
that our customers may have problems implementing or obtaining the
required components or services from other vendors;

- the rate of adoption of SANs as an alternative to existing data storage
and management systems;

- the rate of adoption of EAI products and related solutions;

- announcements and new product introductions by our competitors and
deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors;

- decreases over time in the prices at which we can sell our products;

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- our ability to obtain sufficient supplies of components, including
limited sourced components, at reasonable prices, or at all;

- communication costs and the availability of communication lines;

- increases in the prices of the components we purchase;

- our ability to attain and maintain production volumes and quality levels
for our products; and

- increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key strategic partners.

Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely, in some future period, that
our operating results may be below expectations of public market analysts or
investors. If this occurs, the price of offered securities likely will drop.

OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF DEMAND FOR OUR SAN AND EAI
PRODUCTS

We are dependent upon the success of our SAN and EAI businesses. Potential
customers who have invested substantial resources in their existing data storage
and management systems may be reluctant or slow to adopt a new approach, like
SANs. Moreover, potential EAI customers may decide to adopt entirely new systems
that eliminate the need for an EAI product. Our success in generating net
revenues in these areas will depend on, among other things, our ability to:

- educate potential customers, strategic partners and end users about the
benefits of SAN, EAI and related technologies;

- maintain and enhance our relationships with leading strategic partners;
and

- predict and base our products on standards that ultimately become
industry standards.

In addition, the continued growth of the market for SANs and related
products depends on the continued decrease in price of related services and
components, such as communication charges and switches. Any increase in the
price of these related services and components would likely cause this market to
grow at a reduced rate.

Finally, SANs are often implemented in connection with deployment of new
storage systems and servers. Accordingly, our future success is also
substantially dependent on the market for new storage systems and servers.

WE HAVE RECENTLY INCURRED LOSSES AND MAY NOT BE ABLE TO MAINTAIN PROFITABILITY

We experienced a loss of $2.3 million in 1997. We cannot be certain that we
will be able to sustain recent growth rates or that we will realize sufficient
revenues to maintain profitability. Also, we are depending on our SAN and EAI
products for a significant portion of future revenues, especially as revenues
from our channel networking and server gateways and tools products continue to
decline. Our SAN and EAI related revenues must increase more rapidly than our
revenues related to our channel networking and server gateways and tools
products decline. We expect to incur significant product development, sales and
marketing and administrative expenses in connection with the introduction of new
SAN and EAI products, and as a result, we will need to generate significant
revenue increases to achieve and maintain profitability. We may not be able to
sustain or increase profitability.

OUR SAN AND EAI BUSINESSES ARE DIFFICULT TO PREDICT BECAUSE OF OUR LIMITED
OPERATING EXPERIENCE IN THESE MARKETS

We have only recently expanded into the SAN and EAI markets. In addition,
we expect that a significant portion of our future revenues will be derived from
these businesses. This limited operating experience, combined with the evolving
nature of the markets in which we sell our SAN and EAI products, reduces our
ability to accurately forecast our quarterly and annual revenue. Further, we
plan our

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operating expenses based in part on these revenue projections. Because most of
our expenses are fixed in the short-term or incurred in advance of anticipated
revenue, we may not be able to decrease our expenses in a timely manner to
offset any unexpected shortfall in revenue.

IF OUR RELATIONSHIPS WITH STRATEGIC PARTNERS ARE UNSUCCESSFUL OR TERMINATED, OUR
PRODUCT REVENUES COULD DECLINE

We market our products in connection with a few significant storage
vendors, including EMC, Hitachi Data Systems and IBM. In the six months ended
June 30, 1999, sales of our SAN products to customers using EMC's disk mirroring
systems accounted for 25% of our product revenues. As a result, our success
depends substantially on our ability to manage and expand our relationships with
EMC and other storage vendors, to initiate relationships with new strategic
partners that will recommend our products and the success of our strategic
partners' products. In addition, we rely to a significant extent on the
continued recommendation of our products by our strategic partners. To the
extent that our strategic partners do not recommend our products, or to the
extent that they recommend products offered by our competitors, our business
will be harmed.

Additionally, we have only a limited number of sales people devoted to the
sale of our EAI products. We have chosen to rely on the efforts of our strategic
partners to assist us in these sales efforts. To the extent these strategic
partners are unable to sell these products, are unable to implement systems
using our products or recommend our competitor's products, our future revenues
could be substantially affected.

We may not be able to manage and expand our relationships with strategic
partners successfully, and they may not market our products successfully.
Moreover, our relationships with strategic partners are not in writing, have no
minimum purchase commitments and can be terminated or changed at any time. Our
failure to manage and expand our relationships with our significant strategic
partners, our failure to develop relationships with new strategic partners or
the failure of our strategic partners to market our products could substantially
reduce our net revenues and seriously harm our business.

WE HAVE LIMITED PRODUCT OFFERINGS AND OUR EXISTING PRODUCTS AND NEW PRODUCTS
MUST ACHIEVE WIDESPREAD MARKET ACCEPTANCE

We derive a substantial portion of our net revenues from a limited number
of SAN and EAI products. Specifically, for the six-month period ended June 30,
1999, we derived approximately 48% and 5% of our product revenues from our SAN
and EAI products, respectively. We expect that net revenues from these products
will account for a substantial and growing portion of our total net revenues for
the foreseeable future. Moreover, we expect net revenues from our channel
networking and server gateways and tools products to decline. As a result, for
the foreseeable future, we will continue to be subject to the risk of a dramatic
decrease in net revenues if demand for our newest products, particularly our SAN
products, decline. Therefore, widespread market acceptance of these products is
critical to our future success. These products have been only recently
introduced. Accordingly, the demand for, and market acceptance of, these
products is uncertain.

Factors that may affect the market acceptance of our SAN and EAI products,
some of which are beyond our control, include the following:

- growth of the SAN, EAI and related products markets;

- performance, quality, price and total cost of ownership of our SAN and
EAI products;

- availability, price, quality and performance of competing products and
technologies; and

- successful development of our relationships with new and existing
customers and strategic partners.

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OUR INDUSTRIES ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND WE MUST KEEP PACE
WITH THE CHANGES TO SUCCESSFULLY COMPETE

The markets for our products are characterized by rapidly changing
technology, evolving industry standards and the frequent introduction of new
products and enhancements. Our future success depends in large part on our
ability to enhance our existing products and to introduce new products on a
timely basis to meet changes in customer preferences and evolving industry
standards. We cannot be certain that we will be successful in developing,
manufacturing and marketing new products or product enhancements that respond to
such changes in a timely manner and achieve market acceptance. We also cannot be
certain that we will be able to develop the underlying core technologies
necessary to create new products and enhancements.

Additionally, changes in technology and consumer preferences could
potentially render our current products noncompetitive or obsolete. If we are
unable, for technological or other reasons, to develop new products or enhance
existing products in a timely manner in response to technological and market
changes, our business, results of operations and financial condition would be
harmed.

WE ARE SUBSTANTIALLY DEPENDENT ON THE FINANCIAL SERVICES, TELECOMMUNICATIONS AND
INFORMATION OUTSOURCING INDUSTRIES

During the six months ended June 30, 1999, approximately 18%, 16% and 7% of
our product revenues were derived from businesses in the financial services,
telecommunications and information outsourcing industries, respectively. In
addition, for the years ended December 31, 1997 and 1998, combined, 37% and 44%
of our product revenues were derived from businesses in these industries. The
erosion of our relationships with our customers in these industries, or the
erosion of demand for SAN and EAI products in these industries generally, would
harm our financial condition and operating results.

WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR KEY COMPONENTS

We depend upon a limited number of suppliers for several key components
used in the manufacture of our products. In the future, we may experience
shortages of, or difficulties in acquiring, these components. If we are unable
to buy these components, then we will not be able to manufacture our products on
a timely basis.

We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As a
result, our component requirement forecasts may not be accurate. If we
overestimate our component requirements, then we may have excess inventory,
which would increase our costs. If we underestimate our component requirements,
then we may have inadequate inventory, which could interrupt our manufacturing
and delay delivery of our products to our customers. Either of these occurrences
would negatively impact our business and operating results.

THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS OR REDUCED MARKET SHARE

The markets for our products are competitive and are likely to become even
more competitive. Increased competition could result in pricing pressures,
reduced sales, reduced margins, reduced profits, reduced market share or the
failure of our products to achieve or maintain market acceptance. Our products
face competition from multiple sources, including the ability of some of our
customers to design solutions to the problems targeted by our products. Many of
our competitors and potential competitors have longer operating histories,
greater name recognition, access to larger customer bases or substantially
greater resources than we have. As a result, they may be able to respond more
quickly than we can to new or changing opportunities, technologies, standards or
customer requirements. For all of the foregoing reasons, we may not be able to
compete successfully against our current and future competitors.

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WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR SHAREHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES

As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products and
services, expand the breadth of our markets, enhance our technical capabilities,
or otherwise offer growth opportunities. In the event of any future purchases,
we could:

- spend significant amounts of cash;

- issue stock that would dilute our current shareholders' percentage
ownership;

- incur amortization expense related to goodwill and other intangible
assets; or

- incur debt or assume liabilities.

These purchases also involve numerous risks, including:

- problems combining the purchased operations, technologies, personnel or
products;

- unanticipated costs;

- diversion of management's attention from our core business;

- adverse effects on existing business relationships with suppliers,
customers or strategic partners;

- risks associated with entering markets in which we have no or limited
prior experience;

- potential loss of key employees of acquired or merged organizations; and

- the growth rates of any acquired company may be less than those projected
by analysts or anticipated by markets, which could have a depressive
effect on our stock price.

We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel related to organizations that we
might acquire or merge with in the future.

THE NOTES WILL RANK BELOW OUR EXISTING AND FUTURE SENIOR INDEBTEDNESS AND WE MAY
BE UNABLE TO REPAY OUR OBLIGATIONS UNDER THE NOTES

The notes will be unsecured and subordinated in right of payment to all of
our existing and future Senior Indebtedness, and the existing and future
liabilities of our subsidiaries. The notes are subordinate to our Senior
Indebtedness and we will make payments on the notes only after we have satisfied
all of our Senior Indebtedness upon the occurrence of any of the following
events:

- our bankruptcy, liquidation or reorganization;

- upon default in the payment of principal or interest on Senior
Indebtedness; or

- in certain other events described in the indenture.

As a result, we may not have sufficient assets remaining to pay amounts on
any or all of the notes.

The notes and related indenture do not limit our ability to incur other
indebtedness and liabilities. We may have difficulty paying our obligations
under the notes if we incur additional indebtedness or liabilities. As of June
30, 1999, our outstanding Senior Indebtedness was approximately $3.1 million,
and our consolidated liabilities were approximately $34.1 million. We anticipate
that from time to time we may incur additional indebtedness, including Senior
Indebtedness, which could adversely affect our ability to pay our obligations
under the notes.

WE MAY BE UNABLE TO REPURCHASE THE NOTES

There is no sinking fund with respect to the notes, and at maturity the
entire outstanding principal amount of the notes will become due and payable by
us. If we experience a change in control, under

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certain circumstances a holder of the notes may require that we repurchase all
or a portion of its notes. At maturity or if a Change of Control does occur, we
might not have sufficient funds or be able to arrange for additional financing
to pay the repurchase price for all the notes tendered to us or due at maturity.
Future borrowing arrangements or agreements relating to Senior Indebtedness to
which we become a party may contain restrictions on, or prohibitions against,
our repurchase of the notes. If the maturity date or a Change of Control occurs
when we are prohibited from repurchasing the notes, we could try to obtain the
consent of the lenders under those arrangements to purchase the notes or we
could attempt to refinance the borrowings that contain the restrictions. If we
do not obtain the necessary consents or refinance these borrowings, we will be
unable to repurchase the notes. In that case, our failure to repurchase any
tendered notes or notes due upon maturity would constitute an event of default
under the related indenture. This could, in turn, cause a default under the
terms of our then existing Senior Indebtedness. As a result, in these
circumstances, the subordination provisions of the indenture would, absent a
waiver, prohibit any repurchase of the notes until we pay in full the senior
debt.

UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND DELAY
PRODUCT INTRODUCTION

Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our products, including new
or enhanced products. In addition, our products are combined with products from
other vendors. As a result, when problems occur, it may be difficult to identify
the source of the problem. These problems may cause us to incur significant
warranty and repair costs, divert the attention of our engineering personnel
from our product development efforts and cause significant customer relations
problems. Moreover, the occurrence of hardware and software errors, whether
caused by our or another vendor's products, could delay or prevent the
development of the markets in which we compete.

THE LOSS OF KEY EXECUTIVE OR EXPERIENCED PERSONNEL OR THE INABILITY TO HIRE AND
RETAIN ADDITIONAL PERSONNEL WITH EXPERTISE IN THE SAN AND EAI INDUSTRIES COULD
NEGATIVELY IMPACT SALES AND DELAY PRODUCT INTRODUCTION

We are dependent on Thomas G. Hudson, our Chairman, President and Chief
Executive Officer. In addition, we rely upon the continued contributions of our
key management, engineering and sales and marketing personnel, many of whom
would be difficult to replace quickly. We also believe that our success depends
to a significant extent on the ability of our management to operate effectively,
both individually and as a group. Many members of our management team have only
recently joined us. The loss of any one of our key employees could adversely
affect our sales or delay the development or marketing of existing or future
products.

We believe our future success will depend also in part upon our ability to
attract and retain highly skilled and qualified managerial, engineering, sales
and marketing, and finance and operations personnel. Competition for these
personnel is intense. In the past, we have experienced difficulty in hiring
qualified personnel with expertise in the SAN and EAI industries, and there can
be no assurance that we will be successful in attracting and retaining these
individuals in the future. The inability to attract or retain qualified
personnel in the future or delays in hiring required personnel, particularly
engineers and sales personnel, could delay the development and introduction of
and negatively impact our ability to sell our products. In addition, companies
in our industry whose employees accept positions with competitors frequently
claim that their competitors have engaged in unfair hiring practices. We cannot
assure you that we will not receive such claims in the future as we seek to hire
qualified personnel or that such claims will not result in costly litigation. We
could incur substantial costs in defending ourselves against these claims,
regardless of their merits.

WE MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH

We plan to continue to expand our operations to pursue existing and
potential market opportunities. We expect that this growth will place a
significant demand on our management and our operational

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resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures and controls and train our employee base.
Accordingly, we cannot assure you that:

- we will be able to effectively manage the expansion of our operations;

- our key employees will be able to work together effectively as a team to
successfully manage our growth;

- we will be able to hire, train and manage our employee base;

- we will be able to properly integrate our acquisitions;

- our systems, procedures or controls will be adequate to support our
operations; and

- our management will be able to achieve the rapid execution necessary to
fully exploit the market opportunity for our products and services.

Our inability to manage growth effectively could harm our business.

WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES, WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS

International markets accounted for approximately 34% of our revenues in
1998. We plan to expand our international sales activities, and therefore our
success will become increasingly dependent on our performance in international
markets. In fiscal 1999 and 2000, we intend to focus on expanding our
international sales activities in The Netherlands, Mexico and Brazil. Our
international sales growth in these and other countries will be limited if we
are unable to establish relationships with international distributors, establish
additional foreign operations, expand international sales channel management,
hire additional personnel and develop relationships with international service
providers. Even if we are able to successfully expand international operations,
we cannot be certain that we will be able to maintain or increase international
market demand for our products. Our international operations, including our
sales activities in the rest of Europe, China, The Netherlands, Mexico and
Brazil, are subject to a number of risks, including:

- supporting multiple languages;

- recruiting sales and technical support personnel with the skills to
support our products;

- increased complexity and costs of managing international operations;

- protectionist laws and business practices that favor local competition;

- dependence on local vendors;

- multiple, conflicting and changing governmental laws and regulations;

- longer sales cycles;

- difficulties in collecting accounts receivable, converting foreign
currency to dollars and remitting funds to the United States;

- difficulties enforcing our legal rights;

- reduced or limited protections of intellectual property rights; and

- political and economic instability.

None of our products include screen displays or user documentation in any
language other than the English language. Our future prospects in international
markets may require us to develop multiple language versions of our products and
support documentation. The lack of such documentation could cause prospective
customers to select other products. In addition, the development of such
products and documentation could be costly and time consuming.

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Because a significant portion of our international revenues are denominated
in foreign currencies, primarily French francs, the euro and British pounds
sterling, an increase in the value of the U.S. dollar relative to these
currencies could make our products more expensive and thus less competitive in
foreign markets.

WE HAVE APPLIED FOR AND RECEIVED A LIMITED NUMBER OF PATENTS AND WE MAY BE
UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY AFFECT OUR
ABILITY TO COMPETE

Historically, we have not pursued patents on all our intellectual property.
Traditionally, we have relied, and currently continue to rely, on a combination
of patent, copyright, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. We also enter into
confidentiality or license agreements with substantially all our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. We have four
patents in process and have three existing patents. In addition, while we intend
to more vigorously pursue patent protection for our intellectual property in the
future, unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States or
where legal authorities in foreign countries do not vigorously enforce existing
laws.

We have from time to time received, and may in the future receive,
communications from parties asserting patent rights against us that relate to
certain of our products. Although we believe that we possess all required
proprietary rights to the technology involved in our products and that our
products, trademarks and other intellectual property rights do not infringe upon
the proprietary rights of third parties, we cannot assure you that others will
not claim a proprietary interest in all or part of our technology or assert
claims of infringement. All such claims, regardless of their merits, could
expose us to costly litigation and could substantially harm our operating
results.

A LICENSE EXPIRES ON DECEMBER 31, 1999

A license related to the sale of Channelink(R) and UltraNet(R) products
that use ESCON expires on December 31, 1999. ESCON is the enterprise serial
connection protocol and interface used on IBM mainframes. If we are unable to
renew this license, we may be prohibited from further use of the subject
technology and our operating results and financial condition would be harmed. In
1998, Channelink(R) and UltraNet(R) represented approximately one-half of our
product revenues.

OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US, WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we are not
currently involved in any intellectual property litigation, we may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property. These claims and any
resulting lawsuits could subject us to significant liability for damages and
invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:

- stop selling, incorporating or using our products or services that use
the challenged intellectual property;

- obtain a license from the owner of the infringed intellectual property
right allowing us to sell or use the relevant technology, which license
may not be available on reasonable terms, or at all; and

- redesign those products or services that use such technology.

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In addition to the related costs of the foregoing actions, if we are forced
to take any of these actions, we may be unable to manufacture and sell the
related products, which would reduce our revenues.

OUR FAILURE OR THE FAILURE OF OUR SUPPLIERS, STRATEGIC PARTNERS OR CUSTOMERS TO
BE YEAR 2000 COMPLIANT COULD HARM OUR BUSINESS

Failure of our products to recognize correctly date information when the
year changes to 2000 could result in significant decreases in market acceptance
of our products, increases in warranty claims and legal liability for defective
software. We have undertaken testing and will continue to test our products to
be sure that they are fully year 2000 compliant. Year 2000 preparations by our
strategic partners, suppliers and customers could also slow down purchases of
our products.

Our internal year 2000 compliance review is focused on reviewing our
internal computer information and security systems for year 2000 compliance and
developing and implementing remedial programs to resolve year 2000 issues in a
timely manner. Additionally, we are contacting our third party suppliers and
requesting their written assurances that their systems are year 2000 compliant.

If our suppliers, vendors, major distributors or partners fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities or operations. If a year 2000
problem occurs, it may be difficult to determine which vendor's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
year 2000 problem resulting from the readiness of third-party suppliers and
vendors, we are unable to determine at this time whether any year 2000 failures
will harm us.

A worst case scenario relative to the year 2000 issue would be the
discovery of additional year 2000 deficiencies in our products that require
significant extra time and expense to correct. A critical year 2000 deficiency
by a key supplier, coupled with a failure to locate a suitable alternative
source of supply, could also have a material impact on our business.

OUR CUSTOMERS MAY DELAY PRODUCT PURCHASES UNTIL AFTER JANUARY 1, 2000, WHICH
WOULD HARM OUR SALES

Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. In
addition, our sales could be materially impacted in 1999 and 2000 if customers
were to stop, or significantly reduce, procurement of new equipment for their
data centers and networks until after the start of the year 2000.

OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS

The market for our products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. For example, all components of a SAN must
utilize a limited number of defined standards in order to work with existing
computer systems. Our products comprise only a part of the entire storage area
network and we depend on the companies that provide other components of the
storage area network, many of whom are significantly larger than we are, to
support the industry standards as they evolve. Also, our EAI products must
provide compatibility with major hardware and software platform standards in
order to be useful to our customers. The failure of these providers to support
these industry standards could adversely affect the market acceptance of our
products. In addition, in the United States, our products must comply with
various regulations and standards defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, products that we
develop will also be required to comply with standards established by
authorities in various countries. Failure to comply with existing or evolving
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could materially harm our business.

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MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH OUR
SHAREHOLDERS AND NOTEHOLDERS MAY NOT AGREE

Our management can spend the net proceeds from this offering in ways with
which our shareholders and noteholders may not agree. We cannot assure you that
our investments and use of the net proceeds of this offering will yield
favorable returns or results.

PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS PLAN, EXISTING
AGREEMENTS AND MINNESOTA LAW COULD PREVENT OR DELAY A TAKEOVER OF OUR COMPANY
AND MAY IMPACT THE LIKELIHOOD OF TAKEOVER OFFERS THAT WOULD BE ATTRACTIVE TO OUR
SHAREHOLDERS

Provisions of our articles of incorporation, bylaws, shareholder rights
plan and existing agreements may discourage, delay or prevent a merger or
acquisition that a shareholder may consider favorable. These provisions include:

- authorizing the issuance of preferred stock without shareholder approval;

- termination of contracts and license agreements in the event of a
takeover;

- limiting the persons who may call special meetings of shareholders; and

- preventing a takeover of us under our shareholder rights plan as a result
of the dilutive effect the issuance of securities under the plan would
have on acquiring parties.

Provisions of Minnesota law also may discourage, delay or prevent someone
from acquiring or merging with us. Further, some of our existing contracts may
give other parties the right to terminate the contract or take other action that
could harm our business as a result of a takeover.

THERE MAY BE NO PUBLIC MARKET FOR THE NOTES

The notes will be a new issue of securities with no established trading
market. Although the underwriters for any offering of the notes may advise us
that they intend to make a market in the notes, they will have no obligation to
do so and may discontinue their market making at any time without notice. In
addition, their market making activity will be subject to limits imposed under
the federal securities laws. Accordingly, a market for the notes may not develop
and, if it does develop, it may not be maintained. Various factors could have a
material adverse effect on the trading price of the notes, including the failure
of an active market to develop and fluctuations in prevailing interest rates. In
addition, our operating results and prospects could from time to time fall below
the expectations of public market analysts and investors, which could adversely
affect public perception of our creditworthiness and therefore the trading price
of the notes.

THE MARKET PRICE FOR OUR COMMON STOCK HAS BEEN VOLATILE AND COULD EXPERIENCE
EXTREME VOLATILITY IN THE FUTURE

The stock market in general, and the stock prices of technology-based
companies in particular, have experienced extreme volatility that has often been
unrelated to the performance of any specific public companies. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in the
future. Any of the following factors, some of which are beyond our control,
could have a significant impact on the market price of our common stock:

- actual or anticipated fluctuations in our operating results;

- differences between our financial or operating results and those
projected by our analysts;

- changes in market valuations of other technology companies;

- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;

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- general conditions in the financial services and telecommunications
industries, and among information outsourcers;

- losses of major customers;

- additions or departures of key personnel;

- sales of common stock in the future; and

- anticipated trends in the economy in general, such as increased interest
rates, and domestic and foreign political events, including war and civil
unrest.

WE DO NOT PLAN TO PAY CASH DIVIDENDS

We have never paid cash dividends and do not anticipate paying any cash
dividends in our foreseeable future. We intend to retain future earnings, if
any, to finance the growth and expansion of our business and for general
corporate purposes. Loan agreements and other contracts that we might enter into
in the future could prevent us from paying dividends.

PLAN OF DISTRIBUTION

We may sell the offered securities:

- directly to purchasers;

- through dealers;

- through underwriters; or

- through a combination of any of these methods of sale.

We may effect the distribution of the offered securities from time to time
in one or more transactions either:

- at a fixed price or prices, which may be changed;

- at market prices prevailing at the time of sale;

- at prices related to such prevailing market prices; or

- at negotiated prices or competitive bid basis.

We may directly solicit offers to purchase offered securities. If an
underwriter is, or underwriters are, utilized in the sale, we will execute an
underwriting agreement with such underwriters at the time of sale to them and
the names of the underwriters will be set forth in the prospectus supplement,
which will be used by the underwriters to make resales of the offered securities
in respect of which this prospectus is delivered to the public. In connection
with the sale of offered securities, such underwriters may be deemed to have
received compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of offered
securities for whom they may act as agents. Underwriters may also sell offered
securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agents. Any
underwriting compensation paid by us to underwriters in connection with the
offering of offered securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable prospectus supplement.

Underwriters, dealers and other persons may be entitled, under agreements
that may be entered into with us, to indemnification by us against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which they may be required to make in respect thereof.
Underwriters may engage in transactions with, or perform services for, us in the
ordinary course of business.

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Certain persons participating in an offering of offered securities may
engage in passive market making transactions in the common stock in accordance
with Rule 103 of Regulation M under the Securities Exchange Act of 1934. Rule
103 permits, upon the satisfaction of certain conditions, underwriting and
selling group members participating in a distribution that are also registered
Nasdaq market makers in the security being distributed, or a related security,
to engage in limited passive market making transactions during the period when
Regulation M would otherwise prohibit the activity. In general, a passive market
maker may not bid for or purchase a security at a price that exceeds the highest
independent bid for those securities by a person that is not participating in
the distribution and must identify its passive market making bids on the Nasdaq
electronic inter-dealer reporting system. In addition, the net daily purchases
made by a passive market maker generally may not exceed 30% of the market
maker's average daily trading volume in the security for the two full
consecutive calendar months, or any 60 consecutive days ending within 10 days,
immediately preceding the date of filing of the registration statement of which
this prospectus is a part.

To facilitate the offering of offered securities, certain persons
participating in the offering may engage in transactions that stabilize,
maintain, or otherwise affect the price of the securities. This may include
over-allotments or short sales of the offered securities, which involves the
sale by persons participating in the offering of more securities than we sold to
them. In these circumstances, these persons would cover the over-allotments or
short positions by making purchases in the open market of or by exercising an
over-allotment option. In addition, these persons may stabilize or maintain the
price of offered securities by bidding for or purchasing the offered securities
in the open market, or by imposing penalty bids, whereby selling concessions
allowed dealers participating in the offering may be reclaimed if securities
sold by them are repurchased in connection with stabilization transactions. The
effect of these transactions may be to stabilize or maintain the market price of
securities at a level above that which might otherwise prevail in the open
market. These transactions may be discontinued at any time.

The anticipated date of delivery of offered securities will be set forth in
the applicable prospectus supplement relating to each offer.

Other than in the United States, and except as may be set forth in a
prospectus supplement, no action has been taken by us or the underwriters that
would permit a public offering of the offered securities by this prospectus in
any jurisdiction which requires action for that purpose. The securities offered
by this prospectus may not be offered or sold, directly or indirectly, nor may
this prospectus or any other offering material or advertisements be distributed
or published in any jurisdiction, except under circumstances that will ensure
compliance with the applicable rules and regulations of the jurisdiction.
Persons holding this prospectus are advised to inform themselves about and to
observe any restrictions relating to this offering and the distribution of this
prospectus. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered by this prospectus in any
jurisdiction in which an offer or a solicitation is unlawful.

DESCRIPTION OF THE NOTES

Each offering of notes will be issued under an indenture (the "Indenture")
to be entered into between us and a trustee (the "Trustee") chosen by us and
qualified to act under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). A supplemental indenture may also be entered into with the
Trustee prior to issuance of the notes which specifies certain terms of the
notes. A copy of the form of Indenture is filed as an exhibit to the
registration statement of which this prospectus is a part. The terms of the
Indenture are also governed by certain provisions contained in the Trust
Indenture Act of 1939. The descriptions under this heading related to the notes
are summaries of their anticipated provisions. The summaries are not complete
and are qualified in their entirety by reference to the actual Indenture, any
supplemental indenture, the notes and terms made a part of the Indenture under
the Trust Indenture Act. A form of the Indenture under which we may issue our
notes has been filed as an exhibit to the registration statement of which this
prospectus is a part. Whenever we refer in this prospectus or in the prospectus
supplement to certain provisions of the Indenture, any supplemental indenture or
the notes, or

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to defined terms, those sections or defined terms are incorporated by reference
herein. You should read the Indenture, any supplemental indenture and the notes
for provisions that may be important to you. The form of the Indenture, any
supplemental indenture and the notes may be examined under the heading "Where
You Can Find More Information".

The terms and conditions described under this heading are of terms and
conditions that apply generally to the notes. The particular terms of any
offering of notes will be summarized in the applicable prospectus supplement.
Those terms may differ from the terms set forth below. Except as set forth in
the applicable indenture or in any supplemental indenture and described in a
particular prospectus supplement, we may issue notes in one or more series and
with limitations as to aggregate principal amount as set forth in the prospectus
supplement.

GENERAL

The notes will be general unsecured subordinated obligations of ours and
will be convertible into our common stock as described below under "Conversion
of Notes." Unless other arrangements are made, interest will be paid by check
mailed to holders entitled thereto. Principal will be payable, and the notes may
be presented for conversion, registration of transfer and exchange, without
service charge, at the corporate trust office of the Trustee or at the option of
the holder of the note, at any other office or agency of ours maintained for
that purpose pursuant to the Indenture. Payments, transfers, exchanges and
conversions relating to beneficial interests in notes issued in book-entry form
will be subject to the procedures described under "Form, Denomination, Transfer,
Exchange and Book-Entry Procedures" and "Exchange of Book-Entry Notes for
Certificated Notes."

The Indenture will not contain any financial covenants or any restrictions
on the incurrence of debt by us or any of our subsidiaries.

TERMS OF NOTES TO BE INCLUDED IN THE PROSPECTUS SUMMARY

The prospectus supplement relating to any series of notes that we may offer
will set forth the price or prices at which the notes will be offered, and will
contain the applicable specific terms of the notes of that series. These terms
may include:

- the title of the notes;

- the aggregate principal amount of the notes;

- the maturity date or dates of the Notes;

- the percentage of the principal amount at which notes will be issued, and
if other than the principal amount of those notes, the portion of the
principal amount payable upon declaration of acceleration of the maturity
of the notes;

- the date or dates, or method of determining the date or dates, on which
the principal of the notes will be payable;

- the rate or rates at which the notes will bear interest;

- the rate or rates at which the notes may be converted into our common
stock;

- the date or dates, or the method for determining the date or dates, from
which interest will accrue, the dates on which interest will be payable,
the regular record dates for interest payment dates, or the method by
which record dates may be determined, the persons to whom interest will
be payable, and the basis on which interest is to be calculated if other
than a 360 day year;

- the period or periods within which, the price or prices at which and the
other terms and conditions upon which the notes may be redeemed, in whole
or part, at our option, if we have such option; and

- any other terms of the notes.
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The notes may be offered and sold at a substantial discount below their
original stated principal amount and may be "original issue discount
securities." "Original issue discount securities" means that less than the
entire principal amount of the securities will be payable upon declaration of
acceleration of their maturity. Special United States federal income tax,
accounting and other considerations applicable to original issue discount
securities will be described in the applicable prospectus supplement.

CONVERSION OF NOTES

The holders of notes will be entitled, at any time through the close of
business on the business day immediately preceding the maturity date, subject to
prior redemption or repurchase, to convert any notes or portions thereof (in
denominations of $1,000 in principal amount or multiples thereof) into our
common stock at the conversion price set forth on the cover page of the
prospectus supplement, subject to adjustment as described below; provided that
in the case of notes called for redemption, conversion rights will expire
immediately prior to the close of business on the last business day before the
date fixed for redemption, unless we default in payment of the redemption price.
A note (or portion thereof) in respect of which a holder is exercising its
option to require repurchase upon a Change of Control may be converted only if
such holder withdraws its election to exercise such repurchase option in
accordance with the terms of the Indenture.

Except as described below, no adjustment will be made on conversion of any
notes for interest accrued thereon or for dividends paid on any common stock we
issue. Holders of notes at the close of business on a record date will be
entitled to receive the interest payable on such notes on the corresponding
interest payment date. However, notes surrendered for conversion after the close
of business on a record date, and before the close of business on the day
following the corresponding interest payment date must be accompanied by funds
equal to the interest payable on such succeeding interest payment date on the
principal amount so converted (unless such note is subject to redemption on a
redemption date between such record date and the corresponding interest payment
date). The interest payment with respect to a note called for redemption on a
date during the period from the close of business on or after any record date to
the close of business on the business day following the corresponding payment
date will be payable on the corresponding interest payment date to the
registered holder at the close of business on that record date (notwithstanding
the conversion of such note before the corresponding interest payment date) and
a holder of notes who elects to convert need not include funds equal to the
interest paid. We are not required to issue fractional shares of our common
stock upon conversion of notes and, in lieu thereof, we will pay a cash
adjustment based upon the closing price of our common stock on the last business
day prior to the date of conversion.

The conversion price is subject to adjustment (under formulae set forth in
the Indenture) upon the occurrence of certain events, including:

(1) The issuance of our common stock as a dividend or distribution on
our outstanding common stock;

(2) The issuance to all holders of our common stock of certain rights,
options or warrants to purchase our common stock at less than the current
market price;

(3) Certain subdivisions, combinations and reclassifications of our
common stock;

(4) Distributions to all holders of our common stock of our capital
stock (other than our common stock) or evidences of our indebtedness or
assets (including securities, but excluding those dividends, rights,
options, warrants and distributions referred to in clauses (1) and (2)
above, dividends and distributions in connection with our liquidation,
dissolution or winding up and dividends and distributions paid exclusively
in cash);

(5) Distributions consisting exclusively of cash (excluding any cash
portion of distributions referred to in clause (4) above or in connection
with a consolidation, merger or sale of our assets as referred to in clause
(2) of the second paragraph below) to all holders of our common stock in an
aggregate amount that, together with (A) all such other all-cash
distributions made within the
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preceding 12 months in respect of which no adjustment has been made and (B)
any cash and the fair market value of other consideration payable in
respect of any tender offers by us or any of our subsidiaries for our
common stock concluded within the preceding 12 months in respect of which
no adjustment has been made, exceeds 20% of our market capitalization
(being the product of the then current market price of our common stock
times the number of shares of our then outstanding common stock) on the
record date for such distribution; and

(6) The purchase of our common stock pursuant to a tender offer made
by us or any of our subsidiaries that involves an aggregate consideration
that, together with (A) any cash and the fair market value of any other
consideration payable in any other tender offer by us or any of our
subsidiaries for our common stock expiring within the 12 months preceding
such tender offer in respect of which no adjustment has been made and (B)
the aggregate amount of any such all-cash distributions referred to in
clause (5) above to all holders of our common stock within the 12 months
preceding the expiration of such tender offer in respect of which no
adjustments have been made, exceeds 20% of our market capitalization on the
expiration of such tender offer.

Except as stated above, the conversion price will not be adjusted for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing. No
adjustment in the conversion price will be required unless such adjustment would
require a change of at least 1% in the conversion price then in effect; provided
that any adjustment that would otherwise be required to be made shall be carried
forward and taken into account in any subsequent adjustment.

No adjustment will be made pursuant to clause (4) of the preceding
paragraph if we make proper provision for each holder of notes who converts a
note to receive, in addition to our common stock issuable upon such conversion,
the kind and amount of assets (including securities) if such holder had been a
holder of our common stock at the time of the distribution of such assets or
securities. Rights, options or warrants distributed by us to all holders of our
common stock that entitle the holders thereof to purchase shares of our capital
stock and that, until the occurrence of an event (a "Triggering Event"), (1) are
deemed to be transferred with the common stock; (2) are not exercisable; and (3)
are also issued in respect of future issuances of our common stock, shall not be
deemed to be distributed until the occurrence of the Triggering Event.

In the case of (1) any reclassification or change of our common stock
(other than changes in par value or from par value to no par value or resulting
from a subdivision or a combination) or (2) a consolidation or merger involving
us or a sale or conveyance to another corporation or business entity of our
property and assets as an entirety or substantially as an entirety (determined
on a consolidated basis), in each case as a result of which holders of our
common stock shall be entitled to receive stock, other securities, other
property or assets (including cash) with respect to or in exchange for such
common stock, each note then outstanding will, without the consent of the holder
of any note, become convertible only into the kind and amount of shares of
stock, other securities or other property or assets that they would have owned
or been entitled to receive upon such reclassification, change, consolidation,
merger, sale or conveyance had such notes been converted into our common stock
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance, assuming that a holder of notes would not have exercised any
rights of election as to the stock, other securities or other property or assets
receivable in connection therewith and received per share the kind and amount
received per share by a plurality of non-electing shareholders.

If a taxable distribution to holders of common stock (or other transaction)
results in any adjustment of the conversion price, the holders of notes may, in
certain circumstances, be deemed to have received a distribution subject to the
U.S. federal income tax as a dividend. In certain other circumstances, the
absence of such an adjustment may result in a taxable dividend to the holders of
our common stock. The material federal income tax consequences in those
circumstances will be set forth in the applicable prospectus supplement.

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We may, from time to time and to the extent permitted by law, reduce the
conversion price by any amount for any period of at least 20 business days, in
which case we shall give at least 15 days' notice of such decrease, if the Board
of Directors has made a determination that such decrease would be in our best
interests, which determination shall be conclusive. We may, at our option, make
such reductions in the conversion price, in addition to those set forth above,
as we deem advisable to avoid or diminish any income tax to our shareholders
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes. The material
federal income tax consequences in those circumstances will be set forth in the
applicable prospectus supplement.

SUBORDINATION

The payment of principal of, premium, if any, and interest on the notes,
including amounts payable on any redemption or repurchase, will, to the extent
set forth in the Indenture, be subordinated in the event of right of payment to
the prior payment in full of all Senior Indebtedness. Upon any distribution to
our creditors in our liquidation or dissolution or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding related to us or
our property, in an assignment for the benefit of creditors or any marshalling
of our assets and liabilities, the holders of Senior Indebtedness then
outstanding will first be entitled to receive payment in full of all amounts due
or to become due thereon before the holders of the notes will be entitled to
receive any payment in respect of the principal of, premium, if any, or interest
on the notes (except that holders of notes may receive securities that are
subordinated at least to the same extent as the notes to Senior Indebtedness and
any securities issued in exchange for Senior Indebtedness).

We also may not make any payment upon or in respect of the notes (except in
such subordinated securities) and may not acquire any notes for cash or property
(except in such subordinated securities) if (1) a default in the payment of the
principal of, premium, if any, or interest on, including a default under any
repurchase or redemption obligation with respect to, Senior Indebtedness occurs
and is continuing beyond any applicable period of grace; or (2) any other
default occurs and is continuing with respect to Designated Senior Indebtedness,
as defined below, that permits holders of the Designated Senior Indebtedness as
to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from a holder of
such Designated Senior Indebtedness or other person permitted to give such
notice under the Indenture. Payments on the notes may and shall be resumed and
we may acquire notes (A) in the case of a payment default, upon the date on
which such default is cured or waived; or (B) in the case of a non-payment
default, 179 days after the date on which the applicable Payment Blockage Notice
is received (or sooner, if such default is cured or waived), unless the maturity
of any Senior Indebtedness has been accelerated. No new period of payment
blockage may be commenced within 360 days after the receipt by the Trustee of
any prior Payment Blockage Notice. No non-payment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be the basis for a subsequent Payment Blockage Notice.

"Designated Senior Indebtedness" means our obligations under particular
Senior Indebtedness in which the instrument creating or evidencing the same or
the assumption or guarantee thereof, or related agreements or documents to which
we are a party, expressly provides that such indebtedness shall be "Designated
Senior Indebtedness" for purposes of the Indenture, provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Indebtedness to exercise the rights of Designated
Senior Indebtedness.

"Senior Indebtedness" with respect to the notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred or created:

(1) Our indebtedness, matured or unmatured, whether or not contingent,
for money borrowed evidenced by notes or other written obligations;

(2) Any interest rate contract, interest rate swap agreement or other
similar agreement or arrangement designed to protect us or any of our
subsidiaries against fluctuations in interest rates;

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(3) Our indebtedness, matured or unmatured, whether or not contingent,
evidenced by notes, debentures, bonds or similar instruments or bankers
acceptances, letters of credit or similar facilities (or reimbursement
agreements in respect thereof);

(4) Our obligations as lessee under capitalized leases and under
leases of property made as part of any sale and leaseback transactions;

(5) Indebtedness of others of any of the kinds described in the
preceding clauses (1) through (4) assumed or guaranteed by us; and

(6) Renewals, extensions, modifications, amendments and refundings of,
and indebtedness and obligations of a successor person issued in exchange
for or in replacement of, indebtedness or obligations of the kinds
described in the preceding clauses (1) through (5), unless the agreement
pursuant to which any such indebtedness described in clauses (1) through
(5) is created, issued, assumed or guaranteed and expressly provides that
such indebtedness is not senior or superior in right of payment to the
notes;

provided, however, that the following shall not constitute Senior
Indebtedness:

(A) Any of our indebtedness or obligations in respect of the notes;

(B) Any of our indebtedness to any of our subsidiaries or other
affiliates;

(D) Any of our indebtedness incurred for the purchase of goods or
materials in the ordinary course of business.

If the Trustee (or paying agent if other than the Trustee) or any holder
receives any payment of principal of, premium, if any, or interest with respect
to the notes at a time when such payment is prohibited under the Indenture, such
payment shall be held in trust for the benefit of, and shall be paid over and
delivered to, the holders of Senior Indebtedness then outstanding or their
representative as their respective interests may appear. After all Senior
Indebtedness is paid in full and until the notes are paid in full, holders of
the notes shall be subrogated (equally and ratably with all other indebtedness
ranking equally with the notes) to the rights of holders of Senior Indebtedness
to receive distributions applicable to Senior Indebtedness to the extent that
distributions otherwise payable to the holders of the notes have been applied to
the payment of Senior Indebtedness.

At June 30, 1999, our Senior Indebtedness consisted of various capital
lease obligations aggregating approximately $2.1 million and the remaining $1.0
million installment due for our purchase of IntelliFrame.

In addition, the notes will be structurally subordinated to all
indebtedness and other liabilities, including trade accounts payable and lease
obligations, of our subsidiaries, as any right of ours to receive any assets of
its subsidiaries upon their liquidation or reorganization, and the consequent
right of holders of the notes to participate in those assets, will be
effectively subordinated to the claims of that subsidiary's creditors, including
trade creditors, except to the extent that we are recognized as a creditor of
that subsidiary, in which case our claims will still be subordinate to any
security interest in the assets of such subsidiary senior to that held by us.

No provision contained in the Indenture or the notes will affect our
obligation, which is absolute and unconditional, to pay, when due, principal of,
premium, if any, and interest on the notes. The subordination provisions of the
Indenture and the notes will not prevent the occurrence of any Default or Event
of Default under the Indenture or limit the rights of the Trustee or any other
holder, subject to the provisions described herein, to pursue any other rights
or remedies with respect to the notes.

The Indenture does not prohibit or limit the incurrence of any indebtedness
by us or our subsidiaries.

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PROVISIONAL REDEMPTION BY US

Unless otherwise set forth in the prospectus supplement, we may redeem the
notes, in whole or in part, at any time prior to a date designated in the
prospectus supplement, at a redemption price equal to $1,000 per $1,000
principal amount of notes to be redeemed plus accrued and unpaid interest, if
any, to the Redemption Date (the "Provisional Redemption Date") if the closing
price of the common stock shall have exceeded 150% of the conversion price then
in effect for at least 20 trading days within a period of 30 consecutive trading
days ending on the trading day prior to the date of mailing of the notice of
provisional redemption (the "Notice Date," which date shall be no more than 60
nor less than 30 days prior to the Provisional Redemption Date).

Upon any Provisional Redemption, we will make an additional payment in cash
(the "Make-Whole Payment") with respect to the notes called for redemption to
holders on the Notice Date in an amount set forth in the prospectus supplement
(per $1,000 principal amount of notes), less the amount of any interest actually
paid on such note prior to the Notice Date. We will be obligated to make the
Make-Whole Payment on all notes called for provisional redemption, including any
notes converted after the Notice Date and prior to the Provisional Redemption
Date.

OPTIONAL REDEMPTION BY US

At any time after the dates set forth in the prospectus supplement, we have
the option to redeem the notes on at least 30 but not more than 60 days' notice,
in whole at any time or in part from time to time, at the prices set forth in
the prospectus supplement.

If fewer than all the notes are to be redeemed, the Trustee will select the
notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof by lot. If any note is to be redeemed in part only, a new note or notes
in principal amount equal to the unredeemed principal portion thereof will be
issued. If a portion of a holder's notes is selected for partial redemption and
such holder converts a portion of such notes, such converted portion shall be
deemed to be taken from the portion selected for redemption. No sinking fund is
provided for the notes.

REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL

Unless otherwise set forth in the prospectus supplement, upon the
occurrence of a Change of Control, each holder of notes shall have the right to
require us to repurchase such holder's notes in whole or in part in integral
multiples of $1,000 at a purchase price in cash in an amount equal to 100% of
the principal amount thereof, together with accrued and unpaid interest to the
date of purchase, pursuant to an offer (the "Change of Control Offer") made in
accordance with the procedures described below and the other provisions in the
Indenture.

A "Change of Control" means an event or series of events in which:

- Any "person" or "group" (as such terms are used in sections 13(d) and
14(d) of the Exchange Act) acquires "beneficial ownership" (as determined
in accordance with Rule 13d-3 under the Exchange Act), directly or
indirectly, of more than 50% of the combined voting power of the then
outstanding securities entitled to vote generally in elections of our
directors (the "Voting Stock") other than acquisitions by us, our
subsidiaries or our employee benefit plans; or

- We consolidate with or merge into any other corporation or business
entity (other than any merger which is effected solely to change our
jurisdiction of incorporation), or convey, transfer or lease all or
substantially all of our assets (determined on a consolidated basis) to
any person, or any other corporation or business entity merges with or
into us, and, in the case of any such transaction, our outstanding common
stock is changed or exchanged as a result, unless our shareholders
immediately before such transaction own, directly or indirectly, more
than 50% of the combined voting power of the outstanding voting
securities of the corporation or business entity resulting from such
transaction in substantially the same proportion as their ownership of
the Voting Stock immediately before such transaction;
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provided that a Change in Control shall not be deemed to have occurred if
either:

- The closing price per share of the common stock for any five trading days
within the period of ten consecutive trading days during a period set
forth in the Indenture in connection with the Change of Control shall
equal or exceed 105% of the conversion price of the notes in effect on
each such trading day; or

- At least 90% of the consideration in the Change of Control transaction
consists of shares of common stock traded on a national securities
exchange or quoted on the Nasdaq National Market, and as a result of such
transaction, the notes become convertible solely into such common stock.

Within 30 days following any Change of Control, unless we have given the
holders notice of our irrevocable intention to redeem all outstanding notes as
described under "Optional redemption by us," we shall send by first-class mail,
postage prepaid, to the Trustee and to each holder of notes, at such holder's
address appearing in the security register, a notice (the "Change of Control
Notice") stating, among other things, that a Change of Control has occurred, the
purchase price, the purchase date, which shall be a business day no earlier than
30 days nor later than 60 days from the date such notice is mailed, and certain
other procedures that a holder of notes must follow to accept a Change of
Control Offer or to withdraw such acceptance.

We will comply, to the extent applicable, with the requirements of Rule
13e-4 under the Exchange Act and other securities laws or regulations in
connection with the repurchase of the notes as described above.

We may, to the extent permitted by applicable law, at any time purchase the
notes in the open market or by tender at any price or by private agreement. Any
note so purchased by us may, to the extent permitted by applicable law, be
reissued or resold or may, at our option, be surrendered to the trustee for
cancellation. Any notes surrendered as aforesaid may not be reissued or resold
and will be canceled promptly.

The foregoing provisions would not necessarily afford holders of the notes
protection in the event of a highly leveraged or other transaction involving us
that may adversely affect holders.

Our future indebtedness may contain prohibitions of certain events that
would constitute a Change of Control or require us to offer to repurchase such
indebtedness upon a Change of Control. Moreover, the exercise by the holders of
notes of their rights to require us to purchase the notes could cause a default
under such indebtedness, even if the Change of Control itself does not, due to
the financial effect of such purchase on us. Finally, our ability to pay cash to
holders of notes upon a purchase may be limited by our then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required purchases. Furthermore, the Change of
Control provisions may in certain circumstances make more difficult or
discourage a takeover of us and the removal of the incumbent management.

CERTAIN COVENANTS

Merger, consolidation and sale of assets. Unless otherwise set forth in the
prospectus supplement, we shall not consolidate with or merge with or into, or
convey, transfer or lease all or substantially all of our assets (determined on
a consolidated basis), whether in a single transaction or a series of related
transactions, to any person unless:

- Either we are the resulting, surviving or transferee person (the
"Successor Company") or the Successor Company is a corporation, limited
liability company, partnership or trust organized and existing under the
laws of the United States or any State thereof or the District of
Columbia, and the Successor Company (if not us) expressly assumes by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of our obligations under the Indenture
and the notes, including the conversion rights described above under
"Conversion of Notes;"

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- Immediately after giving effect to such transaction, no Event of Default
has happened and is continuing; and

- We deliver to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture, if any, comply with the Indenture.

EVENTS OF DEFAULT AND REMEDIES

Unless otherwise set forth in the prospectus supplement, an Event of
Default is defined in the Indenture as being:

- Default in payment of the principal of or premium, if any, on the notes
of the applicable series when due at maturity, upon redemption or
otherwise, including our failure to purchase the notes when required upon
a Change of Control (whether or not such payment shall be prohibited by
the subordination provisions of the Indenture);

- Default for 30 days in payment of any installment of interest on the
notes (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture) of the applicable series;

- Failure to provide a Change of Control Notice, whether or not such notice
or payment pursuant to a Change of Control Offer shall be prohibited by
the subordination provisions of the Indenture;

- Failure to perform any other covenant in the Indenture with respect to
the applicable series continuing for 90 days after written notice by the
Trustee or the holders of 25% in aggregate principal amount of the notes;
and

- Certain events involving the bankruptcy, insolvency or reorganization of
us.

The Indenture provides that the Trustee may withhold notice to the holders
of notes of any default (except in payment of principal, premium, if any, or
interest with respect to the notes) if the Trustee considers it in the interest
of the holders of notes to do so.

The Indenture provides that if any Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in principal
amount of the notes of any applicable series then outstanding may declare the
principal of and premium, if any, on the notes to be due and payable
immediately. At any time after a declaration of acceleration, but before a
judgement or decree based on acceleration has been obtained, the holders of a
majority in aggregate principal amount of the notes of any applicable series
may, under certain circumstances, rescind and annul such acceleration.

The holders of a majority in principal amount of the notes of any
applicable series then outstanding shall have the right to direct the time,
method and place of conducting any proceedings for any remedy available to the
Trustee, subject to certain limitations specified in the Indenture. The
Indenture provides that, subject to the duty of the Trustee following an Event
of Default to act with the required standard of care, the Trustee will not be
under an obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any of the holders of the notes, unless the
Trustee receives satisfactory indemnity against any associated loss, liability
or expense.

SATISFACTION AND DISCHARGE; DEFEASANCE

The Indenture and any supplemental indenture will cease to be of further
effect as to all outstanding notes of the applicable series except as to:

- Rights of registration of transfer and exchange and our right of optional
redemption;

- Substitution of apparently mutilated, defaced, destroyed, lost or stolen
notes;

- Rights of holders of notes to receive payments of principal of, premium,
if any, and interest on, the notes;
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<PAGE> 87

- Rights of holders of notes to convert to common stock;

- Rights, obligations and immunities of the Trustee under the Indenture;
and

- Rights of the holders of notes as beneficiaries of the Indenture with
respect to the property so deposited with the Trustee payable to all or
any of them;

if:

(A) We will have paid or caused to be paid the principal of,
premium, if any, and interest on the notes as and when the same will
have become due and payable;

(B) All outstanding notes (except lost, stolen or destroyed notes
which have been replaced or paid) have been delivered to the Trustee for
cancellation; or

(C) (i) the notes not previously delivered to the Trustee for
cancellation will have become due and payable or are by their terms to
become due and payable within one year or are to be called for
redemption under arrangements satisfactory to the Trustee upon delivery
of notice and (ii) we will have irrevocably deposited with the Trustee,
as trust funds, cash, in an amount sufficient to pay principal of and
interest on the outstanding notes, to maturity or redemption, as the
case may be.

Such trust may only be established if such deposit will not result in a
breach or violation of, or constitute a default under, any agreement or
instrument pursuant to which we are a party or by which the trust is bound, and
we have delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that all conditions related to such defeasance have been
complied with.

The Indenture will also cease to be in effect (except as described above)
and the indebtedness on all outstanding notes of the applicable series will be
discharged on the 123rd day after the irrevocable deposit by us with the
Trustee, in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of notes of the applicable series, of cash, U.S.
Government Obligations (as defined in the Indenture) or a combination thereof,
in an amount sufficient, with interest earnings thereon, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay the principal of,
premium, if any, and interest on the notes of the applicable series then
outstanding in accordance with the terms of the Indenture and the notes ("legal
defeasance"). Such legal defeasance may only be effected if:

- Such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which we are a party or by
which we are bound;

- We have delivered to the Trustee an opinion of counsel stating that (A)
we have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either
case to the effect that, based thereon, the holders of the notes of the
applicable series will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit, defeasance and discharge
by us and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred;

- We have delivered to the Trustee an opinion of counsel to the effect that
after the 123rd day following the deposit, the trust funds will not
constitute a preferential transfer under Section 547(b) of the United
States Bankruptcy Code; and

- We have delivered to the Trustee an Officers' Certificate and an opinion
of counsel stating that we have complied with all conditions related to
the defeasance.

We may also be released from our obligations under the covenants described
above under "Repurchase at Option of Holders upon a Change of Control" and
"Certain Covenants" with respect to the notes of the applicable series
outstanding on the 123rd day after the irrevocable deposit by us with the

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Trustee, in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of notes of the applicable series, of cash, U.S.
Government Obligations or a combination thereof, in an amount sufficient, with
interest earnings thereon, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay the principal of, premium, if any, and interest
on the notes of the applicable series then outstanding in accordance with the
terms of the Indenture and such notes ("covenant defeasance"). Such covenant
defeasance may only be effected if:

- Such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which we are a party or by
which we are bound;

- We have delivered to the Trustee an Officers' Certificate and an opinion
of counsel to the effect that the holders of notes of the applicable
series will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and covenant defeasance by us and
will be subject to federal income tax on the same amount, in the same
manner and at the same times as would have been the case if such deposit
and covenant defeasance had not occurred;

- We have delivered to the Trustee an Officers' Certificate and an opinion
of counsel stating that we have complied with all conditions related to
the covenant defeasance.

Following such covenant defeasance, we will no longer be required to comply
with the obligations described above under "Certain Covenants" and will have no
obligation to repurchase the notes of the applicable series pursuant to the
provisions described under "Change of Control."

Notwithstanding any satisfaction and discharge or defeasance of the
Indenture, our obligations described under "Conversion of Notes" will survive to
the extent provided in the Indenture until the notes cease to be outstanding.

FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES

Notes will be issued only in fully registered form, without interest
coupons, in minimum denominations of $1,000 and integral multiples in excess
thereof. Notes sold in any offering will be issued only against payment therefor
in immediately available funds.

The notes of each series initially will be represented by one or more notes
in registered, global form without interest coupons (each a "global note" and
collectively, the "global notes"). The global notes will be deposited upon
issuance with the Trustee as custodian for The Depository Trust Company ("DTC"),
in New York, New York, and registered in the name of DTC or its nominee, in each
case for credit to an account of a direct or indirect participant in DTC as
described below.

Transfer of beneficial interests in the global notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants,
which may change from time to time.

Except as set forth below, the global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in certificated form except in the limited circumstances described below under
"-- Exchange of Book-Entry notes for Certificated Notes."

EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES

A beneficial interest in a global note may not be exchanged for a note in
certificated form unless (1) DTC (A) notifies us that DTC is unwilling or unable
to continue as depositary for the global note or (B) has ceased to be a clearing
agency registered under the Exchange Act and in either case we thereupon fail to
appoint a successor depository within 90 days; (2) we, at our option, notify the
Trustee in

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<PAGE> 89

writing that we elect to cause the issuance of our notes in certificated form;
or (3) there shall have occurred and be continuing an Event of Default or any
event that after notice or lapse of time or both would be an Event of Default
with respect to the notes. In all cases, certificated notes delivered in
exchange for any global note or beneficial interests therein will be registered
in the names, and issued in any approved denominations, requested by or on
behalf of DTC, in accordance with its customary procedures.

CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL NOTES. THE DESCRIPTION OF THE
OPERATIONS AND PROCEDURES OF DTC THAT FOLLOW ARE PROVIDED SOLELY AS A MATTER OF
CONVENIENCE. THESE OPERATIONS AND PROCEDURES ARE SOLELY WITHIN THE CONTROL OF
DTC AND ARE SUBJECT TO CHANGE BY IT FROM TIME TO TIME. WE TAKE NO RESPONSIBILITY
FOR THESE OPERATIONS AND PROCEDURES AND URGE INVESTORS TO CONTACT DTC OR ITS
PARTICIPANTS DIRECTLY TO DISCUSS THESE MATTERS.

DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants ("participants") and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical transfer and delivery of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Certain of such participants, or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").

DTC has advised us that its current practice, upon the issuance of a global
note, is to credit, on its internal system, the respective principal amount of
the individual beneficial interests represented by such global note to the
accounts with DTC of the participants through which such interests are to be
held. Ownership of beneficial interest in the global note will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by DTC or its nominees, with respect to interests of participants, and the
records of participants and indirect participants, with respect to interests of
persons other than participants.

AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL NOTE,
DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND
HOLDER OF THE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE
INDENTURE AND THE NOTES. Except in the limited circumstances described above,
owners of beneficial interest in a global note will not be entitled to have any
portions of such global note registered in their names, will not receive or be
entitled to receive physical delivery of notes in definitive form and will not
be considered the owners or holders of the global notes, or any notes
represented thereby, under the Indenture or the notes. Accordingly, each person
owning a beneficial interest in the global note must rely on the procedures of
DTC and, if such person is not a participant, those of the participant through
which such person owns its interest, in order to exercise any rights of a holder
under the Indenture or such note.

Investors may hold their interests in the global note directly through DTC,
if they are participants in such system, or indirectly through organizations
that are participants in such system. All interests in a global note will be
subject to the procedures and requirements of DTC.

The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a global note to such persons may be limited to
that extent. Because DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants and certain banks, the ability of a
person having beneficial
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<PAGE> 90

interests in a global note to pledge such interests to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests.

Cash payment of the principal of, interest on, or the redemption or
repurchase of the global note will be made to DTC or its nominee, as the case
may be, as the registered owner of the global note by wire transfer of
immediately available funds on each relevant payment date. Neither we, the
Trustee nor any of our respective agents will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a global note including any delay by DTC or
any participant or indirect participant in identifying the beneficial ownership
interests, and we and the Trustee may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes.

We expect that DTC or its nominee, upon receipt of any cash payment of
principal, interest or the redemption or repurchase price in respect of a global
note representing any notes held by it or its nominee, will immediately credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global note for
such notes as shown on the records of DTC or its nominee (adjusted as necessary
so that such payments are made with respect of whole notes only), unless DTC has
reason to believe that it will not receive payment on such payment date. We also
expect that payments by participants to owners of beneficial interests in such
global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." Such payments will be
the responsibility of such participants.

Redemption notices will be sent to DTC or its nominee. If less than all
notes are being redeemed, DTC's practice is to determine by lot the amount of
the holdings of each participant in such issue to be redeemed.

Neither DTC nor its nominee will consent or vote with respect to the notes.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date. The omnibus proxy assigns DTC's, or its
nominee's, consenting or voting rights to those participants to whose accounts
the notes are credited on the record date identified in a listing attached to
the omnibus proxy.

Interests in the global notes will trade in DTC's Same-Day Funds Settlement
System, and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject to all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.

DTC has advised us that it will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below and the conversion of notes, only at the direction of one or more
participants to whose account with DTC interests in the global notes are
credited and only in respect of such portion of the aggregate principal amount
of the notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default, as defined above, under the
notes, DTC reserves the right to exchange the global notes for notes in
certificated form, and to distribute such notes to its participants.

Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the global note among
participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.

Neither we, the Trustee nor any of our respective agents will have any
responsibility for the performance by DTC, its participants or indirect
participants of their respective obligations under the rules and procedures
governing its operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial ownership
interests in global notes.

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MODIFICATIONS AND WAIVERS OF THE INDENTURE

The Indenture contains provisions permitting us and the Trustee, with the
consent of the holders of not less than a majority in principal amount of the
notes of the applicable series at the time outstanding, to modify the Indenture
or any supplemental indenture or the rights of the holders of notes of the
applicable series, and to waive certain of our past defaults, except that
without the consent of the holder of each note so affected no such modification
shall:

- Extend the fixed maturity of any note;

- Reduce the rate or extend the time of payment of interest thereon;

- Reduce the principal amount thereof or premium, if any, thereon;

- Reduce any amount payable upon redemption thereof;

- Change our obligation to repurchase any note upon the happening of a
Change of Control;

- Impair or affect the right of a holder to institute suit for the payment
thereof;

- Change the currency in which the notes are payable;

- Modify the subordination provisions of the Indenture in a manner adverse
to the holders of notes; or

- Impair the right to convert the notes into common stock subject to the
terms set forth in the Indenture.

In addition, no modification shall reduce the foregoing percentage of notes
without the consent of the holders of all of the notes then outstanding.

The holders of a majority in aggregate principal amount of the outstanding
notes of the applicable series may waive compliance by us with certain
restrictive provisions of the Indenture and may also waive any past defaults
under the Indenture, except a default in the payment of principal, premium, if
any, or interest.

COMPLIANCE CERTIFICATES

The Indenture requires us to file annual Officer's Certificates with the
Trustee stating whether or not to the best knowledge of the officer executing
the certificate we are in compliance with the terms and conditions of the
Indenture. We must also notify the Trustee if we become aware of any default or
Event of Default.

GOVERNING LAW

The Indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York.

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DESCRIPTION OF COMMON STOCK

Our authorized capital stock currently consists of 100,000,000 shares of
common stock and 1,000,000 shares of preferred stock. Following is a summary of
the material provisions of our common stock, our preferred stock, our rights
plan, the anti-takeover provisions of the Minnesota Business Corporation Act,
our articles of incorporation and our bylaws.

COMMON STOCK

As of July 23, 1999, there were 23,440,093 shares of common stock
outstanding held of record by approximately 1,000 shareholders of record. No
shares of preferred stock are outstanding.

Subject to preferences that may be applicable to any outstanding preferred
stock, the holders of outstanding shares of common stock are entitled to the
following rights:

- to receive dividends out of assets legally available therefor at such
times and in such amounts as our board of directors from time to time may
determine;

- one vote for each share held on all matters submitted to a vote of our
shareholders; and

- upon our liquidation, dissolution or winding-up, to share ratably in all
assets remaining after payment of liabilities and the liquidation or
redemption of any preferred stock.

Cumulative voting for the election of directors is not authorized by our
articles of incorporation, which means that the holders of a majority of the
outstanding shares of stock with voting rights can elect all of the directors
then standing for election. The common stock is not entitled to preemptive
rights and is not subject to conversion or redemption. The rights of holders of
common stock may be altered by the greater of the vote of holders of a majority
of shares of common stock present and entitled to vote at a meeting of
shareholders, and a vote at a meeting of shareholders of holders of a majority
of the minimum number of shares of common stock that would constitute a quorum.
A quorum consists of a majority of the shares issued and outstanding and
entitled to vote.

PREFERRED STOCK

Our board of directors is authorized, without action by our shareholders,
to designate and issue preferred stock in one or more series. The board of
directors can designate the rights, preferences and privileges of the shares of
each series and any qualifications, limitations or restrictions thereon.

The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of our common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes could, among other things, have the effect of delaying,
deferring or preventing a change in control. The issuance of preferred stock
with voting or conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We have
no current plans to issue any shares of preferred stock.

SHAREHOLDER RIGHTS PLAN

Out of the 1,000,000 authorized shares of preferred stock, on July 23, 1999
there were 35,000 shares of Series A Junior Participating Preferred Stock
reserved for issuance in connection with our shareholder rights plan set forth
in our Rights Agreement, dated July 24, 1998, with ChaseMellon Shareholder
Services, L.L.C. as rights agent.

In July 1998, the board of directors adopted the shareholder rights plan
and declared a dividend distribution of one preferred stock purchase right for
each share of common stock to shareholders of record on August 10, 1998. Each
share of common stock issued subsequent to such date, including the shares of
common stock issuable upon conversion of the notes, includes a corresponding
preferred stock purchase right. Each preferred stock purchase right entitles the
registered holder to purchase from us 1/1000th of a

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share of the series A preferred stock at a price of $50.00 per unit, subject to
adjustment. The rights become exercisable upon the earlier of:

- the close of business on the tenth day following a public announcement
that a person or group of affiliated or associated persons have acquired
beneficial ownership of 20% or more of the outstanding common shares; or

- the close of business of the tenth day following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer,
the consummation of which would result in the beneficial ownership by a
person or group of 20% or more of the outstanding common shares.

Upon exercise and payment of the then current purchase price for the right,
the right holder will have the right to receive common stock (or, in some
circumstances, cash, property or other securities of ours) having a value equal
to two times the purchase price. Upon the occurrence of certain other events,
each right holder shall have the right to receive, upon exercise and payment of
the then current purchase price, common stock of the other party to the
transaction having a value equal to two times the purchase price.

We are entitled to redeem the rights in whole, but not in part, at a price
of $0.01 per right, subject to adjustment, payable in cash or shares of our
common stock, at any time prior to the earlier of the expiration of the rights
in July 2008 or ten days following the time that a party has acquired beneficial
ownership of 20% or more of the shares of common stock then outstanding. Any of
the provisions of the Rights Agreement governing the rights may be supplemented
or amended by us in our sole and absolute discretion. Such supplements or
amendments by us may be made without the approval of the rights holders.

The existence of the shareholder rights plan as well as the ability of the
board of directors to issue preferred stock and the anti-takeover provision of
Minnesota law described below may serve to discourage an acquisition of us or
stock purchases in furtherance of an acquisition.

BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS UNDER THE MINNESOTA
BUSINESS CORPORATION ACT

As a public corporation, we are governed by the provisions of sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act. These
anti-takeover provisions could operate to deny shareholders the receipt of a
premium on their stock and may also have a depressive effect on the market price
of our stock. Section 302A.671 basically provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved by the shareholders in a prescribed manner. A
"control share acquisition" is generally defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner of 10% or more of a
corporation's voting stock. Reference is made to the detailed terms of sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.

ARTICLES OF INCORPORATION AND BYLAWS

Our articles of incorporation and bylaws could make completion of an offer
to acquire us more difficult. We believe that the benefits of increased
protection from unfriendly or unsolicited proposals to acquire or restructure us
outweigh the disadvantages of discouraging such proposals, including proposals
that are priced above the then current market value of our common stock,
because, among other things, negotiation of such proposals could result in an
improvement of their terms.

Our articles of incorporation authorize, without action by the
shareholders, the board of directors to designate and issue preferred stock in
one or more series. Our board of directors can also issue shares of a class or
series to holders of shares of another class or series to effectuate share
dividends, splits or
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conversions of our outstanding shares. In addition, our articles of
incorporation grant the board of directors the authority to adopt, amend or
repeal all or any of the bylaws, by a majority of its members present at a duly
called meeting, subject to the power of the shareholders to change or repeal the
bylaws. In addition, our bylaws provide that meetings of our shareholders may
only be called by the board of directors, certain of our officers and
shareholders holding not less than 3% of all outstanding voting shares.

The provisions of the shareholder rights plan, our articles of
incorporation, our bylaws and Minnesota law are intended to encourage potential
acquirers to negotiate with us and to allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
shareholder value. Such provisions may also have the effect of discouraging
acquisition proposals or delaying or preventing a change in control, which may
harm our stock price.

TRANSFER AGENT

The transfer agent for our common stock is ChaseMellon Shareholder
Services, L.L.C., 150 North Wacker Drive, Suite 2120, Chicago, IL 60606.

EXPERTS

The consolidated balance sheets as of December 31, 1997 and 1998 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998 included in our Annual Report on Form 10-K for
the year ended December 31, 1998, have been audited by KPMG LLP, independent
certified public accountants, as stated in their reports with respect thereto,
and are incorporated herein by reference in reliance upon the authority of said
firm as experts in auditing and accounting.

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PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THE
ACCOMPANYING PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT. NEITHER COMPUTER NETWORK
TECHNOLOGY CORPORATION NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE
PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL INFORMATION. THE ACCOMPANYING
PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THE ACCOMPANYING PROSPECTUS
AND THIS PROSPECTUS SUPPLEMENT IS CORRECT ONLY AS OF THE DATE OF THE
ACCOMPANYING PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT, REGARDLESS OF THE TIME
OF DELIVERY OF THE ACCOMPANYING PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT OR ANY
SALE OF THESE SECURITIES.

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary............................... S-1
Risk Factors.......................... S-6
Use of Proceeds....................... S-9
Price Range of Common Stock........... S-9
Dividend Policy....................... S-9
Capitalization........................ S-10
Selected Financial Data............... S-11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-13
Business.............................. S-21
Management............................ S-32
Principal Shareholders................ S-35
Underwriting.......................... S-37
Legal Matters......................... S-39
Experts............................... S-39
Where You Can Find More Information... S-39
Incorporation of Certain Information
by Reference........................ S-39
Index to Financial Statements......... F-1

PROSPECTUS
Special Note Regarding Forward-Looking
Statements.......................... 1
About This Prospectus................. 1
Where You Can Find More Information... 1
About Computer Network Technology
Corporation......................... 2
Ratio of Earnings to Fixed Charges.... 3
Use of Proceeds....................... 4
Risk Factors.......................... 4
Plan of Distribution.................. 14
Description of The Notes.............. 15
Description of Common Stock........... 29
Experts............................... 31
</TABLE>

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3,700,000 SHARES

[COMPUTER NETWORK TECHNOLOGY LOGO]

COMPUTER NETWORK
TECHNOLOGY CORPORATION
COMMON STOCK

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PROSPECTUS SUPPLEMENT
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BEAR, STEARNS & CO. INC.
SG COWEN
WIT SOUNDVIEW
SEPTEMBER , 2000

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