ANCOR COMMUNICATIONS INC /MN/, S-3/A, 1999-07-26

ANCOR COMMUNICATIONS INC /MN/
S-3/A, 1999-07-26
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE>

As filed with the Securities and Exchange Commission on July 26, 1999

Registration No. 333-82947

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933

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ANCOR COMMUNICATIONS, INCORPORATED
(Exact name of registrant as specified in its charter)

Minnesota 41-1569659
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6130 Blue Circle Drive
Minnetonka, Minnesota 55343
(612) 932-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

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Kenneth E. Hendrickson
Ancor Communications, Incorporated
6130 Blue Circle Drive
Minnetonka, Minnesota 55343
(612) 932-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copy to:

Daniel J. Winnike Amy E. Ayotte
Howard, Rice, Nemerovski, Canady, Dorsey & Whitney LLP
Falk & Rabkin, A Professional 220 South Sixth Street
Corporation Minneapolis, MN 55402
1755 Embarcadero Rd., Suite 200 (612) 340-2600
Palo Alto, CA 94303
(650) 842-8500

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share* Price* Fee(2)
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<S> <C> <C> <C> <C>
Common Stock ($.01 par
value), including
attached preferred
share purchase
rights............... 2,875,000 shares $28.8125 $82,835,937 $23,029
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</TABLE>
* Estimated pursuant to Rule 457(c) solely for purposes of computing the
registration fee and based upon the last sale price for such common stock
on July 15, 1999, as reported on the Nasdaq SmallCap Market.
(1) Includes 375,000 shares that may be purchased by the Underwriters solely
to cover over-allotments, if any.
(2) Previously paid upon the initial filing of the Company's Registration
Statement on Form S-3 on July 15, 1999.

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Prospectus (Not Complete)

Issued July 26, 1999

2,500,000 Shares

[Logo of Ancor]

Common Stock

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Ancor Communications, Incorporated is offering 2,500,000 shares of common
stock in a firmly underwritten offering.

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Our common stock is listed on the Nasdaq SmallCap Market under the symbol
"ANCR." Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "ANCR" beginning on or about July 27, 1999. On July 23,
1999, the last reported sale price of our common stock on the Nasdaq SmallCap
Market was $30.75 per share.

-----------

Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4.

-----------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Offering Price.................................................. $ $
Discounts and Commissions to Underwriters....................... $ $
Offering Proceeds to Ancor...................................... $ $
</TABLE>

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

We have granted the underwriters the right to purchase up to an additional
375,000 shares of common stock to cover any over-allotments. Banc of America
Securities LLC expects to deliver the shares of common stock to investors on or
about , 1999.

Banc of America Securities LLC

Bear, Stearns & Co. Inc.

Morgan Keegan & Company, Inc.

John G. Kinnard and Company, Incorporated

-----------

, 1999
<PAGE>

[ANCOR LOGO]

TRADEMARKS

Each trademark, trade name or service mark appearing in this prospectus
belongs to its respective holder. Among the trademarks that we claim rights to
are GigWorks(TM), GigVision(TM), Ancor Communications and the Ancor logo.

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

We were incorporated in the State of Minnesota in 1986. Our principal
executive offices are located at 6130 Blue Circle Drive, Minnetonka, Minnesota,
55343, and our telephone number is (612) 932-4000. Our website is located at
www.ancor.com. Information contained on our website is not incorporated by
reference into this prospectus and you should not consider this information a
part of this prospectus.
<PAGE>

Image (two pages wide:)

The image consists of two boxed images positioned side-by-side in the top
left hand corner of the page and a third image which takes up the other
three-quarters of the two pages.

There is a title above the two boxed images labeled "Early Storage
Implementations." The boxed image on the left is subtitled "In traditional
storage topologies, stored data is directly attached to individual servers."
Below the subtitle, the image depicts three computers on the left, a cloud
representing a LAN in the middle and two servers on the right, with each
connected to a storage device. Below the image are the following three bullet
points:

. Single access point to storage creates data traffic jam

. Limited to 16 connections

. Short distance between servers and storage.

The boxed image on the right is subtitled "Fibre channel hubs solve part of
the problem, providing shares bandwidth connectivity among multiple servers and
multiple storage devices." Below the subtitle, the image shows three computers
on the left, a cloud representing a LAN in the middle and a hub on the right,
with the hub surrounded by three servers and three storage devices. The LAN
cloud is connected by solid lines to the three servers, and the hub is connected
to the servers and the storage devices by solid lines. Below the image are the
following two bullet points:

. As devices are added, bandwidth sharing diminishes performance

. Limited to 126 connections
<PAGE>

The large image consists of five computers surrounding a cloud representing a
LAN in the bottom left corner of the page. In the top right corner of the page
is a larger cloud representing a SAN. Inside the cloud are seven switches which
have lines interconnecting them. Surrounding the SAN cloud are eight storage
devices, labeled "Storage devices attached to Ancor fibre channel switches," and
three servers, labeled "Servers attached to Ancor fibre channel switches." Three
solid lines connect the LAN cloud in the bottom left corner of the page with the
three servers. Above the large image, and to the right of the two boxed images,
is the title:

"Ancor's fibre channel switches offer shared storage with maximum bandwidth --
plus the ability to scale from single-switch to large multi-switch
configurations." Below the image are the following heading and five bullets:

Storage Area Networks using Ancor fibre channel switches
alleviate the limitations of early storage implementations

* More Scalability -- Cross-connect architecture allows growth to
thousands of connections

* Enhanced Performance -- Transmission speeds of up to one gigabit per
second for each connection

* More Flexibility -- Spans distances up to 10 km for storage/server
consolidation and remote backup infrastructures

* Easy Management -- GigVision(TM) software allows SAN monitoring and
control

* Improved LAN performance -- SANs offload data storage applications
from the LAN, improving LAN performance

[GIGWORKS(TM) ANCOR COMMUNICATIONS, INC. LOGO]

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 4
Where You Can Find More Information...................................... 13
Use of Proceeds.......................................................... 14
Price Range of Common Stock and Dividend Policy.......................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 26
Management............................................................... 39
Principal Shareholders................................................... 42
Description of Capital Stock............................................. 43
Underwriting............................................................. 46
Legal Matters............................................................ 48
Experts.................................................................. 48
Index to Financial Statements............................................ F-1
</TABLE>

FORWARD-LOOKING STATEMENTS

This prospectus, including the documents incorporated by reference in this
prospectus, includes forward-looking statements. We have based these forward-
looking statements on our current expectations and projections about future
events. Our actual results could differ materially from those discussed in, or
implied by, these forward-looking statements. Forward-looking statements are
identified by words such as "believe," "anticipate," "expect," "intend,"
"plan," "will," "may" and other similar expressions. In addition, any
statements that refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. Forward-
looking statements in these documents include, but are not necessarily limited
to, those relating to:

. our expectation that we will receive revenue from Sun Microsystems in the
fourth quarter of 1999;

.our intention to develop further business with existing customers and to
attract new customers;

. the anticipated growth in the storage area network and fibre channel
switch markets;

. our ability to carry out our strategy;

. our success in developing new or enhanced products to take advantage of
market opportunities or to respond to competition; and

. our achieving year 2000 compliance or the impact on us of any third
party's failure to achieve year 2000 compliance.

Factors that could cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this prospectus.
We are not obligated to update or revise these forward-looking statements to
reflect new events or circumstances.

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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information
appearing in this prospectus is accurate as of the date on the front cover of
this prospectus only. Our business, financial condition, results of operations
and prospects may have changed since that date.
<PAGE>

PROSPECTUS SUMMARY

This summary provides an overview of the key aspects of the offering.
Because this is a summary, it may not contain all of the information that is
important to you. You should read the entire prospectus carefully, including
the "Risk Factors" section and the financial statements and related notes
contained therein. Unless otherwise indicated, all information in this
prospectus assumes that the underwriters will not exercise their over-allotment
option. The terms "Ancor Communications, Incorporated," "Ancor," "we," "us" and
"our" as used in this prospectus refer to Ancor Communications, Incorporated.

Ancor Communications, Incorporated

We provide a wide range of switching solutions for storage area networks,
commonly referred to as SANs, which are networks that connect a company's data
storage systems and computer servers. Our switching solutions are based on the
fibre channel interconnect protocol, an industry networking standard designed
for data-intensive transfers. Our GigWorks family of fibre channel switches
enables a company to cost-effectively manage the growth of its data storage
requirements, improve the data transfer performance between its servers and
data storage systems, increase user access to data, increase the size and scope
of its SAN and improve the performance of its local area network, or LAN, by
offloading data storage applications to the SAN.

We sell our fibre channel switching solutions primarily to original
equipment manufacturers that combine our switches with their own products and
sell the combined products under their own brand. For instance, in June 1999 we
signed an agreement to sell fibre channel switches to Sun Microsystems for
incorporation into Sun's storage products. We also sell to system integrators
that integrate our switches with products from other manufacturers and sell the
combined solution to end-user customers. Our other customers include MTI
Technology, Hitachi Data Systems, INRANGE Technologies, Prisa Networks and
Forefront Graphics.

We have an extensive history designing fibre channel switches, during which
time we have developed significant technical expertise. We were the first to
offer a fibre channel switch, the first to develop a gigabit-speed fibre
channel switch, and the first to offer gigabit-speed fibre channel switches
with features like multistage support, cross-connectivity, arbitrated loop
support and self-configuring ports. Our key technological advantages lie in our
ability to design highly-integrated application specific integrated circuits,
or ASICs, which provide cost, reliability and performance benefits compared to
other fibre channel switches, and in our fibre channel architecture, which
significantly improves the scalability and performance of large SANs. These
advantages allow us to provide fibre channel switches which offer what we
believe is the best combination of scalability, reliability, performance and
cost of any fibre channel switch on the market.

Over the past decade, the volume of business-critical data created,
processed and accessed throughout organizations has increased dramatically,
creating a data traffic jam between storage systems and servers. In response to
the demand for high-speed and high-performance storage-to-server and server-to-
server connectivity, the fibre channel interconnect protocol was developed in
the early 1990s and has earned broad support from storage and server industry
leaders. Fibre channel's support for networked connections, large data block
transfers and multiple protocols has enabled the development of SANs to meet
companies' increasing data management needs.

The servers and storage systems that make up a SAN can be interconnected
using either hubs or switches. Fibre channel switches offer significant
benefits over hubs, including allocating full network bandwidth, or capacity,
to each device on the SAN, providing much greater scalability and facilitating
network management. International Data Corporation estimates that the market
for fibre channel switches will grow from approximately $83 million in 1998 to
approximately $1.7 billion in 2002, representing a compound annual growth rate
of 113%.

Our goal is to be the leading supplier of fibre channel switching products
for SAN applications. Key elements of our strategy to achieve this goal
include:

. capitalizing on our core technology to offer low-cost, high-performance
solutions;
. leveraging our original equipment manufacturer relationships to expand
our customer base;
. broadening our product offerings to meet customers' evolving SAN needs;
and
. continuing our leadership in the expansion of the fibre channel standard
to promote interoperability.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Common stock offered by Ancor...................... 2,500,000 shares
Common stock to be outstanding after the offering.. 27,389,107 shares
Use of proceeds.................................... For working capital and
for general corporate
purposes. See "Use of
Proceeds."
Nasdaq National Market symbol...................... ANCR
</TABLE>

The number of shares that will be outstanding after the offering is based on
the actual number outstanding as of June 30, 1999. It excludes:

. 4,787,039 shares of common stock reserved for issuance under our stock
option plans, of which options to purchase 3,430,734 shares were
outstanding as of June 30, 1999, at a weighted average exercise price of
$2.64 per share; and

. 2,120,392 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $7.42 per share. See
"Capitalization."

Summary Financial Data

You should read the summary financial data below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes included in this
prospectus.

<TABLE>
<CAPTION>
As of June 30,
1999
----------------
As
Actual Adjusted
------- --------
<S> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents...................................... $ 192 $72,489
Working capital................................................ 7,882 80,179
Total assets................................................... 15,724 88,021
Long-term debt, net of current maturities...................... 86 86
Total shareholders' equity..................................... 4,983 77,280
</TABLE>

For an explanation of the determination of the number of shares used in
computing basic and diluted net income per share, see note 1 of notes to
financial statements.

The balance sheet data as of June 30, 1999 as adjusted reflect our sale of
2,500,000 shares of common stock offered by this prospectus at an assumed
public offering price of $30.75 per share, after deducting the estimated
underwriting discounts and commissions and the offering expenses that we will
pay. See "Use of Proceeds" and "Capitalization."

3
<PAGE>

RISK FACTORS

This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business, financial condition and results of operations could be seriously
harmed by any of the following risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.

Because we expect to incur significant product development, sales, marketing
and administrative expenses, we may not become profitable.

We have incurred significant losses since inception and expect to incur
losses in the future. We expect to incur significant product development, sales
and marketing and administrative expenses and, as a result, we will need to
generate substantially more revenue than we have to date to achieve and
maintain profitability. There is a risk that we will not be able to realize
sufficient revenues to achieve profitability in the future.

If a significant market for SANs and SAN switching products does not develop,
our business may fail.

Our growth will be limited if storage area network, or SAN, technology and
solutions do not become widely accepted. Our product development and marketing
efforts are focused on the SAN market, which has only recently begun to develop
and is evolving rapidly. The markets for new technology frequently develop more
slowly than the technology targeted to those markets. Organizations often
implement SANs in connection with their deployment of new storage systems and
servers and, as a result, we are partly dependent on the storage systems and
server markets. Potential end-user 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. We cannot be sure that
SANs will ever achieve widespread market acceptance or that the market will
develop as quickly as anticipated.

Our success also depends in part upon market acceptance of our SAN switching
solutions as an alternative to the use of hubs or other interconnect devices in
SANs. In general, hubs are priced lower than switches. We currently expect that
substantially all of our future revenue will be derived from sales of our fibre
channel switches. Because this market is new, it is difficult to predict its
potential size or future growth rate. If the market does not accept the use of
SAN switches, our business could be adversely affected.

If our relationship with Sun Microsystems fails, our business would be
materially harmed.

In June 1999, we announced an original equipment manufacturing agreement
with Sun Microsystems. Under this agreement, we expect to sell fibre channel
switches to Sun for incorporation into Sun's SAN products. However, like other
original equipment manufacturer agreements, our agreement with Sun does not
provide us with any assurance that we will ultimately sell our products to Sun.
The agreement does not require Sun to purchase any volume of products from us,
and Sun could incorporate a competitor's fibre channel switch into its
products. In addition, there are risks that Sun may decide to incorporate
technology other than fibre channel switches into its products, or may
experience problems integrating our fibre channel switches with other
components of its products either of which would result in Sun failing to
purchase products from us. Together with Sun, we are currently in the final
stages of testing our new switch for use with the SAN products that Sun is
developing. We cannot assure you that Sun will be able to complete the
integration of our switch with its final SAN products, nor can we assure you
that Sun will not find any material deficiencies during this final testing
stage. If Sun is unable to integrate our switch into its SAN products, if Sun
finds material deficiencies with our switch or if other unanticipated events
occur, our business will be adversely affected, and the price of our common
stock may decline. Our relationship with Sun is new and, as a result, we have
not yet achieved any sales to Sun.

In addition to the revenue we expect to generate by selling our products to
Sun, this agreement is extremely important to our business because it is viewed
by the market as a validation of our technology, our

4
<PAGE>

products and our ability to service a significant original equipment
manufacturer. If our relationship with Sun were harmed in any way, it would
significantly negatively impact the market's perception of us and our products,
and our revenues could be significantly reduced.

As is generally the case with original equipment manufacturer agreements,
our agreement with Sun contains precise manufacturing quality specifications.
The agreement further contemplates that we will lower the price of our products
to Sun during the term of the agreement. If we cannot satisfy these quality and
price reduction provisions, Sun may seek an alternative supplier or could gain
access to our technology to remedy problems that we cannot correct.

If we fail to develop and maintain relationships with successful original
equipment manufacturers, we may be unable to become profitable.

To succeed in the SAN market, we will need to sell our products directly to
original equipment manufacturers. We have only recently marketed our products
to original equipment manufacturers, and we have limited experience selling our
products to them. We cannot be certain that our original equipment manufacturer
customers will continue to develop, market and sell products that incorporate
our technology, nor can we control their ability or willingness to do so. We
sell our products through original equipment manufacturers who compete in
highly competitive markets, and our success will depend on the success of these
customers. If we fail to develop and manage relationships with original
equipment manufacturers or if our customers fail to sell our products, we may
be unable to achieve profitability.

Original equipment manufacturers typically conduct significant evaluation,
testing, implementation and acceptance procedures before they begin to market
and sell products incorporating new components. This evaluation process can be
lengthy and may range from several months to over a year. In addition, the
process is complex, and we may be required to incur significant sales,
marketing and management expenses to support it. The process is becoming more
complex as we simultaneously qualify our products with multiple customers. As a
result, we may expend significant sales, marketing and managerial resources to
develop customer relationships without success or before we recognize any
revenue from these relationships. In addition, even if we are selected by an
original equipment manufacturer as a supplier, there is typically no purchase
commitment made. Thus, we cannot assure you that we will sell specified or
minimum amounts of product to any current or future original equipment
manufacturer customers.

Competition in the SAN market may lead to reduced sales of our products,
reduced profits and reduced market share.

Because of the intense competition to provide components to the SAN market,
our business may not develop as significantly as we expect or we may lose
current or potential customers. Alternatively, our profitability could be
impaired by pricing pressure from intense competition. Our primary competitor
in the fibre channel switch market, Brocade Communications, currently sells
more switches than we do, and its perception by some as an early leader in the
SAN market may adversely affect our ability to develop new customer
relationships. Other companies are also providing fibre channel switches and
other products to the SAN market, including Gadzoox, McData and Vixel, and
their products could become more widely accepted than ours. In addition, a
number of companies, including Emulex, Interphase, JNI and QLogic are
developing, or have developed, fibre channel products other than switches, such
as adapters or hubs, that compete with our products in some applications. We
anticipate that these and other companies may introduce additional fibre
channel products, including switches, in the near future. To the extent that
these companies have current supplier relationships with our potential
customers, it will be more difficult for us to win business from these
potential customers. If fibre channel technology gains wider market acceptance,
it is likely that an increasing number of competitors will begin developing and
marketing fibre channel products. Some of the companies that produce or may
produce competitive fibre channel products have substantially greater
resources, greater name recognition and access to larger customer bases than we
do. As a result, our competitors may succeed in adapting more rapidly and
effectively to changes in technology or the market. If we fail to compete
effectively, it would prevent us from generating sufficient sales to allow us
to attain profitable operations. See "Business--Competition."

5
<PAGE>

Our revenue will be materially reduced as a result of the warrant we granted to
Sun Microsystems.

As part of our agreement with Sun, we granted a warrant to Sun to purchase
up to 1.5 million shares of our common stock at an exercise price of $7.30 per
share. In order for the warrant shares to vest, Sun must purchase products from
us. The warrant shares are earned at the rate of one share for each $67.00 of
revenue we receive from Sun through September 30, 2002. In each period in which
the warrant shares are earned, a non-cash sales discount will be recorded. The
amount of the non-cash sales discount will be the fair value of the warrant
shares which are earned in the period. Fair value of the warrant shares will be
calculated by using the Black-Scholes option pricing model. The primary
component in the Black-Scholes calculation is the value of our common stock at
that time. The value of the warrant shares, and the corresponding sales
discount, increases as our stock price increases. Conversely, the value of the
warrant shares, and the corresponding sales discount, decreases as our stock
price decreases. Since the price of our stock cannot be estimated, it is not
possible to estimate the amount of the non-cash sales discount that could be
recorded, but it could be significant. For example, if our share price is
$30.75, the value of a warrant share would be $29.08 based on the Black-Scholes
option pricing model. This means that for each $67.00 in gross revenue to Sun,
we would record a non-cash sales discount of $29.08. Depending on our stock
price, this sales discount could cause us to report a negative gross margin on
sales to Sun.

None of the warrant shares will vest until we have received a total of
$10,000,000 in revenue from Sun. During this period, any warrant shares earned
in one quarter will be revalued in subsequent quarters using the then-current
Black-Scholes option pricing model, and an additional non-cash sales discount
will be recorded if the value of the warrant shares increases or a non-cash
sales credit will be recorded if the value of the warrant shares decreases. In
the quarter in which we achieve an aggregate of $10,000,000 in revenues from
Sun, we will perform a final Black-Scholes calculation for the warrant shares
earned through the end of that quarter, which will result in a final adjustment
to the non-cash sales discount. Thereafter, warrant shares will vest as they
are earned, and we will record a non-cash discount quarterly based on the
Black-Scholes calculation, as described above. No subsequent revaluations will
be recorded.

The market for SANs and for our products may be impaired if sufficient
interoperability is not achieved and maintained.

Given that organizations want products that they purchase from different
vendors to work together, the ability of the various components that comprise a
SAN, such as adapter cards, hubs and switches, to interoperate is an important
factor in the development of the SAN market. Currently, manufacturers of these
various components have not established a complete interoperability standard
and may never do so. If manufacturers of fibre channel SAN products do not
manufacture products that interoperate with the products of other
manufacturers, the development of the SAN market may be limited. In addition,
if interoperability standards are not agreed upon, our products could fail to
achieve the desired level of market acceptance because potential customers may
believe that a competitor's products represent the standard that will more
likely prevail.

In addition, our products are designed to conform to the fibre channel
interconnect protocol and other industry standards. There is a risk that fibre
channel, or the other standards we have employed, may not be widely adopted,
and competing standards may emerge that will be preferred by original equipment
manufacturers or end-users. If end-users and original equipment manufacturers
do not adopt the standards we have adopted for our products, our growth may be
limited.

Since we have entered the SAN business recently, we cannot reliably predict our
operating requirements.

Our inability to accurately anticipate our future operating results could
cause us to incur unnecessary expenses or to forego opportunities because we
may not take sufficient steps to support growth. Moreover, most of our expenses
are fixed in the short-term or incurred in advance of receipt of corresponding
revenue. As a result, we may not be able to decrease our spending to offset any
unexpected shortfall in our revenues. We have only recently begun marketing our
products to the SAN market and do not have meaningful historical results upon
which to base our forecasts. If we are unable to forecast our operating
requirements, our results of operations could be negatively impacted.

6
<PAGE>

If we are unable to develop new and enhanced products that meet customer needs
and achieve widespread market acceptance, our results of operations could be
negatively impacted.

The data storage markets are subject to rapid technological change,
including changes in customer requirements, frequent new product introductions
and enhancements and evolving industry standards. Our success depends in part
on our ability to keep pace with technological developments and emerging
industry standards. We must also respond to evolving customer requirements by
enhancing our current products and developing and introducing new products.
There is a risk that if we fail to anticipate or respond rapidly to advances in
technology by adapting our products appropriately, our products could become
obsolete. If this occurs, our business could be adversely affected. As we
introduce new or enhanced products, we will also need to manage successfully
the transition from older products to minimize disruption in our customers'
ordering patterns, to avoid excessive levels of older product inventories and
to ensure that enough supplies of new products can be delivered to meet our
customers' demands. If we fail to develop and introduce successfully new
products and product enhancements, our revenue would be reduced, or we could
incur substantial charges.

Since our business is dependent on a small number of customers, the loss of any
one of them will materially reduce our revenues.

In the past, a significant portion of our revenue has been generated by
three customers. Hucom generated 4% of our revenue in 1998, 88% in 1997, and
41% in 1996. Netmarks, which succeeded Hucom as our Japanese distributor,
generated 22% of our revenue in 1998. Boeing generated 50% of our revenue in
1998, 9% in 1997, and 1% in 1996. None of these customers is expected to
contribute a significant portion of our revenues in the future as a result of
our change in focus from the local area network market to the SAN market.

Going forward, we expect to derive a substantial portion of our revenue from
original equipment manufacturers. To date, we have agreements with only nine
original equipment manufacturers, and anticipate that a small number of
customers will account for a significant portion of our future revenues. Our
agreements with original equipment manufacturers do not provide any assurance
of future sales to these customers. Original equipment manufacturers can stop
purchasing and marketing our products at any time and our agreements are not
exclusive and do not require any minimum purchases. If we lose any significant
customers or if a significant customer materially reduces its purchases of our
products, our revenues might decline.

New products we develop may contain undetected hardware and software errors,
which could require significant expenditures of time and money to correct, harm
our relationships with existing customers, and negatively impact our reputation
in the industry.

Like other products as complex as ours, our SAN switches may contain
undetected hardware or software errors when we first introduce new products or
release new versions of existing products. Despite our testing and quality
control efforts, we anticipate that errors may be found from time to time in
our new or enhanced products after commercial introduction. 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. If
we are unable to rapidly correct any errors, it could result in the following
consequences, among others:

. delay or loss of market acceptance of our products;

. significant warranty or other liability claims;

. diversion of engineering and other resources from product development
efforts;

. significant customer relations problems;

. loss of credibility in the market; and

. inability to sell our products until any errors are corrected.

7
<PAGE>

Moreover, the occurrence of hardware and software errors, whether caused by our
products or another vendor's SAN products, could delay or prevent the
development of the SAN market. Our growth depends on our SAN products and if
any of the above events occur, our business could be seriously harmed.

If our subcontractors do not meet our manufacturing needs, we may not be able
to produce and sell our products.

We subcontract a majority of our production activities, including the
manufacture, assembly and testing of our products. We currently depend upon LSI
Logic for the manufacture of our application specific integrated circuits, or
ASICs, and Pemstar for the manufacture and assembly of our switch products. We
depend on these and other subcontractors to deliver high-quality products in a
timely manner, but we cannot assure you that they will. We currently do not
have a long-term supply contract with any of our subcontractors. Our
subcontractors are not obligated to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order. We generally place orders with our subcontractors between one
and three months before scheduled delivery of products to our customers.
Accordingly, if we inaccurately forecast demand for our products, we may be
unable to obtain adequate manufacturing capacity from our subcontractors to
meet our customers' delivery requirements, or we may accumulate excess
inventories. Poor performance by one of our subcontractors would have a
material adverse effect on our business until we find an alternate
subcontractor. We cannot assure you that we would be able to find an alternate
subcontractor to deliver quality products at an acceptable price. If we
experience problems with one of our subcontractors, our business could be
materially adversely affected.

In addition, future growth may cause us to increase the orders to our
subcontractors. If this happens, we may not be able to accurately forecast our
needs or manage our relationship with our subcontractors during the transition.
Significant increases in the volume of product we order will also place
increased demands on our subcontractors, including the need to secure adequate
supplies of the components needed for our products and to successfully begin
large scale production of a new line of products. Frequently, manufacturers
encounter delays or difficulties in beginning volume production of new product
lines. If we or our subcontractors are not able to effectively manage the
anticipated increase in production volumes, our business could suffer.

Our dependence on a limited number of suppliers and the possible unavailability
of some key components may prevent us from being able to produce our products.

Some of the components we use in our products are available only from a
single supplier, or from a limited number of suppliers. For example, we
purchase ASICs and microprocessors from single sources, and power supplies and
other specific electronic components used in our products from limited sources.
Other components may occasionally be in short supply or temporarily be
available from only a single supplier. The following factors could each have a
material adverse effect on our ability to obtain components for our products:

. scarce quantities of components;

. a reduction or interruption in component supply;

. a disruption of existing supplier relationships;

. an inability to develop alternative sources; and

. a significant increase in the price of components.

If we are unable to buy components on a timely basis, we will not be able to
produce our products.

If our business grows, it will place increased demands on our management,
operational and production capabilities that we may not be able to adequately
address. If we are unable to meet these increased demands, our business will be
harmed.

Unless we manage our growth effectively, we may make mistakes in operating
our business, such as inaccurate sales forecasting and material planning.
Future growth of our operations may place significant

8
<PAGE>

demands on our management, operational and production resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. If we cannot manage growth
effectively, our business could suffer.

If we fail to comply with evolving regulatory approvals or government
regulations or the emerging fibre channel standard, we may be unable to sell
our products.

If we fail to comply with evolving regulatory approvals or government
regulations, we may be unable to sell our products. Similarly, if we fail to
comply with the emerging fibre channel standard, we may be unable to sell our
products. Our products must comply with various regulations and standards
defined by the Federal Communications Commission and Underwriters Laboratories
in the United States. Internationally, products that we develop will also be
required to comply with standards established by authorities in various
countries.

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 several
factors. The primary factors that may affect our quarterly results include the
following:

. the effect of the warrant granted to Sun Microsystems;

. timing, size and terms of customer orders;

. changes in customer buying patterns;

. uncertainties associated with the introduction of any new product or
product enhancement;

. the timing of the announcement and introduction of new products by us or
our competitors;

. the mix of our products sold and the mix of distribution channels through
which our products are sold;

. deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors;

. technological developments affecting the data communication network
market; and

. the overall strength of the economy.

As a result of the variability in our operating results, our stock price has
fluctuated and may continue to fluctuate in the future. It is likely that in
some future period our operating results will be below your expectations or
those of public market analysts. If our operating results are lower than
expected, our stock price could decline.

The market price of our stock may be volatile.

Like other technology companies, our stock price may be volatile and could
drop substantially below the price investors pay for shares in this offering.
In addition to changes in our stock price resulting from operating results, our
stock price may fluctuate due to the following factors:

. changes in financial estimates by securities analysts;

. changes in market valuations of other technology companies;

. gain or loss of significant original equipment manufacturer customers;

. short-selling of our common stock;

. announcements of business developments by us or our competitors;

. public perception regarding fibre channel's market status;

. developments or disputes concerning proprietary rights;

. technological innovations or newly introduced products;

9
<PAGE>

. general conditions in the data communications network industry and the
economy; and

. comments about us or our markets posted on the internet.

Loss of key personnel or the inability to hire additional qualified personnel
would negatively impact our business.

The loss of the services of any of our key management employees, our
inability to attract and retain qualified personnel 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 to our key management personnel, our success depends on
our ability to attract and retain highly skilled managerial, engineering, sales
and marketing and other personnel. Competition for these personnel is intense.
In recent years, there has been great demand for qualified skilled and
unskilled employees in the Minneapolis area, where our main operations are
located, and in other areas where we operate. There is a risk that we will be
unsuccessful in attracting and retaining the personnel we need for our
business.

Our business is dependent on our intellectual property, and our inability to
protect our intellectual property could negatively affect our ability to
compete.

Our success will depend on our ability to protect our intellectual property
rights. To establish and protect our intellectual property rights, we rely on a
combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure. We also enter into confidentiality or license
agreements with our consultants, customers and corporate partners. We cannot be
certain that the steps we take to protect our intellectual property will
adequately protect our proprietary rights, or that others will not
independently develop or otherwise acquire equivalent or superior technology.
In addition, the laws of some of the countries in which our products are or may
be sold may not protect our proprietary rights as fully as the laws of the
United States.

We may be a party to intellectual property litigation, which may result in
significant costs and be time consuming.

In the future, we may be a party to intellectual property litigation, either
to protect our intellectual property or as a result of an alleged infringement
of others' intellectual property. Any litigation or dispute, regardless of its
success, would likely result in substantial costs and be time consuming. An
adverse determination could:

. subject us to significant liabilities to third parties;

. invalidate our proprietary rights;

. require us to seek licenses from or pay royalties to third parties;

. require us to develop appropriate alternative technology; or

. require us to stop using the challenged intellectual property or stop
selling our products that incorporate it.

Any of these events could have a material adverse effect on our business,
financial condition and results of operations.

Because of competitive pricing pressures, the average price of our products may
decline, resulting in a decrease in our revenues and gross margins.

We anticipate that the average price of our products will decrease in the
future in response to competitive pricing pressures and changes in product mix
or other factors. If we are unable to offset these decreases by increasing our
sales volumes, our revenues will decline. In addition, to maintain our gross
margins, we must develop and introduce new products and product enhancements,
and we must continue to reduce the manufacturing cost of our products. If we
fail to do this, our business could suffer.

10
<PAGE>

We may not be successful in our international sales activities, which could
adversely affect our growth.

Our international sales will be limited if we are unable to establish and
maintain relationships with international distributors and original equipment
manufacturers. Even if we increase our international sales efforts, we cannot
be certain that we will increase demand for our products in these markets. Our
international operations are subject to a number of risks, including:

. longer sales cycles;

. difficulty in collecting accounts receivable;

. political and economic instability;

. reduced protection of intellectual property rights;

. protectionist laws and business practices that favor local competition;
and

. dependence on local vendors.

To date, none of our international revenues and costs has been denominated
in foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore less competitive in foreign markets. A portion of our international
revenues may be denominated in foreign currencies in the future, which would
subject us to risks associated with fluctuations in those foreign currencies.

If we, our key suppliers or our customers are not ready for the year 2000
calendar change, our business may be severely disrupted and our business may be
negatively affected.

The year 2000 computer issue creates risks for us. Year 2000 issues exist
when computer systems and applications fail to recognize date information
correctly when the year changes to 2000. If those computer programs are not
corrected, many computer systems could fail or create erroneous results. We
believe that the most significant year 2000 risk to us relates to year 2000
compliance of our suppliers and customers, particularly because we are
dependent on third party manufacturers. We are in the process of identifying
year 2000 issues of key third parties which could impact us. We cannot assure
you that the year 2000 issue will be properly addressed by customers, vendors
and other third parties. The efforts of third parties are not within our
control, and their failure to remedy year 2000 issues successfully could result
in business disruption, loss of revenue and increased operating cost. In
addition, concern over year 2000 issues may make potential customers reluctant
to invest in advanced new technology, like SANs, on which our business depends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."

Our shareholder rights plan, articles of incorporation and Minnesota law could
make it more difficult for a third party to acquire us and may prevent our
shareholders from recognizing a premium on our stock.

Our shareholder rights plan and provisions of our articles of incorporation
and of the Minnesota Business Corporation Act may make it more difficult for a
third party to acquire us, even if doing so would allow our shareholders to
receive a premium over the prevailing market price of our shares. Our
shareholder rights plan and those provisions of our articles of incorporation
and Minnesota law are intended to encourage potential acquirers to negotiate
with us and allow our board of directors the opportunity to consider
alternative proposals in the interest of maximizing shareholder value. In
addition, our stock option agreements provide for acceleration of vesting of
stock options granted to our officers and employees upon a change of control of
Ancor. To the extent that a potential acquiror is interested in us because of
our human capital, this acceleration of vesting will make us less attractive
because key employees may not be motivated to remain with the new entity
following a change of control. However, such provisions may also discourage
acquisition proposals or delay or prevent a change in control, which could harm
our stock price.

11
<PAGE>

We may not meet our future capital needs, limiting our ability to grow.

We may require additional capital to support our operations in the future.
Additional capital may be unavailable, or available only on unfavorable terms.
Any additional equity financings may be dilutive to purchasers in this
offering. Any debt financing may involve restrictive covenants that could limit
how we conduct our business or limit our ability to pay dividends. Failure to
secure additional financing if and when needed could adversely affect our
operations. If we are unable to raise additional capital, we would be required
to delay, scale back, or eliminate market expansion activities and research and
development on existing or new products, or cease operations entirely.

We have a legal proceeding pending which, if decided against us, could require
a substantial cash payment.

We have been sued in Hennepin County district court in the State of
Minnesota by an entity with which we were negotiating a lease. We intend to
defend this suit vigorously. However, the litigation process is inherently
uncertain and we may not prevail. Our defense of this litigation, regardless of
its outcome, has and will continue to consume management and financial
resources. If we do not prevail, we could be subject to material financial
liabilities. See "Business--Pending Legal Proceeding."

Our business may be harmed by class action litigation due to the volatility of
our stock price.

In the past, parties have brought securities class action litigation against
a company after periods of volatility in the market price of the company's
securities. We were a defendant in a consolidated class action captioned In re
Ancor Communications, Inc. Securities Litigation, Case No. 97-CV-1696 (D.
Minn.) which alleged that we violated the federal securities laws. We settled
the lawsuit in November 1998 and the district court dismissed it in February
1999. Under the terms of the settlement, a fund was created in the amount of
$1,650,000. We paid $250,000 of the total settlement and our insurer paid the
remaining $1,400,000. We may be the target of similar litigation in the future.
Additional securities litigation could result in substantial costs and divert
our management's attention and resources.

You will experience immediate and substantial dilution.

Investors in this offering will experience substantial dilution in net
tangible book value per share from the public offering price. See "Dilution."

Future sales of our common stock could adversely affect our stock price.

Future sales of substantial amounts of our common stock in the public
market, including the shares covered by this prospectus, or the perception that
these sales could occur, could adversely affect the market price of our common
stock. As of June 30, 1999, we had outstanding 24,889,107 shares of common
stock, plus 3,430,734 shares of common stock reserved for issuance upon
exercise of outstanding options, 135,834 of which are currently exercisable and
1,686,043 of which become exercisable as of October 21, 1999, and 2,120,392
shares of common stock reserved for issuance upon exercise of outstanding
warrants, 620,392 of which are currently exercisable. All of the outstanding
shares of our common stock are either freely saleable or saleable under
currently effective registration statements.

12
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available to the public over the internet at the SEC's website at
http://www.sec.gov. You may read and copy any materials that we have filed with
the SEC at its public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330.

This prospectus is part of a registration statement on Form S-3 that we
filed with the SEC and omits certain information contained in the registration
statement as permitted by the SEC. Additional information regarding Ancor and
the common stock we are offering is contained in the registration statement,
including any exhibits and schedules. You can obtain a copy of the registration
statement from the SEC at the street address or at the website listed in the
paragraph above.

The SEC allows us to incorporate by reference into this prospectus the
information we have filed with it. The information incorporated by reference is
an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be a part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, after the initial filing of the registration
statement that contains this prospectus and before the time that we sell the
securities offered by this prospectus:

. our annual report on Form 10-K for the fiscal year ended December 31,
1998;

. our quarterly report on Form 10-Q for the quarter ended March 31, 1999;

. our quarterly report on Form 10-Q for the quarter ended June 30, 1999;

. our current report on Form 8-K filed June 11, 1999;

. our current report on Form 8-K filed July 16, 1999;

. our current report on Form 8-K filed July 22, 1999;

. the description of our common stock contained in the registration
statement on Form 8-A, dated March 11, 1994, and any amendment or report
filed to update this description filed subsequent to the date of this
prospectus and before the termination of this offering; and

. the description of our shareholder rights plan contained in the
registration statement on Form 8-A, dated November 4, 1998, as amended on
Form 8-A/A-1, dated July 22, 1999, and any amendment or report filed to
update this description filed subsequent to the date of this prospectus
and before the termination of this offering.

We will provide a copy of these filings to you at no cost if you request
them in writing at the following address: Ancor Communications, Incorporated,
6130 Blue Circle Drive, Minnetonka, Minnesota, 55343, Attention: Steven E.
Snyder, Chief Financial Officer, or call (612) 932-4000.

13
<PAGE>

USE OF PROCEEDS

We estimate the net proceeds we will receive from the sale of the 2,500,000
shares of our common stock offered in this offering will be approximately $72.3
million, or approximately $83.2 million if the underwriters' over-allotment
option is exercised in full, based on an assumed public offering price of
$30.75 per share and after deducting the estimated underwriting discounts and
commissions and our estimated offering expenses.

We intend to use the net proceeds from this offering for working capital and
for general corporate purposes, including research and development, sales and
marketing efforts and funding of accounts receivable and inventory. We may also
use a portion of the proceeds for acquisitions of complimentary businesses,
products or technologies, although we currently have no plans to do so.

Pending these uses, we intend to invest the net proceeds from this offering
in short-term, investment-grade, interest-bearing securities.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Our common stock is listed on the Nasdaq SmallCap Market. Our common stock
has been approved for listing on the Nasdaq National Market beginning on or
about July 27, 1999. Our common stock is also traded on the Pacific Exchange,
Inc. The following table shows the high and low sale prices of our common stock
for each full quarterly period within the three most recent fiscal years, as
reported by the Nasdaq SmallCap Market.

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1997:
First Quarter.......................................... $16 $ 3
Second Quarter......................................... 9 3 13/16
Third Quarter.......................................... 12 1/2 7 3/16
Fourth Quarter......................................... 10 13/16 3 9/16
Year ended December 31, 1998:
First Quarter.......................................... $9 1/8 $4 7/16
Second Quarter......................................... 7 5/16 2 1/2
Third Quarter.......................................... 4 1
Fourth Quarter......................................... 4 7/16 1 1/16
Year ended December 31, 1999:
First Quarter.......................................... $9 1/8 $3 31/32
Second Quarter......................................... 32 3/4 4 3/4
Third Quarter (through July 23, 1999).................. 38 1/2 27 1/16
</TABLE>

On July 23, 1999, the last sale price of our common stock as reported by the
Nasdaq Small Cap Market was $30.75 per share. On June 30, 1999, the number of
shareholders of record was approximately 320 and the estimated number of
beneficial holders was approximately 11,000.

We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.

14
<PAGE>

CAPITALIZATION

The following table summarizes our capitalization as of June 30, 1999, on an
actual basis, and on an as adjusted basis to give effect to our receipt of the
estimated net proceeds from the sale of the shares of our common stock offered
by this prospectus at an assumed public offering price of $30.75 per share,
after deducting the underwriting discounts and commissions and the estimated
offering expenses we will pay. You should read this information in conjunction
with our financial statements and the related notes that appear elsewhere in
this prospectus.

The number of shares issued and outstanding shown in the table below
excludes:

. 2,120,392 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average purchase price of $7.42 per share.

<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------
Actual As Adjusted
------------ -----------
<S> <C> <C>
Long-term debt, less current portion............. $ 86,183 $ 86,183
Shareholders' equity:
Common stock, $.01 par value, 40,000,000 shares
authorized, 24,889,107 shares outstanding,
actual; 27,389,107 shares outstanding, as
adjusted........................................ 248,891 273,891
Additional paid-in capital....................... 50,133,162 122,405,037
Accumulated deficit.............................. (45,398,889) (45,398,889)
------------ -----------
Total shareholders' equity..................... 4,983,164 77,280,039
------------ -----------
Total capitalization........................... $ 5,069,347 $77,366,222
============ ===========
</TABLE>

15
<PAGE>

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the as adjusted net tangible book value per share of our
common stock after this offering. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the as adjusted net tangible book
value per share of common stock immediately after completion of this offering.

Our net tangible book value as of June 30, 1999, was $4,743,000 or $0.19 per
share of common stock. Net tangible book value per share as of a specified date
is determined by dividing our tangible book value (total tangible assets less
total liabilities) by the number of outstanding shares of common stock at that
date. After giving effect to our sale of the 2,500,000 shares of common stock
in this offering, based upon an assumed public offering price of $30.75 per
share and after deducting the estimated underwriting discounts and commissions
and offering expenses, our net tangible book value as of June 30, 1999, would
have been $77,040,000 or $2.81 per share of common stock. This represents an
immediate increase in net tangible book value to existing shareholders of $2.62
per share and an immediate dilution to new investors of $27.94 per share. The
following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share....................... $30.75
Net tangible book value per share as of June 30, 1999......... $0.19
Increase attributable to new investors........................ 2.62
-----
As adjusted net tangible book value per share after this
offering..................................................... 2.81
------
Dilution per share to new investors........................... $27.94
======
</TABLE>

The following table shows as of June 30, 1999, the difference between the
existing shareholders and the purchasers of shares in this offering, at an
assumed public offering price of $30.75 per share, for the number of shares
purchased from us, the total consideration paid and the average price paid per
share:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 24,889,107 90.9% $ 53,364,202 41.0% $ 2.14
New public investors...... 2,500,000 9.1 76,875,000 59.0 30.75
---------- ----- ------------ -----
Total................... 27,389,107 100.0% $130,239,202 100.0% 4.76
========== ===== ============ =====
</TABLE>

If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 2,875,000.

As of June 30, 1999, there were options outstanding to purchase a total of
3,430,734 shares of common stock, at a weighted average exercise price of $2.64
per share and approximately 4,787,039 additional shares reserved for future
grants and issuances under our stock option plans. Additionally, as of June 30,
1999, there were outstanding warrants to purchase a total of 2,120,392 shares
of common stock at a weighted average exercise price of $7.42 per share. To the
extent that any of these options or warrants are exercised, there will be
further dilution to new investors.

16
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data shown below as of and for the year ended
December 31, 1998, have been derived from our financial statements, included
elsewhere in this prospectus, which have been audited by KPMG LLP, independent
auditors. The selected financial data shown below as of December 31, 1997 and
for the years ended December 31, 1997 and 1996 have been derived from our
financial statements, included elsewhere in this prospectus, which have been
audited by McGladrey & Pullen, LLP, independent auditors. The selected
financial data shown below as of December 31, 1994, 1995 and 1996 and for the
years ended December 31, 1995 and 1994 have been derived from our financial
statements, not included elsewhere in this prospectus, which have been audited
by McGladrey & Pullen, LLP, independent auditors. The selected financial data
as of and for the six months ended June 30, 1998 and 1999 are unaudited but
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, contain all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the
financial information shown in these statements. The operating results for the
six months ended June 30, 1998 and 1999 are not necessarily indicative of the
results to be expected for the full year or for any future period. You should
read these selected financial data along with the historical financial
statements and related notes included in this prospectus, as well as under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results.

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 4,761 $ 4,673 $ 6,258 $ 7,924 $ 4,393 $ 1,179 $ 5,118
Cost of sales........... 2,743 2,533 3,566 5,991 6,431 5,206 2,213
------- ------- ------- -------- -------- -------- -------
Gross profit (loss).... 2,018 2,140 2,692 1,933 (2,038) (4,027) 2,905
Operating expenses:
Selling, general and
administrative........ 2,377 2,785 4,944 7,685 7,195 3,514 3,811
Research and
development........... 2,056 2,542 3,198 4,271 5,451 2,669 3,019
------- ------- ------- -------- -------- -------- -------
Total operating
expenses.............. 4,433 5,327 8,142 11,956 12,646 6,183 6,830
------- ------- ------- -------- -------- -------- -------
Operating loss.......... (2,415) (3,187) (5,450) (10,023) (14,684) (10,210) (3,925)
Interest expense........ (275) (153) (64) (19) (34) (20) (11)
Other income net........ 95 71 224 219 220 165 128
------- ------- ------- -------- -------- -------- -------
Net loss................ (2,595) (3,269) (5,290) (9,823) (14,498) (10,065) (3,808)
Accretion on convertible
preferred stock........ 0 0 (331) (345) (762) (425) (12)
------- ------- ------- -------- -------- -------- -------
Net loss attributable to
common shareholders.... $(2,595) $(3,269) $(5,621) $(10,168) $(15,260) $(10,490) $(3,820)
------- ------- ------- -------- -------- -------- -------
Basic and diluted net
loss per share......... $ (0.47) $ (0.44) $ (0.60) $ (0.93) $ (1.04) $ (0.88) $ (0.16)
======= ======= ======= ======== ======== ======== =======
Weighted average common
shares outstanding..... 5,516 7,449 9,351 10,963 14,741 11,917 24,100
======= ======= ======= ======== ======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
As of December 31, As of
------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.............. $ 93 $ 251 $ 507 $ 2,001 $ 3,477 $ 192
Working capital........... 2,101 1,561 6,384 4,432 5,598 7,882
Total assets.............. 4,443 5,773 12,262 10,164 12,738 15,724
Long-term debt, net of
current maturities....... 1,657 200 178 130 111 86
Total shareholders'
equity................... 1,299 2,759 9,907 8,316 5,208 4,983
</TABLE>

17
<PAGE>

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

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those described under "Risk Factors" and elsewhere in this
prospectus. You should read the following discussion in conjunction with our
financial statements and related notes included elsewhere in this prospectus.

Overview

From our inception in 1986 through 1997, we focused on developing and
marketing fibre channel switches and adapter cards for the local area network,
or LAN, market. During 1996 and 1997, we brought in a new management team that
refocused our business to take advantage of potential opportunities in the
storage area network, or SAN, market and de-emphasized our LAN products
business. Although we continue to support existing LAN customers, we are
focused on the emerging SAN switch market and have experienced decreasing
revenues from our LAN products. We have only recently begun to recognize
revenue from the sale of switches into the SAN market, and our future success
is dependent upon achieving significant sales to our existing or future SAN
customers. Until we do so, our revenues may decline.

Product revenue is generally recognized at the time products are shipped to
customers. Revenue is deferred if the customer agreement contains a right of
return other than as a warranty claim, if product returns cannot be estimated
or if we still have an obligation to perform significant services for the
customers. To the extent revenue is deferred, it is recognized on a case-by-
case basis as the circumstances which caused the deferral are resolved. We
generally expect to sell to original equipment manufacturers with no right of
return except under warranty. We provide a warranty of between one to three
years on our products, and we provide a reserve for warranty costs at the time
of shipment based on historical and projected experience rates. The workmanship
of our products is warranted by our contract manufacturer. Typically, the
standard components used in our products are warranted by the manufacturer for
both workmanship and function.

We currently intend to sell substantially all of our products to several
major original equipment manufacturers. The initial evaluation and product
qualification cycle with original equipment manufacturers typically takes from
several months to over a year, and includes technical evaluation, integration,
testing, product launch planning and execution. Our sales strategy also
includes recruiting system integrators with the technical resources to design,
implement and support SANs. We believe that as the fibre channel market
matures, system integrators will play a more significant role in the
distribution of our products. We conduct our sales efforts in North America,
Europe and Japan.

In June 1999, we entered into an original equipment manufacturing agreement
with Sun Microsystems. Under this agreement, we expect to sell our fibre
channel switches to Sun for incorporation into Sun's SAN products. Together
with Sun, we are in the final stages of testing our new switch for use with Sun
products and expect to begin recognizing limited amounts of revenue from Sun
beginning in the fourth quarter of 1999. However, we cannot be certain that Sun
will complete the integration of our switch with its final SAN products and,
like other original equipment manufacturer agreements, our agreement with Sun
does not guarantee that we will ultimately sell our products to Sun.

As part of our agreement with Sun, we granted Sun a warrant to purchase 1.5
million shares of our common stock at an exercise price of $7.30 per share. The
warrant shares are earned at a rate of one share for every $67.00 of product
sales to Sun through September 30, 2002. In each period in which the warrant
shares are earned, a non-cash sales discount will be recorded. The amount of
the non-cash sales discount will be the fair value of the warrant shares which
are earned in the period. Fair value of the warrant shares will be calculated
by using the Black-Scholes option pricing model. The primary component in the
Black-Scholes calculation is the value of our common stock at that time. The
value of the warrant shares, and the corresponding sales discount, increases as
our stock price increases. Conversely, the value of the warrant shares, and the
corresponding sales discount, decreases as our stock price decreases. Since the
price of our stock cannot be estimated, it is not possible to estimate the
amount of the non-cash sales discount that could be

18
<PAGE>

recorded, but it could be significant. Consequently, gross margins could be
impacted significantly by the vesting of the Sun warrant shares. For example,
if our share price is $30.75, the value of a warrant share would be $29.08
based on the Black-Scholes model. This means that for each $67.00 in gross
revenue to Sun, we would record a non-cash sales discount of $29.08. Depending
on our stock price, this sales discount could cause us to report a negative
gross margin on sales to Sun. Although these sales discounts will be recorded
beginning with initial sales to Sun, no warrant shares will vest until Sun
purchases an aggregate of $10 million of products from us.

Results of Operations

The following table indicates the percentage of total revenues represented
by items reflected in our statement of operations.

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............. 57.0 75.6 146.4 441.5 43.3
------- -------- -------- -------- -------
Gross profit (loss)..... 43.0 24.4 (46.4) (341.5) 56.7
Operating expenses:
Selling, general and
administrative......... 79.0 97.0 163.8 298.0 74.4
Research and
development............ 51.1 53.9 124.1 226.3 59.0
------- -------- -------- -------- -------
Total operating expenses.. 130.1 150.9 287.9 524.3 133.4
------- -------- -------- -------- -------
Operating loss............ (87.1) (126.5) (334.3) (865.8) (76.7)
Nonoperating income
(expense)
Interest expense........ (1.0) (0.2) (0.8) (1.8) (0.2)
Other, net.............. 3.6 2.7 5.0 14.0 2.5
------- -------- -------- -------- -------
Net loss.................. (84.5)% (124.0)% (330.0)% (853.6)% (74.4)%
======= ======== ======== ======== =======
</TABLE>

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999

Net Sales. Net sales for the six months ended June 30, 1999 increased by
approximately $3,939,000, or 334%, from 1998 to approximately $5,118,000. The
increase in net sales was attributable to: (a) shipment of our fibre channel
switches to Boeing for use in a LAN application; (b) an increase in the
shipments of our MKII fibre channel switches to original equipment
manufacturers as a result of our shift in marketing focus to opportunities in
the SAN market; and (c) license fee revenue of approximately $623,000 from
INRANGE Technologies. These increases in revenue were offset by decreases in
sales to our Japanese distributors. Future sales to our current Japanese
distributor, Netmarks, are uncertain.

Gross Profit. Gross profit in the first six months of 1999 increased to
approximately $2,905,000, or 57% of sales, from a loss of approximately
$4,027,000 in the first six months of 1998. The significant increase in gross
profit shows the effect of special charges of approximately $4,432,000 which
were recorded in the second

19
<PAGE>

quarter of 1998. Gross profit excluding the effects of the special charges was
approximately $405,000, or 34% of sales for the first six months of 1998. Gross
profit is affected by sales volume and its direct cost and also by indirect
costs, such as normal scrap and overhead allocations, the percentage impact of
which is decreased as sales increase. Gross profit percentage is also impacted
by the mix of product sold within a period. Adapter cards generally have lower
margins than switches and service revenue and various switch types have
different margins. Excluding the effects of special charges in 1998, the
increase in gross profit for the first six months of 1999 was due primarily to
increased sales volume. The gross profit percentage was impacted positively
because (a) indirect costs remained relatively constant; and (b) the mix of
product sold during the period carried greater margins than that sold in the
comparable period in 1998, particularly the revenue from INRANGE. The INRANGE
license fee revenue impacts margins positively as substantially all the costs
to develop the licensed technology were expended in prior years.

Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the first six months of 1999 were approximately
$3,811,000, or 74% of net sales, compared to approximately $3,514,000, or 298%
of net sales, in the first six months of 1998. The increase was attributable to
additions to staff, particularly sales and customer account management
positions, which increased personnel related expenses by approximately $350,000
in the first six months of 1999, compared to the same period in 1998.

Research and Development Expenses. Our research and development expenses for
the first six months of 1999 were approximately $3,019,000, or 59% of net
sales, compared to approximately $2,669,000, or 226% of net sales, in the first
six months of 1998. Increase in employee and contractor headcount caused
personnel costs to increase by approximately $250,000. Additionally, due to the
timing of non-recurring engineering charges between periods, there was an
increase of approximately $140,000 in expenses related to product development
and enhancement in the first six months of 1999 compared to the first six
months of 1998.

Other Income (Expense). Interest expense decreased to approximately $11,000
in the first six months of 1999 from approximately $20,000 in the first six
months of 1998. Interest income of approximately $128,000 in the first six
months of 1999 and $165,000 in the first six months of 1998 was earned from the
investment of available cash balances. The interest income in the first six
months of 1998 was earned from the investment of the net proceeds of the
preferred stock offering in February 1998.

Years Ended December 31, 1996, 1997 and 1998

Net Sales. Net sales for 1998 decreased by approximately $3,531,000, or 45%,
from 1997 to approximately $4,393,000. The decrease in net sales was
attributable to: (a) decreased sales to our Japanese distributors; (b) our
shift in emphasis to opportunities in the SAN market, which resulted in
diminished sales to customers in the high-performance LAN market; and (c) the
slower than anticipated development of the SAN market. Net sales to our
Japanese distributors decreased 84% from approximately $6,983,000, or 88% of
total sales, in 1997 to $1,141,000, or 26% of total sales, in 1998. General
economic conditions in Japan continue to make future sales to our Japanese
distributors uncertain. The decline in net sales to our Japanese distributors
was partially offset by net sales of approximately $967,000 to Boeing and
license fee revenue of approximately $312,000 from INRANGE generated during the
fourth quarter.

Net sales for 1997 increased by approximately $1,666,000, or 27%, from 1996
to $7,924,000. The increase in net sales was due primarily to a significant
increase in net sales to our Japanese distributors, offset by a decrease in
domestic sales. International net sales increased $4,063,000, or 124%, from
approximately $3,277,000 in 1996 to $7,340,000 in 1997, representing 93% of
total net sales for the year. Net sales to our Japanese distributors increased
from $2,585,000, or 79% of international sales, in 1996 to $6,983,000, or 95%
of international sales, in 1997, and represented 88% of total net sales for the
fiscal year. Domestic sales decreased by approximately $2,397,000, or 80%, from
1996 to $584,000, as several large sales transactions included in revenue for
1996 were not replaced in 1997.

The increase in net sales for 1997 included the effect of an allowance
against sales of $1,500,000 for product returns and customer stock rotation.
There was no addition to the allowance recorded in 1998. We do not generally
provide customers with a right of return at the date of sale. However, in
response to significant

20
<PAGE>

pressure from the marketplace, we have allowed product returns in the past from
customers as a marketing concession to stimulate a positive impression of our
company and products in the marketplace. In addition, in 1997 resellers
incorrectly anticipated the configuration needed by end user equipment
purchasers and requested that purchased but unused product be exchanged for the
product needed to meet the end user requirements. Further, some end users have
requested that they purchase their initial products from us, instead of the
reseller, which resulted in credits issued to the resellers in the first
quarter of 1997. Additionally, in the fourth quarter 1997, we recorded
additional reserves for sales returns and allowances which we expected from our
former distributors as a result of our shift in marketing focus to original
equipment manufacturers and resellers who are more experienced in and are
focused on specific vertical markets that we believe are most appropriate for
our products. As a result of these factors, our 1997 net assets included a
reserve to provide for potential future return of product sold in 1997 and
previous periods. The reserve balance at December 31, 1997, was approximately
$695,000, which represented $1,050,000 of gross sales less the estimated value
of the product to be returned. The reserve was fully utilized during 1998 with
a resulting balance of zero at December 31, 1998.

Gross Profit. Gross profit in 1998 decreased to a loss of approximately
$2,038,000, from a profit of approximately $1,933,000, or 24% of sales in 1997.
The decrease in gross profit for 1998 from the prior year was primarily
attributable to special charges of approximately $4,428,000 recorded in the
cost of sales during the second quarter. These charges included: (a) a
$4,015,000 provision for excess or obsolete inventory; (b) a $243,000 provision
for future commitments to purchase excess or obsolete inventory, and (c) a
$170,000 fee for canceling an order for excess or obsolete inventory. We made
these provisions because our shift in focus from LANs to SANs and lack of
demand in Japan caused us to believe our inventory of certain products exceeded
current and future market demand. Gross profit for 1998 excluding the effects
of the special charges was approximately $2,390,000, or 54% of sales. A similar
but lesser provision was recorded in 1997 as we began our transition to the SAN
market.

Excluding the effects of special charges, the gross margin percentage for
1998 was impacted positively because the mix of product sold during the period
carried greater margins than that sold in the comparable period in 1997.

Gross profit in 1997 decreased to approximately $1,933,000, or 24% of sales,
from approximately $2,692,000, or 43% of sales, in 1996. Although a higher mix
of switches versus adapters was sold in 1997 than 1996, the higher gross
margins on the switches were offset by provisions made for excess and obsolete
inventory. Included in the cost of sales for 1997 is a $1,000,000 provision for
excess and obsolete inventory which had the effect of decreasing gross profit
as a percentage of sales by 13%. We made this provision because changes in the
fibre channel market caused us to believe (a) our inventory of certain host bus
adapter cards exceeded market demand as customers transitioned to newer server
and workstation platforms; and (b) our inventory of component parts used for
earlier version switches was made obsolete by newer generation switches. For
these same excess and obsolescence reasons, when calculating the allowance for
potential returns, we reduced the estimated value of the product to be
returned.

Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for 1998 were approximately $7,195,000, or 164% of net
sales, compared to approximately $7,685,000, or 97% of net sales, in 1997. The
decrease in selling, general and administrative expenses was primarily due to a
change in the process of allocation of depreciation and a decrease in indirect
marketing efforts, offset by increases in the cost for personnel. Although we
did not change our methods of depreciation, we changed our process for
allocating total depreciation to reflect the usage of the related assets, such
that approximately $586,000 of depreciation expense was reclassified in 1998
from selling, general and administrative to research and development when
compared to 1997. Additionally, the shift in our marketing focus required
changes in marketing tactics, employing direct contact with potential original
equipment manufacturers through increased sales staff and less indirect contact
through seminar presentations and advertising. Thus, indirect marketing
expenses decreased approximately $528,000 in 1998 compared to 1997. However,
reorganization and a 14% growth in personnel, particularly in sales and
marketing senior management positions, resulted in personnel and

21
<PAGE>

related expenses increasing approximately $558,000 in 1998 as compared with
1997. Further, the shareholder litigation against us received final settlement
approval by the district court on February 5, 1999, for which we recorded a
charge in the 1998 selling, general and administrative expenses of $250,000.
See "--Litigation."

Our selling, general and administrative expenses for 1997 were approximately
$7,685,000, or 97% of net sales, compared to approximately $4,944,000, or 79%
of net sales, in 1996. The increase in selling, general and administrative
expense was due to an increase in the cost for personnel, increased marketing
and sales expenses to prepare for the original equipment manufacturer storage
market, and increased depreciation. Personnel and related expenses increased
approximately $2,017,000 in 1997 as compared with 1996. This increase was
caused in part by a 10% increase in the number of employees at December 31,
1997 over December 31, 1996. Also included in this increase was a third quarter
1997 charge of $250,000, recorded to reflect compensation owed to one of our
former executives whose services were discontinued. The amount of the accrual
was based on the compensation payable to the executive under the terms of the
executive's employment contract. Additionally, our aggressive commitment to
front end spending for marketing and sales tactics resulted in advertising and
marketing expense increasing approximately $946,000 over 1996.

Research and Development Expenses. Our research and development expenses for
1998 were approximately $5,451,000, or 124% of net sales, compared to
approximately $4,271,000, or 54% of net sales, in 1997. In addition to the
$586,000 depreciation allocation described above, our ongoing commitment to
product development and enhancements, including the cost of additional
engineering personnel, caused an increase in development expenses of
approximately $536,000 in 1998 as compared with 1997.

Our research and development expenses for 1997 were approximately
$4,271,000, or 54% of net sales, compared to approximately $3,198,000, or 51%
of net sales, in 1996. Primarily due to amortization of capitalized software
development costs, depreciation and amortization expense increased
approximately $460,000 compared to 1996. In addition, labor costs increased
approximately $600,000 due to an increase in product development and
enhancement projects.

Other Income (Expense). Interest expense increased to approximately $34,000
in 1998 from approximately $19,000 in 1997 as a result of our payments on an
increased level of capitalized lease obligations. However, the 1997 interest
expense of approximately $19,000 decreased from approximately $64,000 in 1996
as a result of our repayment of a $1.5 million note payable in June 1996.
Interest income of approximately $220,000 in 1998, $218,000 in 1997 and
$224,000 in 1996 was earned from the investment of the net proceeds of
preferred stock offerings occurring in the first quarter of each year.

Liquidity and Capital Resources

Our cash, cash equivalents and short-term investments were approximately
$8,115,000 as of June 30, 1999, compared to approximately $7,447,000 as of
December 31, 1998. For the six months ended June 30, 1999, cash flows used in
operating activities totaled approximately $2,240,000, due primarily to the
operating loss and an increase in end-of-period receivables, offset by the
third and final $3,000,000 installment received under the technology licensing
agreement with INRANGE. For the six months ended June 30, 1999, cash flows used
in investing activities totaled approximately $4,548,000 primarily as a result
of the purchase of short-term investments with available cash balances.

Our principal source of liquidity at December 31, 1998 was cash, cash
equivalents and short term investments of approximately $7,447,000. This
compares to approximately $2,001,000 at year end 1997, and to approximately
$1,511,000 at year end 1996. Net cash used in operating activities of
approximately $4,354,000 in 1998 decreased from approximately $6,057,000 in
1997 and from approximately $8,058,000 in 1996. The primary reason for the
decrease in 1998 was our receipt of approximately $6,000,000 as part of the
technology license agreement we signed with INRANGE, which has an initial term
of five years. This was offset by the operating loss and excess and obsolete
inventory purchase commitments incurred. In 1997, the decrease was due to
collections of accounts receivable, offset by the operating loss, net payments
to vendors and inventory

22
<PAGE>

purchases in anticipation of future sales. Additionally, we allow our potential
customers to install our products at their sites in order to perform
evaluations and testing which can occur over a period of several months. This
equipment remains our property, thus increasing inventory, unless the
evaluation is converted into a sale.

Cash flow used in investing activities totaled approximately $4,626,000 in
1998, compared to approximately $527,000 in 1997 and approximately $2,536,000
in 1996. Increases in investing activities for 1998 resulted primarily from
purchases of short-term investments using a portion of our private placement
proceeds. Capital expenditures in 1997 included upgrades to and additions of
desktop systems, development of software and continued construction of
internally-built testing and tooling equipment. Major capital expenditures in
1996 included upgrades and additions to facilities, development of a new
enterprise-wide information system, upgrades of desktop systems, development of
software and internally-built testing and tooling equipment for the next
generation of fibre channel switching products.

On September 24, 1998, we entered into a technology licensing agreement with
INRANGE Technologies, a unit of General Signal Corporation. Under the
agreement, INRANGE, a worldwide provider of data center networking connectivity
technologies, paid us $9,000,000 in three equal installments on September 25,
1998, December 15, 1998, and March 31, 1999. The $9,000,000 is comprised of (a)
approximately $6,200,000 for licensing fees; (b) approximately $800,000, as
valued using the Black-Scholes methodology, in warrants to purchase 750,000
shares of our common stock at prices ranging from $2.50 to $10.00; and (c)
$2,000,000 prepaid royalties. The $6,200,000 licensing fee will be recognized
as revenue evenly over 60 months, which is the term over which we have agreed
to support and keep current the technology which INRANGE has licensed. The
$800,000 in warrants has been recorded as an increase to additional paid in
capital. The $2,000,000 royalty will be recorded as revenue as INRANGE products
ship and royalties are earned. Any additional royalties after this first
$2,000,000 will result in both additional royalty revenue and cash payments to
us.

On February 19, 1998, we completed a private placement of 1,100 shares of
Series C preferred stock for $11,000,000 which resulted in net proceeds of
approximately $10,240,000. As consideration for its services, our placement
agent received a fee equal to 6% of the gross proceeds, plus a five-year
warrant to purchase 90,644 shares of our common stock at a price per share
equal to $7.281. As of June 30, 1999, all of the Series C preferred stock had
been converted into an aggregate of 8,025,827 shares of common stock.

We believe that the proceeds we receive from this offering, together with
interest earned, and anticipated revenues from operations will provide adequate
liquidity to fund our growth, operations, and capital expenditures at least
through the next 12 months. However, we may need to secure additional financing
in order to fund operating and working capital requirements after that. We
cannot assure you that we can obtain additional financing on terms acceptable
to us. Any additional equity financings may be dilutive to existing
shareholders, and any debt financing may contain restrictive covenants. Our
inability to obtain additional financing if and when needed could adversely
affect us and our operations.

Litigation

We were a defendant in a consolidated class action captioned In re Ancor
Communications, Inc. Securities Litigation, Case No. 97-CV-1696 (D. Minn.)
alleging violations of the federal securities laws. We settled the lawsuit in
November 1998 and the district court dismissed it on February 5, 1999. Under
the terms of the settlement, a fund was created in the amount of $1,650,000. We
paid $250,000 of the total settlement and our insurer paid the remaining
$1,400,000. Our $250,000 payment was recorded as an expense in the third
quarter of 1998.

We are also a defendant in a lawsuit brought by Hoyt Properties, Inc. venued
in Hennepin County District Court in the State of Minnesota. Hoyt claims that
we breached an agreement which provided that Hoyt would build and lease to us
an office building to be located in Eden Prairie, Minnesota, and asserts
damages in excess of $2,500,000. We assert there was no binding agreement. We
deny all liability, and allege that Hoyt refused to provide improvements
desirable and necessary to our occupancy of the proposed leased space, and
multiple

23
<PAGE>

contingencies, conditions, and agreements did not occur. We are vigorously
defending the case. There has been limited discovery completed to date.
However, any judgment, order or decree against us arising out of this action
could have a material adverse effect on us or our business. We are unable to
determine at this time if there will be a material adverse outcome. We have
made no provision for any loss that may occur as a result of an adverse outcome
of the suit.

Option Repricing

In order to retain our employees in a competitive employment market, and
given the price of our common stock at the time, on October 21, 1998, our Board
of Directors voted to reprice outstanding options to purchase 1,091,333 shares
of common stock held by active employees to an exercise price of $1.78, the
closing price of our common stock on that day. These options were originally
issued before May 1, 1998 to employees at a weighted average exercise price of
$7.16. The repriced options may not be exercised until October 21, 1999, at
which point the options are exercisable subject to the vesting schedule of the
original option agreements.

Quantitative and Qualitative Disclosure About Market Risks

We have no history of, and do not anticipate in the future, investing in
derivative financial instruments, derivative commodity instruments or other
similar financial instruments. We have entered into agreements with
international customers in U.S. dollars, precluding the need for foreign
currency hedges. Additionally, we invest in money market funds and in U.S.
government obligations, primarily U.S. Treasury bills, which experience minimal
volatility. Thus, our exposure to market risk is immaterial.

Year 2000 Compliance

Year 2000 issues exist when computer systems and applications fail to
recognize date information correctly when the year changes to 2000. If those
computer programs are not corrected, many computer systems could fail or create
erroneous results. To date, we have experienced no year 2000 issues with any of
our internal systems or our products, and we do not expect to experience any.

State of Readiness

We have completed an assessment of year 2000 compliance for our critical
operating and application systems, specifically our enterprise-wide information
systems, analysis tools, computer-aided design systems and supporting operating
system infrastructure. We consider a product to be year 2000 compliant if the
product's performance and functionality are unaffected by the processing of
dates before, during and after the year 2000. As a result of our assessment, we
have determined that through normal recurring system upgrades, the vast
majority of our systems are currently, or will be by the end of third quarter
1999, year 2000 compliant. During fiscal 1996 we purchased from a world-wide
supplier and developer of information systems an enterprise-wide information
system. The developer of this information system has provided its clients
written assurance that the system will correctly function across the year 2000,
as verified by previous system tests and year 2000 certification by the
International Technology Association of America. Additionally, our products,
including software, are not date sensitive as to functionality.

The potential impact of the year 2000 issue will depend not only on our
internal year 2000 compliance, but also on the way in which the year 2000 is
addressed by customers, vendors, service utilities, government and other
external entities. We are communicating with our key customers and vendors to
determine how they are addressing the year 2000 issue and to evaluate any
likely impact on our business. We have requested commitment dates from these
parties as to their year 2000 readiness and will continue to monitor vendor
compliance. The efforts of third parties are not within our control, however,
and their failure to remedy year 2000 issues successfully could result in
business disruption, loss of revenue and increased operating cost.

24
<PAGE>

Costs Associated with Year 2000 Compliance

Since year 2000 compliance with regard to our internal systems has been, or
will be, significantly achieved through normal system upgrades and not through
accelerated or dedicated efforts, the costs of becoming year 2000 compliant has
not had and is not expected to have a material effect on our financial
position, operations or cash flow.

Risks Associated with Year 2000 Issues

While it is impossible to evaluate every aspect of year 2000 compliance, we
believe that either of two events would be our most likely year 2000 worst case
scenario. The first would be from one or more of our sole or limited source
suppliers to fail to be year 2000 compliant or to have its business negatively
impacted by year 2000 issues of others. The second would be delays in receiving
orders or payments from customers due to year 2000 problems they experience.
Similarly, our revenues could be reduced if the market for advanced electronic
products declines due to general concerns with year 2000 compliance. At the
present time, it is not possible to determine whether any of these events is
likely to occur, or to quantify any potential negative impact they may have on
our future results of operations and financial condition.

Contingency Plans

We are preparing contingency plans specifying what we will do if failures
occur in our internal systems, or if important third parties are not Year 2000
compliant. We anticipate the process to be complete by early fourth quarter of
1999.

Additional Risks

Any failure by us to make our products year 2000 compliant could result in a
decrease in sales of our products, an increase in allocation of resources to
address year 2000 problems of our customers without additional revenue
corresponding to our dedication of resources, or an increase in litigation
costs relating to losses suffered by our customers due to year 2000 problems.
Failure of our internal systems could temporarily prevent us from processing
orders, issuing invoices, and developing products, and could require us to
devote significant resources to correcting these problems.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes standards for derivative instruments and hedging activities. We are
required to adopt SFAS 133 on January 1, 2001. We do not anticipate that SFAS
133 will have a material impact on our financial statements.

25
<PAGE>

BUSINESS

Overview

We provide a wide range of fibre channel switching solutions for storage
area networks, which are networks that connect a company's data storage systems
and computer servers. Our GigWorks family of fibre channel switches enables a
company to cost-effectively manage growth of its data storage requirements,
improve the data transfer performance between its servers and data storage
systems, increase user access to data, increase the size and scope of its SAN,
and improve the performance of its local area network, or LAN, by offloading
data storage applications to the SAN. We sell our fibre channel switching
solutions primarily to original equipment manufacturers, and our customers
include Sun Microsystems, MTI Technology, Hitachi Data Systems, INRANGE
Technologies, Prisa Networks and Forefront Graphics.

Our key technological advantages lie in our ability to design highly-
integrated application specific integrated circuits, or ASICs, which provide
cost, reliability and performance benefits compared to other fibre channel
switches, and in our fibre channel architecture, which significantly improves
the scalability and performance of large SANs. These advantages allow us to
provide fibre channel switches which offer what we believe is the best
combination of scalability, reliability, performance and cost of any fibre
channel switch on the market.

Industry Overview

Significant growth in critical data requirements

During the past decade, the volume of data created, processed and accessed
throughout organizations has increased dramatically. This growth has been
driven by a number of factors, including companies' increased dependence on
data-intensive software applications to manage and grow their businesses. These
applications include: complex enterprise resource planning, or ERP, systems;
sophisticated database gathering and retrieval techniques, known as data
warehousing and data mining; and imaging and graphics applications. More
recently, the volume of business-critical data has accelerated as organizations
have embraced the internet and electronic commerce initiatives as key
components of their strategy. As companies expand electronic transactions with
both suppliers and customers, the need for access to large volumes of data on a
real-time basis will continue to increase. Growth in data storage has also been
driven by the continued use of digital media, including voice, video and music,
which is being stored and transmitted in electronic form to more efficiently
reach a broad group of users. International Data Corporation, an independent
research firm, estimated in September 1998 that the worldwide volume of stored
data would increase at a compound annual growth rate of 86% between 1998 and
2002.

Server-to-storage traffic jam

As data has increased significantly in both volume and importance, the
ability of businesses to access this data in a fast, reliable and efficient
basis throughout the organization has become extremely important. In recent
years, there have been significant technological advancements in LANs for the
transfer of data between the server, which delivers the data, and the client,
which receives the data over the network. For example, the adoption of high-
speed technologies like gigabit ethernet has increased LAN transmission speeds
dramatically. Improvements have also been made in the ability to share access
to multiple servers, increase the number of connected devices on a network, and
increase the distance between the devices.

The server-to-storage connection has not kept pace with the enhancements
made in LAN technologies. During the 1980s, the small computer systems
interface, or SCSI, was adopted as the standard for the server-to-storage
interface. This standard, which has traditionally governed the input-output, or
I/O, communication between the server and its dedicated storage system, has
several limitations including the number of connections which can be supported,
the distance by which connected devices can be separated, and the performance
and capacity of the connection. As a result, employees, customers and suppliers
attempting to access data on a real-time basis often experience difficulty as a
data traffic jam develops between the server and

26
<PAGE>

the attached storage device. This problem is exacerbated by the greater volume
of transactions on corporate networks and the increased complexity associated
with the management of a larger number of storage devices.

Emergence of fibre channel technology

To address the limitations of traditional server-to-storage connections,
fibre channel standards were developed in the early 1990s to facilitate high-
performance storage connectivity solutions. Fibre channel enables transfers of
large blocks of data from one network device to another at speeds of up to one
gigabit per second. Fibre channel is capable of supporting a large number of
devices while providing transmission reliability, guaranteed delivery and
transmission distances significantly greater than SCSI provides. Fibre channel
can also transport multiple LAN and I/O protocols, including SCSI and Internet
Protocol, enabling the transport of both storage and network traffic over the
same physical connection. These features make fibre channel well suited for
transferring data between servers and storage systems.

Fibre channel provides significant advantages over SCSI. Most importantly,
it enables any server to access any storage device on a given storage area
network. In addition, fibre channel provides the ability to scale, or expand,
networks to millions of devices and the ability to connect devices that are
separated by up to 10 kilometers. Specific advantages are summarized in the
following table:

<TABLE>
<CAPTION>
Attribute Fibre Channel SCSI*

<S> <C> <C>
Maximum number of connections Up to 16 million 15
- -------------------------------------------------------------------------------------------
Maximum bandwidth 200 megabytes (2 gigabits)/second 80 megabytes/second
in full duplex mode
- -------------------------------------------------------------------------------------------
Data transmission Full duplex or half duplex Half duplex
- -------------------------------------------------------------------------------------------
Connection distance 10 kilometers 12 meters
- -------------------------------------------------------------------------------------------
Functionality Networking and storage Storage
- -------------------------------------------------------------------------------------------
Protocol support SCSI, Internet Protocol, others SCSI
</TABLE>
- --------------------------------------------------------------------------------
* As specified in the Ultra2SCSI specification, the highest performance SCSI
implementation for which both host computer and peripheral storage solutions
are commercially available.

Development of storage area networks

Fibre channel's capabilities have enabled the development of SANs, which are
high-speed networks of shared storage devices, including disk arrays and tape
drives, and computers, including servers and clients. SANs enable fast,
efficient and reliable transfer of data between multiple storage devices and
servers and facilitate the management of storage devices. In addition, by
offloading storage traffic from the LAN, SANs enhance LAN performance. A SAN
essentially transforms dedicated servers and storage devices into resources
that can be directly accessed by any user on a given network, greatly improving
the performance of an organization's data storage systems.

Many components comprise a SAN including a combination of switches, hubs,
routers, host adapters, wide area network bridges, disk drives, storage arrays
and network-attached storage. In January 1999, International Data Corporation
estimated that the market for SAN products would grow from approximately $2.5
billion in 1998 to over $13.3 billion in 2002, representing a compound annual
growth rate of over 50%.

27
<PAGE>

SAN Topologies

SANs can be constructed using arbitrated loop or switched fabric topologies.

The arbitrated loop topology consists of multiple devices that are
sequentially connected to form a continuous path, with the first and last
devices connected to form the loop. This topology permits as many as 126
devices to be interconnected within a single loop, whether they are servers,
workstations or storage subsystems. Rather than wire all of these devices in
sequence, a hub or switch is often used as a central wiring point to simplify
the loop architecture to a hub-and-spoke configuration. Key drawbacks of the
arbitrated loop standard are that only one communication path is available at
any point in time and that only 126 devices can be interconnected.

Arbitrated Loop

[Graphic depicting one hub surrounded by four devices, each device connected by
a solid line to the hub. Two of the devices are labeled as servers and the
other two are labeled as storage.]

The switched fabric topology consists of a network of fibre channel switches
which provide connectivity and data routing for up to 16 million devices. By
providing multiple, simultaneous gigabit paths between every connection in the
system, switched fabrics provide the highest degree of capacity, or bandwidth,
to large SANs. As their name implies, switched fabrics require the use of fibre
channel switches, and cannot be implemented with hubs alone. The network of
fibre channel switches creates a high-throughput system that strongly resembles
the traditional telephone network in that any two devices can be connected at
full bandwidth, and any number of conversations can take place simultaneously.
Switched fabrics are intrinsically reliable given that the multiple connections
between any two devices provide alternative data paths in case of failure of a
particular device in the network.

Switched Fabric

[Graphic depicting a cloud in the middle labeled with words switched fabric and
including a picture of an Ancor switch, surrounded by two arbitrated loops as
described in the previous graphic.]

28
<PAGE>

The need for switched SANs

Devices in a SAN can be interconnected via either hubs or switches. Hub
architectures typically require that each device on the hub share bandwidth,
causing bandwidth per device to decrease as more devices are added. In
addition, SANs based on hubs are limited to a total of 126 devices. In today's
environment, it is often desirable to build much larger SANs. Hub-based SANs
are also limited in their ability to allow the network configuration to be
modified without causing disruption to the environment, reducing the network's
flexibility. Further, hub-based SANs are unable to provide the management
capabilities that are necessary in many networking environments.

Before LANs became prevalent, LAN users faced issues of performance,
scalability, flexibility and manageability similar to those currently
confronting the SAN market. In the LAN environment, switches have become
critical in satisfying those needs and have replaced hubs as the cornerstone of
demanding networks. For the same reasons switches were critical to the wide-
spread adoption of high-performance LANs, we believe switches will be equally
critical to the evolution of the SAN market.

Fibre channel switches provide intelligent bandwidth allocation, meaning
that the full bandwidth of the network can be allocated to each device. In
addition, switched SANs can scale from a single-switch supporting a small
number of devices to a multiple-switch configuration supporting up to 16
million devices. In a switched SAN, devices may be added or removed from the
network or the configuration can be otherwise modified without disrupting the
overall environment, thereby increasing the flexibility of the network. A
switch-based SAN also provides advanced management capabilities similar to
those found in LANs. Specifically, if a device on a loop is disconnected or
malfunctioning, the switch can help the network isolate and accommodate the
problem device without disrupting the remaining devices. These attributes of
switched SANs provide the scalability, bandwidth, flexibility and manageability
that we believe are critical for the wide-scale adoption of SAN solutions.

In the past, the market has embraced hubs due to their low cost and because
most early SANs were small enough that the limitations of hubs did not
significantly degrade network performance. Today, as SANs are growing in size
and complexity, and as the cost of low-end switches is approaching that of
hubs, organizations are increasingly demanding switch-based solutions.
International Data Corporation estimates that the market for fibre channel
switches will grow from approximately $83 million in 1998 to approximately $1.7
billion in 2002, representing a compound annual growth rate of 113%.

29
<PAGE>

The Ancor Solution

We provide fibre channel switches that we believe offer the best combination
of scalability, reliability, performance and cost of any fibre channel switch
available. Our switches enable flexible SAN implementations ranging from low-
cost, single-switch configurations to large, multi-switch SANs.

The key components in our switching products are our ASICs. Our years of
experience designing switches has resulted in highly-integrated ASICs, meaning
that a significant amount of functionality is combined on a single chip. With
more functionality combined on a single chip, fewer parts are required,
resulting in reduced costs and increased reliability. Relative to other switch
products, our product performs more of the basic switch operations in hardware
and less in software, resulting in higher performance because hardware is
inherently faster than software. In addition, our technology and highly-
integrated ASICs allow our switches to be used in a cross-connect architecture.
This enables large SANs to exhibit significantly higher bandwidth and reduced
latency, or time required to make a connection, resulting in increased
scalability and performance relative to other fibre channel switches. The
tables below summarize our key advantages in comparison to other fibre channel
switch providers.

Ancor Differentiators Competitive Advantages

. Cross-connect architecture . Greater scalability
. High level of circuit integration . Enhanced performance
. Extensive experience in ASIC . Increased reliability
development and network technology . Greater cost-efficiency
. Improved manageability

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

The Ancor Strategy

Our goal is to be the leading supplier of fibre channel switching products
for SAN applications. Key elements of our strategy to achieve this goal include
the following:

Capitalize on core technology to offer low-cost, high-performance
solutions. Our leadership position in developing highly-integrated ASICs,
combined with our extensive experience with fibre channel architecture, has
enabled us to develop highly scalable, low cost, high performance and highly
reliable products. We were the first to offer a fibre channel switch, the first
to develop a gigabit-speed fibre channel switch, and the first to offer fibre
channel switches with features like multi-stage support, cross-connectivity,
arbitrated loop support and self-configuring ports. We intend to continue to
leverage our core technological expertise and leadership in ASIC design to
introduce industry-leading fibre channel switch products.

Leverage original equipment manufacturer relationships to expand customer
base. We target our fibre channel switch solutions primarily to original
equipment manufacturers. For example, in June 1999, we entered into an
agreement with Sun Microsystems to supply switches for incorporation into Sun's
storage products. Sun is the leading supplier of storage subsystems for UNIX-
based systems, as reported by International Data Corporation. We believe Sun's
selection of us to supply switches for incorporation into its products has
significantly enhanced the perception of us and our products in the
marketplace. We intend to establish additional relationships with leading
original equipment manufacturers, and to leverage our relationships to attract
additional customers.

Broaden product offering to meet customers' evolving SAN needs. We designed
our fibre channel architecture to enable us to expand our product line both to
provide low-cost switching solutions to smaller SAN users upgrading from hub to
switch performance and to continue to meet the evolving needs of sophisticated
users. As the SAN market evolves, we expect that customers will require switch
products ranging from single switch implementations supporting a small number
of devices to multi-stage implementations supporting thousands of devices. We
are in the final stages of product testing of a switch to support small, non-
fabric SAN implementations. This switch will also provide for fabric, non-
fabric and the inter-connection of

30
<PAGE>

fabric and non-fabric devices. We intend to add to our existing 8- and 16-port
switch product line by offering 64-, 128- and 256-port switches to support a
comprehensive product line. We intend to build upon our technological
leadership to continue to develop fibre channel switches offering features and
capabilities to meet the needs of the SAN market as it evolves.

Continue leadership in the expansion of the fibre channel standard to
promote interoperability. We have been a pioneer in the development of fibre
channel standards. As the fibre channel standard continues to evolve to provide
additional features and functionality, it is important to our customers and the
overall growth of the fibre channel market that interoperability between fibre
channel products of different vendors be established. We are a leading
participant in interoperability initiatives. In addition, we are building
relationships with leaders in the storage, networking and computing industries
in an effort to promote interoperability between fibre channel products and to
facilitate the development of SAN products across the industry. We believe that
by promoting a fibre channel standard and by partnering with vendors of fibre
channel products complementary to our switch products, we can facilitate the
development of products that meet the needs of the SAN market, promote the
expansion of the SAN market as a whole and facilitate the integration of our
products with the products of these industry partners.

Products

We develop and market the GigWorks line of fibre channel switches and switch
management products. Our products provide reliable performance within a variety
of SAN environments, including UNIX, NT and IBM MVS. Our switches can be
deployed in single or multi-stage fabrics of many sizes, making our switches
effective in a wide range of SAN solutions. In 1997, we introduced the 16-port
MKII switch for large, full-scale SAN implementations, which represented the
first of our fourth generation switch products. We introduced our newer 8-port
MKII switch in 1998 to provide a low-cost switch enabling a high-performing,
easy-to-manage SAN at an affordable price. The MKII-8 retains the gigabit-speed
throughput and most of the features of our 16-port MKII switch. Additionally,
since our MKII-8 is only 1.75 inches tall, it occupies only one rack space
which makes it especially attractive in multi-switch configurations, and as a
replacement for hubs.

As part of each switch, we include our GigVision fabric management software
tools that are modular in nature and allow original equipment manufacturers to
select the specific software tools that will be integrated into their product
offerings. This flexibility in configuration allows customers to use all or
only some of our software tools and to integrate our software tools with their
own. Designed for ease-of-use and flexibility, our GigVision management
software's open management system provides a single point of access to all
levels of switch information, from simple monitoring to detailed low-level
diagnostics. Our switch management software uses an open systems architecture.
This makes it relatively easy to modify the software to interface effectively
with a wide variety of protocols, operating systems and storage management
products.

Our ASICs provide building blocks at the chip level for implementing fibre
channel technology. These ASICs combine a number of fibre channel functions in
a single chip and thereby substantially reduce the number of components needed
in our fibre channel switches. We have licensed the use of one of our ASICs to
INRANGE Technologies, and may sell our ASICs as a separate product in the
future.

Our GigWorks switch family provides the following features and benefits:

Performance

. High Speed: Gigabit-per-second, full-duplex bandwidth at every port

. Connectivity at Every Port: Fabric, loop or switch-to-switch connections
supported

. Lowest Switch Latency: Less than 600 nanoseconds is lowest in the
industry

. Increased Throughput and Availability: Hardware-based cut-through
routing, ASIC-embedded buffers and a reliable cross bar architecture
provide enhanced performance in large scale fabrics

31
<PAGE>

Scalability

. Support of Multi-Stage Configurations: Up to 192 fabric ports or
thousands of loop ports achievable

. Large Distance Between Devices: 10 kilometer separation between devices
is ideal for backup and recovery applications

. Network Performance Independent of Size: Cascaded, meshed or multi-staged
architectures allow users to build small and large networks without
sacrificing performance

Reliability

. Experience with Fibre Channel Products: Current switch offerings
represent fourth generation products

. Reduced Part Count: Proprietary multi-port ASICs result in lower cost
switches with fewer parts

. Hot Swappable Functionality: Power supplies and optical interconnect
devices can be exchanged without power-down

. Orderly Delivery of Data: Frames are delivered to a given destination
through any number of links and in the same order as originated

Ease of Management and Use

. Easy Exchange of Devices: Auto-sensing, self-configuring ports allow
loop, fabric and additional switch devices to be exchanged freely

. Remote Diagnostic Capability: Web-based and/or Simple Network Management
Protocol, as well as ethernet ports, allow for remote product support

. Enhanced and Flexible Security: Hardware and software-based zoning
provides a high level of security and flexibility

. Modularity of Software: Modular, layered software provides many interface
options, and any of them can be used to access switch management data

. Compliant with Fibre Channel Standards: Each of our products is fully
compliant with the applicable fibre channel standards to promote the
interoperability of our products within a SAN environment

We are in the final stages of product development for a new version of our
switch that also supports small, non-fabric SAN implementations and that will
provide for fabric, non-fabric and the interconnection of fabric and non-fabric
devices. In addition, we intend to offer 64-, 128- and 256-port switches that
will allow customers to more efficiently build larger fabrics.

Technology

We are focused on developing fibre channel switch products which provide
superior features and functionality. Our years of technological leadership in
the fibre channel industry have allowed us to develop products that offer our
customers significant technological advantages. Our core technological
advantages lie in two areas: ASIC design and our scalable multi-switch
architecture.

ASICs

We continue to develop some of the most sophisticated ASICs in the
commercial electronics industry. Our 15 dedicated ASIC engineers have an
average of over 13 years of ASIC design experience, and we are currently
working on the development of our fifth generation ASIC. Our ASIC strategy is
to use the newest silicon fabrication technologies as soon as they are stable
and economical. This strategy has allowed us to integrate more functionality
onto each of our ASICs at an earlier time than any other fibre channel switch
supplier. In addition to greater functionality on the chip, our ASIC design
allows us to build switches with fewer parts and at a lower cost. We are not
dependent on the fibre channel intellectual property of our chip

32
<PAGE>

manufacturer to produce our ASICs. This gives us the advantage of being able to
change chip suppliers with less complications than would be experienced by
manufacturers of switches who are more dependent upon the intellectual property
of their chip suppliers. Our ability to develop ASICs has been, and will
continue to be, a key element in our product design capability. It is not
possible to design products with the features and performance of our fibre
channel switches without access to a very strong ASIC design engineering
capability.

Multi-Switch Scalability in a GigWorks Fabric

Our 16-port GigWorks switches can be linked to create large fibre channel
fabrics with as many as 192 fabric loops, each of which supports up to 126
devices for a total of 24,000 arbitrated loop devices. To meet the needs of
various installations, we offer a unique range of connecting options, allowing
customers to choose levels of resiliency, scalability, and performance
appropriate to their specific project and budget parameters. Customers can
select from virtually unlimited wiring alternatives in three distinct
categories: cascaded, meshed and multi-staged. In each of these categories,
network traffic is shared and balanced using switches that enable more
efficient overall performance. If a device on the fabric fails, rerouting
around that device prevents additional disruption in the fabric.

Cascading. Our least expensive connectivity option is similar to traditional
network structures which sequentially connect switches. Like any topology that
shares common resources among devices, cascading is most appropriate when
aggregate bandwidth requirements are low or when only a few devices need to be
interconnected, for instance in test beds and other smaller installations.

Although well suited to certain applications, cascaded architectures do not
scale as well as other multi-switch architectures. Adding switches can
significantly reduce performance, due to compound latency caused by multiple
switch-to-switch "hops," and to the limited bandwidth between switches.
Bandwidth and latency vary unpredictably depending on where messages enter and
exit the fabric, which means network planners using this approach must pay
close attention to changing traffic patterns when designing and redesigning
their system.

[Boxed graphic depicting servers on the left, sequentially connected switches
in the center, and storage devices on the right]

33
<PAGE>

Mesh. For projects requiring a more predictable environment, mesh
architectures offer a cost-effective entry to true high-performance multi-
switch topologies. Because each switch is directly connected to every other
switch in the fabric, this configuration maintains a low number of switch-to-
switch "hops" as the fabric scales, minimizing bandwidth loss and the effects
of compound latency. Eventually, however, the high number of required inter-
switch connections overwhelms the ability to add more I/O ports, limiting the
number of devices that can be supported and creating the need for a more
flexible, robust topology.

[Boxed graphic depicting servers on the left, mesh fabric switches in the
center, and storage devices on the right]

Multi-stage. For fabrics above 8-10 switches or for fabrics that require a
high degree of redundancy, our multi-stage architecture provides the ultimate
high-bandwidth solution. In this topology, some switches are dedicated to
perform "cross-connect" functions, creating a variety of performance,
resiliency and cost-per-gigabit benefits not found in any other configuration.

[Boxed graphic depicting servers on the left,a cross-connect fabric in the
centerwith cross-connectlines connecting cross-connect switches to input-
outputswitches, and storage devices on the right]

34
<PAGE>

Features and benefits of multi-stage fabrics include the following:

Performance and Expandability. Multi-stage fabrics maintain the highest
aggregate bandwidth by allowing network designers to control the ratio of I/O
ports to cross-connect ports, creating as many redundant paths as necessary to
achieve a given performance goal. Multi-stage networks can be expanded in three
ways:

1. By adding more cross-connect links. This raises the overall fabric
capacity and the percentage of time each port has uncontested network
access without requiring additional switches, but does lower the number
of available I/O ports.

2. By adding additional I/O switches. This increases the number of
available end ports and overall fabric capacity while incurring only
minimal additional blocking, depending on the number of cross-connect
links used.

3. By adding more cross-connect switches. This raises overall system
performance considerably while maintaining approximately the same number
of I/O ports.

Resiliency. Multi-stage makes it easy to configure systems with no single
point of failure, since each I/O switch is linked to multiple cross-connect
switches. Redundant data paths mean that even in the unlikely event of a total
switch outage, the network as a whole continues to function at normal or near-
normal capacity.

Cost-per-gigabit. Finally, although multi-stage environments can involve
extra hardware costs, their enhanced performance often makes up for this
initial expense when cost is measured on a per-gigabit basis. When the economic
impact of easy expandability and a truly resilient, fail-safe infrastructure is
factored in, we believe multi-stage topologies provide the best return on
investment for a wide range of large- and mid-sized installations.

Customers

Our target customers are primarily original equipment manufacturers. We
currently have relationships with the following original equipment
manufacturers which we announced on the dates indicated:

MTI Technology--July 1999 JNI--February 1999
Sun Microsystems--June 1999 INRANGE Technologies--January 1999
Hitachi Data Systems--April 1999 Forefront Graphics--January 1999
MicroNet--April 1999 Prisa Networks--December 1998
nStor--March 1999

We have achieved only limited revenue to date from these customers. Our goal
is to increase our revenue from our existing original equipment manufacturer
customers and to attract additional customers. We anticipate that a significant
percentage of our future revenue may be derived from a limited number of
original equipment manufacturer customers.

In addition to our original equipment manufacturer customers, we also have
relationships with system integrators, including Netmarks; CONSAN, a
Gates/Arrow company; and Intelligent Solutions.

Sales and marketing

Our sales and marketing strategy is focused on an indirect sales model
executed through original equipment manufacturers and system integrators. Our
original equipment manufacturer customers incorporate our switches into their
end user products which are installed and field-serviced by the original
equipment manufacturer's technical support organizations. The sales cycle used
in selling to an original equipment manufacturer customer can vary
significantly in terms of its length and complexity. Typically it includes the
use of our equipment in the potential customer's development labs, where
substantial testing takes place. It also often involves the submission of
proposal documentation and presentations to the potential customer. This sales
process generally involves the combined efforts of our sales and marketing,
engineering and management teams and can take from several weeks to in excess
of one year.

35
<PAGE>

We also intend to continue selling our products to a limited number of
technically capable system integrators who combine our products with products
of other vendors to provide complete solutions. System integrators typically
provide installation, service and technical support to their end-user
customers.

In addition to these sales channels, in September 1998 we entered into a
license agreement with INRANGE Technologies whereby INRANGE was granted a
license to use our 4-port ASIC in fibre channel switch product offerings
targeting the IBM MVS operating system market. Under the agreement, INRANGE is
required to pay to us a royalty on its sales of products incorporating our
technology. As part of the agreement, we agreed not to license our ASIC to a
competitor for use in the IBM MVS operating system market or to sell switches
in configurations that compete directly with INRANGE's products in that market.
Through this arrangement, we are able to participate in the IBM MVS market
without dedicating the resources necessary to address this complex market
segment on our own. We intend to focus our product offerings on the UNIX and NT
markets, which, according to International Data Corporation, are expected to
grow significantly faster than the IBM MVS market. The agreement does not
preclude INRANGE from selling products competitive with our products in the
UNIX and NT markets, although the obligation to pay a royalty to us for any
such sales would likely result in a competitive disadvantage to them.

Our sales efforts are concentrated in North America, Europe and Japan. As of
June 30, 1999, our sales organization consisted of 10 field sales and
application engineering personnel and 18 marketing and support professionals.
We have sales offices in Atlanta, Georgia; San Jose, California; Bedford, New
Hampshire; and South Salem, New York.

Customer service and support

As the SAN market is still in the early stages of development, we believe
that superior customer service and support are critical as our products are
introduced and integrated with products of other manufacturers. Our experience
in integrating our switch products in the LAN market has provided us with
extensive knowledge and expertise in both fibre channel and networking
environments.

Our customer service strategy is to provide technical support to our
original equipment manufacturers and system integrators, enabling them to
provide technical support to their end-users. We do this by providing training
classes, documentation and hands-on training to our original equipment
manufacturer customers together with 24 hours per day, seven days per week
support. We operate a lab at Ancor that allows us to replicate a field
environment for training and troubleshooting purposes. We can also remotely
monitor our products over the internet or conventional phone circuits.

Manufacturing

We subcontract the majority of our production activities, including the
manufacture, assembly and testing of our proprietary fibre channel switch and
ASIC designs, to organizations specializing in contract manufacturing. LSI
Logic manufactures our current generation ASICs, and Pemstar manufactures and
assembles our switch products. Use of subcontractors results in dependence on
the timely delivery of high quality products from these manufacturers and may
leave us with less flexibility and control over the manufacturing process than
if we conducted all of these operations internally. Using contract
manufacturing, however, reduces our total production costs because we are able
to time-share the expensive capital equipment and personnel required to
manufacture our products. This also provides greater peak capacity than would
otherwise be cost effective. Although we rely on third parties for many of our
manufacturing functions, we conduct our own development, design and quality
management efforts.

The majority of the components used in our products are generally available
from multiple sources. However, certain of the components used in our products
are available only from a single supplier or from a limited number of
suppliers. For example, our ASICs and the microprocessor we use in our products
are available from only a single supplier and the power supplies and other
specific electronic components used in

36
<PAGE>

our products are available from only a limited number of suppliers. The
unavailability of adequate quantities of components, a reduction or
interruption in component supply, a disruption of existing supplier
relationships, an inability to develop alternative sources or a significant
increase in the price of components could each have a material adverse effect
on our ability to produce and market our products in a timely manner.

Research and development

The SAN market is characterized by rapid technological change, including
changes in customer requirements, frequent new product introductions and
enhancements, and evolving industry standards. We believe that continued
research and development efforts are an important factor in our ability to
maintain technological competitiveness. We currently employ 48 individuals in
our research and development efforts, including 15 ASIC design engineers. We
plan to continue to invest in research and development efforts that are focused
on the development and enhancement of switches, ASICs and the associated
software offerings that address the needs of the SAN market. In addition, we
intend to dedicate resources to the continued development of the fibre channel
standards and to achieve interoperability with the fibre channel devices of
other companies.

Competition

Although the competitive environment in the fibre channel switching market
has yet to develop fully, we anticipate that the current and potential market
for our products will be highly competitive, continually evolving and subject
to rapid technological change. Our primary competitor in the fibre channel
switch market is Brocade Communications. Other companies are also providing
fibre channel switches and other products to the SAN market, including Gadzoox,
McData and Vixel. In addition, a number of companies, including Emulex,
Interphase, JNI and QLogic are developing, or have developed, fibre channel
products other than switches, like adapters or hubs, and we anticipate that
these and other manufacturers of network equipment may introduce fibre channel
switch products in the near future. It is also possible that customers could
develop and introduce products competitive with our product offerings. We
believe the competitive factors in this market segment include product
performance and features, product reliability, price, ability to meet delivery
schedules, customer service and technical support.

Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition, and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our 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 may allow them to respond more quickly to new or emerging
technologies and changes in customer requirements. In addition, some of our
current and potential competitors have already established supplier or joint
development relationships with divisions of our current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage customers from purchasing products from us or to persuade customers
to replace our products with our competitors' products. Such increased
competition may result in price reductions, lower gross margins and loss of
market share. There can be no assurance that we will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully against current or future
competitors. There can also be no assurance that competitive pressures will not
materially harm our business.

Intellectual property

Our success will depend in part on our ability to protect our proprietary
rights and to operate without infringing on the proprietary rights of third
parties. To establish and protect our intellectual property rights, we rely on
a combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure. We also enter into confidentiality or license
agreements with our consultants, customers and corporate partners. We cannot be
certain that the steps we take to protect our intellectual property will
adequately protect our proprietary rights, that others will not independently
develop or otherwise acquire equivalent or superior

37
<PAGE>

technology or that we can maintain such technology as trade secrets. In
addition, the laws of some of the countries in which our products are or may be
sold may not protect our proprietary rights as fully as the laws of the United
States.

We currently hold one U.S. patent covering certain aspects of one of our
fibre channel switches. This patent will expire February 6, 2007. We have also
filed two additional patent applications, and we may receive additional patents
in the future. In addition to patents, the source code for the software
contained in our products is protected by copyright law. We have registered our
logo with the United States Patent and Trademark Office and have filed for
registration of two additional marks for which we claim trademark rights, one
of which has been published. United States trademark rights are acquired by use
rather than by registration, and there can be no assurance that other companies
do not have conflicting or superior rights to our unregistered trademarks.

Although to date we have not been involved in any intellectual property
litigation, we may be in the future, either to protect our intellectual
property or as a result of an alleged infringement of others' intellectual
property. Any intellectual property litigation or disputes, regardless of their
success, would likely result in substantial costs and be time-consuming. An
adverse determination could subject us to significant liabilities to third
parties, or require us to either license the challenged intellectual property
or stop selling our products that incorporate it.

Pending legal proceeding

We are a defendant in a lawsuit brought by Hoyt Properties, Inc. in Hennepin
County District Court in the State of Minnesota. Hoyt claims that we breached
an agreement which provided that Hoyt would build and lease to us an office
building to be located in Eden Prairie, Minnesota, and asserts damages in
excess of $2,500,000. We assert there was no binding agreement. We deny all
liability, and allege that Hoyt refused to provide improvements desirable and
necessary to our occupancy of the proposed leased space, and multiple
contingencies, conditions, and agreements did not occur. We are vigorously
defending the case. There has been limited discovery completed to date.
However, any judgment, order or decree against us arising out of this action
could have a material adverse effect on us or our business. We are unable to
determine at this time if there will be a material adverse outcome. We have
made no provision for any loss that may occur as a result of an adverse outcome
of the suit.

Employees

As of June 30, 1999, we had 89 full-time employees and two part-time
employees, including 48 in engineering and product development, 28 in sales and
marketing, seven in manufacturing and eight in general administration and
finance. None of our employees is represented by a labor union or subject to
any collective bargaining agreement. We have never experienced work stoppages,
and we believe our employee relations are good.

Facilities

Our principal offices are located in Minnetonka, Minnesota, where we lease
27,560 square feet of space under a lease that expires in September 1999. The
annual rent is approximately $207,000. To meet our increasing space
requirements, we have entered into a lease covering approximately 32,000 square
feet of new office space located in Eden Prairie, Minnesota which will expire
in 2005. The annual rent for our new office space will be approximately
$400,000. We also lease office space for sales and marketing in San Jose,
California; Atlanta, Georgia; Bedford, New Hampshire; and South Salem, New
York. In the opinion of management, our current facilities are, and the new
facility is expected to be, adequately covered by insurance.

38
<PAGE>

MANAGEMENT

Executive Officers and Directors

The following table provides information as of June 30, 1999, concerning
our executive officers, directors and certain other officers:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers and Directors
Kenneth E. Hendrickson............. 58 Chairman and Chief Executive Officer
Calvin G. Nelson................... 46 President
Steven E. Snyder................... 43 Chief Financial Officer and Secretary
Amyl Ahola(1)...................... 54 Director
Thomas F. Hunt, Jr.(1)............. 50 Director
John F. Carlson(2)................. 60 Director
Gerald M. Bestler(1)............... 69 Director
Paul F. Lidsky(2).................. 45 Director
Michael L. Huntley(2).............. 59 Director
Other Officers
Carla J. Kennedy................... 45 Vice President, Marketing
Thomas Raeuchle, Ph.D.............. 43 Vice President, Engineering
Paul N. Pasqua..................... 48 Vice President, Worldwide Sales
Max Davis.......................... 55 Vice President, Manufacturing
</TABLE>
- --------
(1) Denotes a member of the compensation committee.
(2) Denotes a member of the audit committee.

Kenneth E. Hendrickson has served as Ancor's Chief Executive Officer and as
a director of Ancor since August 1997 and has served as the Chairman of the
Board of Directors since September 1997. Mr. Hendrickson was an independent
consultant from 1996 to 1997. From 1993 to 1996, Mr. Hendrickson was Executive
Vice President and General Manager of the Microcomputer Products Group of
Western Digital Corporation, a disk drive company. Mr. Hendrickson was Vice
President of Operations and Quality of Overland Data, a tape drive company,
from 1992 to 1993 and was President of Archive Technology, another tape drive
company, from 1990 to 1992. Mr. Hendrickson is a director of TechMar
Technologies.

Calvin G. Nelson was named President of Ancor in April 1997 and before that
served as Ancor's Vice President, Engineering and Operations since 1996 and
Vice President, Engineering since 1995. Before joining Ancor, Mr. Nelson was
employed by ADC Telecommunications, a telecommunications company, from 1979 to
1995, serving most recently as Vice President, Engineering.

Steven E. Snyder has served as the Chief Financial Officer and Secretary of
Ancor since October 1997. Before joining Ancor, Mr. Snyder was the Director of
Finance, from 1996 to 1997, the Controller, from 1995 to 1996, and the Senior
Director of Customer Finance from 1993 to 1995, of Cray Research, a
supercomputer manufacturer, which was acquired by Silicon Graphics in 1996.

Amyl Ahola has served as a director of Ancor since October 1997. Mr. Ahola
has been the President and Chief Operating Officer of TeraStor Corporation, a
computer storage device company, since 1997 and before that served as its
Executive Vice President, Marketing. From 1992 to 1996, Mr. Ahola was Vice
President of Seagate Technology, a disk drive company, initially responsible
for corporate development, then marketing, product line management and
corporate strategy.

Thomas F. Hunt, Jr. has served as a director of Ancor since May 1993. Mr.
Hunt has served as President of Medallion Capital, formerly Capital Dimensions,
a venture capital investment company, since 1987. Before

39
<PAGE>

co-founding Capital Dimensions, Mr. Hunt served as President of Control Data
Community Venture Fund and served as Assistant General Counsel for Control Data
Corporation, a computer manufacturer.

John F. Carlson has served as a director of Ancor since September 1997. Mr.
Carlson has been the Chairman and Chief Financial Officer of Excorp Medical, a
medical technology company, since 1996. Before joining Excorp, Mr. Carlson was
with Cray Research from 1976 to 1995, serving as Chairman and Chief Executive
Officer from 1993 to 1995, President and Chief Operating Officer from 1991 to
1993 and Chief Financial Officer from 1984 to 1991. Mr. Carlson is also on the
Board of Directors of TSI, Incorporated and Ultradata Corporation.

Gerald M. Bestler has served as a director of Ancor since May 1990. Mr.
Bestler is retired. He was formerly Executive Vice President of BMC Industries,
an optical and electronic components manufacturer. Mr. Bestler is also a
director of Innovex, a precision electromagnetic products and photo-processing
equipment manufacturer.

Paul F. Lidsky has served as a director of Ancor since October 1997. Mr.
Lidsky has been the President and Chief Executive Officer of OneLink
Communications, a telecommunications company, since 1997. Before joining
OneLink, Mr. Lidsky was Executive Vice President of Strategy and Business
Development of Norstan, a comprehensive technology services company, from 1992
to 1997. Mr. Lidsky is also a director of OneLink Communications.

Michael L. Huntley has served as a director of Ancor since December 1998.
Since March 1999, Mr. Huntley has been a consultant to Seagate. From 1997 to
1998, Mr. Huntley served as Seagate's Senior Vice President of Worldwide Sales
and was responsible for management of all Seagate disk drive sales worldwide.
From 1996 to 1997, Mr. Huntley served as Senior Vice President and General
Manager of Seagate Removable Storage Solutions. From 1993 to 1996, he served as
Vice President of Americas Sales with Seagate.

Carla J. Kennedy has served as the Vice President of Marketing of Ancor
since June 1997. Before joining Ancor, Ms. Kennedy was Senior Director,
Marketing at Cray Research from 1991 to 1997. Before joining Cray in 1991, Ms.
Kennedy was Vice President of Marketing for Seagate.

Thomas Raeuchle, Ph.D. was named Ancor's Vice President of Engineering in
April 1997, after serving as Ancor's Director of Software since 1996. Before
joining Ancor, Dr. Raeuchle was employed by Cray Research from 1990 to 1996,
most recently as Director of Application Products. From 1985 to 1990, he was a
research scientist at Honeywell, a control products company.

Paul N. Pasqua has served as the Vice President of Worldwide Sales of Ancor
since April 1998. Before joining Ancor, Mr. Pasqua was employed by Artesyn
Technologies, an independent power supply and computer manufacturer, formerly
known as Zytec, from 1985 to 1998, most recently as Vice President, Global
Accounts.

Max Davis has served as the Vice President of Manufacturing of Ancor since
October 1998. Before joining Ancor, Mr. Davis served as Vice President of
Manufacturing for Artesyn Technologies from 1995 to 1998. From 1991 to 1994, he
was Senior Partner at Thomas Group, a management consulting services company.

Board of Directors

Our board of directors consists of seven directors divided into three
classes with each class serving for a term of three years. At each annual
meeting of shareholders, directors are elected by the holders of common stock
to succeed those directors whose terms are expiring. The terms of Messrs.
Hendrickson and Carlson will expire in 2000; the terms of Messrs. Bestler,
Lidsky and Huntley will expire in 2001; and the terms of Messrs. Ahola and Hunt
will expire in 2002.

40
<PAGE>

Employment Agreements

We entered into a letter agreement with Kenneth E. Hendrickson dated July
25, 1997, under which we agreed to employ Mr. Hendrickson as our Chief
Executive Officer. Under the terms of the letter agreement, Mr. Hendrickson is
entitled to a severance payment equal to one year's salary and to full vesting
of any stock options in the event we terminate his employment with us without
cause.

We entered into a letter agreement with Steven E. Snyder dated September 23,
1997, under which we agreed to employ Mr. Snyder as our Chief Financial
Officer. Under the terms of the letter agreement, Mr. Snyder is entitled to a
severance payment equal to six month's salary in the event we terminate his
employment with us without cause and, in such an event, any stock options held
by Mr. Snyder would continue to vest according to their terms during the six
months following his termination.

41
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table provides information concerning beneficial ownership of
our common stock as of June 30, 1999, by:

. each shareholder that we know owns more than 5% of our outstanding common
stock;

. each of our named executive officers;

. each of our directors; and

. all of our directors and executive officers as a group.

The percentages under the "Percentage of Common Stock Owned" column are
based on 27,389,107 shares of common stock outstanding upon completion of this
offering, assuming no exercise of the underwriters' over-allotment option.

We determined beneficial ownership in accordance with rules of the
Securities and Exchange Commission. Beneficial ownership includes voting power
and/or investment power with respect to the securities held by the named
individuals. Shares of common stock subject to options currently exercisable or
exercisable within 60 days of July 1, 1999, are deemed outstanding for purposes
of computing the percentage beneficially owned by the person holding the
options but are not deemed outstanding for purposes of computing the percentage
beneficially owned by any other person. Except as otherwise noted, the persons
or entities named have sole voting and investment power with respect to all
shares shown as beneficially owned by them.

Unless otherwise indicated, the principal address of each of the
shareholders below is c/o Ancor Communications, Incorporated, 6130 Blue Circle
Drive, Minnetonka, Minnesota 55343.

<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned(1) Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Kenneth E. Hendrickson......................... 48,540 * *
Calvin G. Nelson............................... 44,908 * *
Steven E. Snyder............................... 12,045 * *
Amyl Ahola..................................... 0 0 0
Thomas F. Hunt, Jr............................. 0 0 0
John F. Carlson................................ 0 0 0
Gerald M. Bestler.............................. 1,000 * *
Paul F. Lidsky................................. 0 0 0
Michael L. Huntley............................. 0 0 0
All directors and executive officers as a group
(9 persons)................................... 106,493 * *
</TABLE>
- --------
* Less than 1%.

(1) The following table indicates the total number of beneficially owned shares
subject to options exercisable within 60 days of July 1, 1999 included in
the table above.

<TABLE>
<CAPTION>
Shares
Subject to
Options
----------
<S> <C>
Kenneth E. Hendrickson.......................................... 12,500
Calvin G. Nelson................................................ 12,500
Steven E. Snyder................................................ 7,500
</TABLE>

42
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 40,000,000 shares of common stock
and 5,000,000 shares of preferred stock, each having a par value of $.01 per
share. Of the 5,000,000 shares of preferred stock authorized, 400,000 shares
are designated as Series D junior participating preferred stock and are
reserved for issuance under our shareholder rights plan. As of June 30, 1999,
there were 24,889,107 shares of common stock outstanding, held by approximately
320 shareholders of record. No shares of preferred stock were outstanding as of
June 30, 1999.

Common Stock

Holders of our common stock do not have cumulative voting rights and are
entitled to one vote for each share held of record on all matters submitted to
a vote of the shareholders, including the election of directors. Holders of our
common stock are entitled to receive ratably any dividends, as may be declared
by the board of directors out of funds legally available, subject to the prior
rights of any preferred stock then outstanding.

Upon a liquidation, dissolution or winding up of Ancor, the holders of our
common stock will be entitled to share ratably in the net assets legally
available for distribution to shareholders after the payment of all debts and
other liabilities of Ancor, subject to the prior rights of any preferred stock
then outstanding. Holders of our common stock have no preemptive or conversion
rights or other subscription rights and there are no redemption or sinking
funds provisions applicable to the common stock. All outstanding shares of
common stock are, and the common stock outstanding upon completion of this
offering will be, fully paid and nonassessable.

Preferred Stock

Our board of directors has the authority, without further action by the
shareholders, to issue from time to time shares of preferred stock in one or
more series and to fix the number of shares, designations and preferences,
powers and relative, participating, optional or other special rights and the
qualifications or restrictions. The preferences, powers, rights and
restrictions of different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and purchase funds and
other matters.

The issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to holders of common stock or adversely
affect the rights and powers, including voting rights, of the holders of common
stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of Ancor. We currently do not plan
to issue any additional shares of preferred stock.

Shareholder Rights Plan

We have 400,000 shares of Series D junior participating preferred stock
authorized and reserved for issuance under our shareholder rights plan in
accordance with the Rights Agreement, dated as of November 3, 1998, as amended
on July 21, 1999, with Norwest Bank Minnesota, as rights agent. Under the plan,
our board of directors declared a dividend of one preferred share purchase
right for each outstanding share of common stock. Each right entitles the
registered holder to purchase from Ancor one one-hundredth of a share of the
Series D stock, par value $.01 per share. On July 21, 1999, we amended the
Rights Agreement to increase the purchase price per one one-hundredth of a
preferred share from $20.00 to $200.00, subject to adjustment.

The rights will become exercisable only upon the earlier to occur of:

. the first date of public announcement that a person or group of
affiliated or associated persons has become an "acquiring person," i.e.,
has become the beneficial owner of 15% or more of our outstanding common
stock, other than as a result of a permitted offer and subject to
exceptions; or

43
<PAGE>

. the close of business on the 10th day after the commencement or public
announcement of a tender offer or exchange offer, the consummation of
which would result in a person or group of affiliated or associated
persons becoming an acquiring person.

A "permitted offer" is a tender offer or an exchange offer for all our
outstanding common shares determined by our board of directors, after receiving
advice as it deems necessary and giving due consideration to all relevant
factors, to be in the best interests of Ancor and its shareholders. The rights
will expire on November 3, 2008, unless extended or earlier redeemed or
exchanged by Ancor.

Preferred shares purchasable upon exercise of the rights will not be
redeemable. Each preferred share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per common share. In the
event of liquidation, the holders of the preferred shares will be entitled to a
minimum preferential liquidation payment of $100.00 per share but will be
entitled to an aggregate payment of 100 times the payment made per common
share. Each preferred share will have 100 votes, voting together with the
common shares. In the event of any merger, consolidation or other transaction
in which common shares are exchanged, each preferred share will be entitled to
receive 100 times the amount received per common share. These rights are
subject to adjustment in the event of a stock dividend on the common shares or
a subdivision, combination or consolidation of the common shares.

If an event occurs which results in an acquiring person, as defined above,
each holder of a right will then have a right to receive, upon exercise at the
then current aggregate exercise price, in lieu of preferred shares, the number
of Ancor common shares having a current aggregate market price equal to twice
the current aggregate exercise price. If at any time after there is an
acquiring person, as defined above, Ancor is acquired in a merger or other
business combination transaction in which 50% or more of the assets or earning
power of Ancor and any subsidiaries, taken as a whole, are sold, holders of the
rights will then have the right to receive, upon exercise of the right at the
then current aggregate exercise price, the number of Ancor common shares of the
acquiring company having a current aggregate market price equal to twice the
current aggregate exercise price.

Until a right is exercised, the holder of the right will have no rights as a
shareholder of Ancor, including, without limitation, the right to vote or to
receive dividends. The rights have anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire Ancor,
unless the offer is conditional on a substantial number of rights being
acquired. The rights, however, should not affect any prospective offeror
willing to make an offer at an equitable price and which is determined by the
Board of Directors to be in the best interests of Ancor and its shareholders.
The rights should not interfere with any merger or other business combination
approved by the board of directors since the board of directors may, at its
option, redeem the rights at any time until there is an acquiring person, as
defined above.

Shares Registered for Future Sale

We have previously registered the resale of 608,392 shares of common stock
issuable upon exercise of warrants outstanding as of June 30, 1999 pursuant to
currently effective registration statements. Upon issuance, these shares may be
resold in the public market subject to compliance with prospectus delivery and
other securities laws requirements.

Provisions of our Restated Articles and Bylaws and State Law Provisions with
Potential Antitakeover Effects

The existence of authorized but unissued preferred stock, described above,
and provisions of Minnesota law, described below, could have an anti-takeover
effect. These provisions are intended to provide management with flexibility,
to enhance the likelihood of continuity and stability in the composition of our
board of directors and the policies of our board and to discourage an
unsolicited takeover of Ancor, if our board of directors

44
<PAGE>

determines that the takeover is not in the best interests of Ancor and our
shareholders. However, these provisions could have the effect of discouraging
attempts to acquire Ancor, which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.

Our board of directors is divided into three classes serving staggered
three-year terms. In addition, our bylaws contain provisions that establish
specific procedures for calling meetings of shareholders and nominating members
of the board of directors.

Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in connection with certain mergers and exchanges to which we are
a party, that results in the beneficial ownership of 20% or more of the voting
stock then outstanding. Section 302A.671 requires approval of any such
acquisitions by a majority vote of our shareholders before its consummation. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by us within 30 days
after the acquiring person has failed to give a timely information statement to
us or the date the shareholders voted not to grant voting rights to the
acquiring person's shares.

Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by us, or by any subsidiaries, with any
shareholder that purchases 10% or more of our voting shares within four years
from the date the shareholder first acquired 10% or more ownership in our
company. The business combination may be permitted if it is approved by a
committee of all of the disinterested members of our board of directors before
the date the shareholder first acquired 10% or more ownership interest in our
company.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, South Saint Paul,
Minnesota 55075, and its telephone number is (651) 450-4064.

45
<PAGE>

UNDERWRITING

We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC, Bear, Stearns
& Co. Inc., Morgan Keegan & Company, Inc. and John G. Kinnard and Company,
Incorporated are the representatives of the underwriters. We have entered into
a firm commitment underwriting agreement with the representatives. Subject to
the terms and conditions of the underwriting agreement, we have agreed to sell
to the underwriters, and the underwriters have each agreed to purchase the
number of shares of common stock listed next to its name in the following
table.

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Banc of America Securities LLC..................................
Bear, Stearns & Co. Inc.........................................
Morgan Keegan & Company, Inc....................................
John G. Kinnard and Company, Incorporated.......................
---------
Total......................................................... 2,500,000
=========
</TABLE>

The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $ per share. The underwriters also
may allow, and any dealers may reallow, a concession of not more than $ per
share to some other dealers. If all the shares are not sold at the public
offering price, the underwriters may change the offering price and the other
selling terms. The common stock is offered subject to a number of conditions,
including:

. receipt and acceptance of our common stock by the underwriters; and

. the right to reject orders in whole or in part.

The underwriters have an option to buy up to 375,000 additional shares of
common stock from Ancor. These additional shares would cover sales of shares by
the underwriters which exceed the number of shares specified in the table
above. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above. Ancor
will pay the expenses, other than the underwriting discounts and commissions,
associated with the exercise of the over-allotment option.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters and the estimated offering expenses
to be paid by Ancor. These amounts are shown assuming no exercise and full
exercise of the underwriters' option to purchase additional shares.

<TABLE>
<CAPTION>
Paid by Ancor
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share underwriting discounts and
commissions.................................... $ $
Total underwriting discounts and commissions....
Estimated expenses to be paid by Ancor..........
</TABLE>

Ancor and each of its executive officers and directors and a number of
employees have entered into lock-up agreements with the underwriters. Under
those agreements, Ancor and those holders of stock, options and warrants may
not dispose of or hedge any Ancor common stock or securities convertible into
or exchangeable for shares of Ancor common stock. These restrictions will be in
effect for a period of 120 days after the date of this prospectus. At any time
and without notice, Banc of America Securities LLC may, in its sole discretion,
release all or some of the securities from these lock-up agreements.

46
<PAGE>

Ancor will indemnify the underwriters against liabilities, including
liabilities under the Securities Act. If Ancor is unable to provide this
indemnification, it will contribute to payments the underwriters may be
required to make in respect of those liabilities.

In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:

. short sales;

. stabilizing transactions; and

. purchases to cover positions created by short sales.

Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.

The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.

The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:

. over-allotment;

. stabilization;

. syndicate covering transactions; and

. imposition of penalty bids.

As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter-market or otherwise.

In connection with this offering, some underwriters and any selling group
members who are qualified market makers on the Nasdaq National Market may
engage in passive market making transactions in the common stock on the Nasdaq
National Market in accordance with Rule 103 of Regulation M, during the
business day before the pricing of the offering, before the commencement of
offers or sales of the common stock. Passive market makers must comply with
applicable volume and price limitations and must be identified as a passive
market maker. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however, the
bid must then be lowered when purchase limits are exceeded.

47
<PAGE>

LEGAL MATTERS

Dorsey & Whitney LLP, Minneapolis, Minnesota, will pass upon the validity of
the issuance of shares of common stock offered by this prospectus for Ancor.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
Palo Alto, California, will pass upon certain legal matters in connection with
the offering for the underwriters. As to matters of Minnesota law, Howard Rice
will rely upon the opinion of Dorsey & Whitney LLP.

EXPERTS

The balance sheet and the related statements of operations, shareholders'
equity, and cash flows of Ancor as of December 31, 1998 and for the year then
ended included in this prospectus have been included in reliance on the report
of KPMG LLP, independent certified public accountants, given on their authority
as experts in auditing and accounting.

The balance sheet as of December 31, 1997 and the related statements of
operations, of shareholders' equity, and of cash flows of Ancor for each of the
two years for the period ended December 31, 1997 included in this prospectus
have been included in reliance on the report of McGladrey & Pullen, LLP,
independent accountants, given on their authority as experts in auditing and
accounting.

48
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports............................................ F-2

Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999........ F-5

Statements of Operations for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 and 1999.................... F-6

Statements of Shareholders' Equity for the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1999.................... F-7

Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 and 1999.................... F-8

Notes to Financial Statements............................................ F-9

Schedule II--Valuation and Qualifying Accounts........................... F-20
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS
ANCOR COMMUNICATIONS, INC.

We have audited the accompanying balance sheet of Ancor Communications, Inc. as
of December 31, 1998, and the related statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Ancor Communications, Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.

KPMG LLP

Minneapolis, Minnesota
February 5, 1999

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS
ANCOR COMMUNICATIONS, INC:

Under date of February 5, 1999, we reported on the balance sheet of Ancor
Communications, Inc. as of December 31, 1998, and the related statements of
operations, shareholders' equity, and cash flows for the year then ended, which
are included in the annual report on Form 10-K for 1998. In connection with our
audit of the aforementioned financial statements, we also audited the related
financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement
schedule based on our audit.

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

KPMG LLP

Minneapolis, Minnesota
February 5, 1999

F-3
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Ancor Communications, Incorporated
Minnetonka, Minnesota

We have audited the accompanying balance sheet of Ancor Communications,
Incorporated as of December 31, 1997 and the related statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Ancor Communications,
Incorporated as of December 31, 1997 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

McGladrey & Pullen, LLP

Minneapolis, Minnesota
February 19, 1998

F-4
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1997 1998 1999
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... $ 2,001,404 $ 3,477,236 $ 191,662
Short-term investments............ -- 3,970,137 7,922,994
Accounts receivable, less
allowances of $804,000, $39,492,
and $39,492, respectively........ 1,499,634 442,600 1,747,587
Inventories....................... 2,493,722 1,288,868 2,118,548
Prepaid expenses and other current
assets........................... 154,983 110,398 488,141
------------ ------------ ------------
Total current assets............ 6,149,743 9,289,239 12,468,932
Equipment, at cost.................. 5,875,424 5,865,404 6,372,371
Less accumulated depreciation..... 2,601,896 2,744,786 3,357,489
------------ ------------ ------------
3,273,528 3,120,618 3,014,882
------------ ------------ ------------
Patents, prepaid royalties, and
other assets, net of accumulated
amortization....................... 269,190 195,668 208,363
Capitalized software development
costs, less accumulated
amortization of $342,900, $470,581
and $571,494, respectively......... 471,043 132,568 31,655
------------ ------------ ------------
740,233 328,236 240,018
------------ ------------ ------------
TOTAL ASSETS........................ $ 10,163,504 $ 12,738,093 $ 15,723,832
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
debt............................. $ 65,145 $ 139,791 $ 94,000
Accounts payable.................. 963,321 448,383 913,995
Accrued compensation and
benefits......................... 477,464 577,206 636,864
Other accrued liabilities......... 210,526 378,470 142,884
Unearned revenue, current......... 1,000 2,146,936 2,798,856
------------ ------------ ------------
Total current liabilities....... 1,717,456 3,690,786 4,586,599
Long-term unearned revenue, less
current............................ -- 3,727,919 6,067,886
Long-term debt, less current
maturities......................... 129,702 110,997 86,183
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, par value $.01
per share, authorized 5,000,000
shares; issued and outstanding
Series A, 42 shares in 1997, 0
shares in 1998, and 0 shares in
1999 Series B, 440 shares in
1997, 0 shares in 1998 and
0 shares in 1999 Series C, none 1 -- --
issued in 1997, 229 shares in 4 -- --
1998 and 0 shares in 1999........ -- 2 --
Common stock, par value $.01 per
share, authorized 40,000,000
shares; issued and outstanding
11,778,006 shares in 1997,
23,265,819 shares in 1998 and
24,889,107 shares in 1999........ 117,780 232,658 248,891
Additional paid-in capital........ 35,290,763 46,566,386 50,133,162
Accumulated deficit............... (27,092,202) (41,590,655) (45,398,889)
------------ ------------ ------------
Total shareholders' equity...... 8,316,346 5,208,391 4,983,164
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................. $ 10,163,504 $ 12,738,093 $ 15,723,832
============ ============ ============
</TABLE>

See Notes to Financial Statements

F-5
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 6,257,840 $ 7,924,001 $ 4,393,197 $ 1,179,263 $ 5,118,369
Cost of goods sold...... 3,565,393 5,990,661 6,431,411 5,206,519 2,213,843
----------- ------------ ------------ ------------ -----------
Gross profit (loss)... 2,692,447 1,933,340 (2,038,214) (4,027,256) 2,904,526
Operating expenses:
Selling, general and
administrative....... 4,944,166 7,684,638 7,195,294 3,513,801 3,810,528
Research and
development.......... 3,198,155 4,271,393 5,450,942 2,669,076 3,019,237
----------- ------------ ------------ ------------ -----------
Total operating
expenses............. 8,142,321 11,956,031 12,646,236 6,182,877 6,829,765
----------- ------------ ------------ ------------ -----------
Operating loss........ (5,449,874) (10,022,691) (14,684,450) (10,210,133) (3,925,239)
Nonoperating income
(expense):
Interest expense...... (63,896) (18,717) (33,532) (20,182) (10,824)
Other, primarily
interest income...... 224,086 218,408 219,529 164,662 127,829
----------- ------------ ------------ ------------ -----------
Net loss.............. $(5,289,684) $ (9,823,000) $(14,498,453) $(10,065,653) $(3,808,234)
Accretion on
convertible preferred
stock................ (331,334) (344,939) (761,704) (424,712) (12,011)
----------- ------------ ------------ ------------ -----------
Net loss attributable
to common
shareholders......... $(5,621,018) $(10,167,939) $(15,260,157) $(10,490,365) $(3,820,245)
=========== ============ ============ ============ ===========
Basic and diluted net
loss per common share.. $ (0.60) $ (0.93) $ (1.04) $ (0.88) $ (0.16)
=========== ============ ============ ============ ===========
Weighted average common
shares outstanding..... 9,351,060 10,963,416 14,741,431 11,916,736 24,099,902
=========== ============ ============ ============ ===========
</TABLE>

See Notes to Financial Statements

F-6
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Preferred Stock
-------------------------------------------
Series A Series B Series C Common Stock Additional
-------------- ------------- -------------- ------------------- Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------ ------ ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995........ -- $-- -- $-- -- $-- 8,273,426 $ 82,734 $14,656,203 $(11,979,518) $ 2,759,419
Sales of Series
A Preferred
Stock (net of
issuance costs
of $756,466)... 1,030 10 -- -- -- -- -- -- 9,543,524 -- 9,543,534
Conversions of
Series A
Preferred
Stock.......... (856) (8) -- -- -- -- 1,352,494 13,525 (13,517) -- --
Exercise of
stock options
and warrants
(net of
issuance costs
of $33,915).... -- -- -- -- -- -- 773,519 7,735 2,832,061 -- 2,839,796
Employee stock
purchases...... -- -- -- -- -- -- 8,248 83 53,549 -- 53,632
Net loss........ -- -- -- -- -- -- -- -- -- (5,289,684) (5,289,684)
----- ---- ---- ---- ----- ---- ---------- -------- ----------- ------------ ------------
Balance, December
31, 1996........ 174 2 -- -- -- -- 10,407,687 104,077 27,071,820 (17,269,202) 9,906,697
Sales of Series
B Preferred
Stock (net of
issuance costs
of $603,253)... -- -- 855 8 -- -- -- -- 7,947,739 -- 7,947,747
Conversions of
Series A
Preferred
Stock.......... (132) (1) -- -- -- -- 407,444 4,074 (4,073) -- --
Conversions of
Series B
Preferred
Stock.......... -- -- (415) (4) -- -- 876,383 8,764 (8,760) -- --
Exercise of
stock options
and warrants... -- -- -- -- -- -- 74,775 748 222,925 -- 223,673
Employee stock
purchases...... -- -- -- -- -- -- 11,717 117 61,112 -- 61,229
Net loss........ -- -- -- -- -- -- -- -- -- (9,823,000) (9,823,000)
----- ---- ---- ---- ----- ---- ---------- -------- ----------- ------------ ------------
Balance, December
31, 1997........ 42 1 440 4 -- -- 11,778,006 117,780 35,290,763 (27,092,202) 8,316,346
Sales of Series
C Preferred
Stock (net of
issuance costs
of $791,814)... -- -- -- -- 1,100 11 -- -- 10,208,175 -- 10,208,186
Warrants issued
in connection
with license
agreement...... -- -- -- -- -- -- -- -- 768,064 -- 768,064
Conversions of
Series A
Preferred
Stock.......... (42) (1) -- -- -- -- 134,268 1,343 (1,342) -- --
Conversions of
Series B
Preferred
Stock.......... -- -- (440) (4) -- -- 3,999,976 40,000 (39,996) -- --
Conversions of
Series C
Preferred
Stock.......... -- -- -- -- (871) (9) 7,196,487 71,965 (71,956) -- --
Exercise of
stock options
and warrants... -- -- -- -- -- -- 58,020 580 215,301 -- 215,881
Employee stock
purchases...... -- -- -- -- -- -- 99,062 990 197,377 -- 198,367
Net loss........ -- -- -- -- -- -- -- -- -- (14,498,453) (14,498,453)
----- ---- ---- ---- ----- ---- ---------- -------- ----------- ------------ ------------
Balance, December
31, 1998........ -- -- -- -- 229 2 23,265,819 232,658 46,566,386 (41,590,655) 5,208,391
Issuance of
warrants in
connection with
Consulting
Agreement...... -- -- -- -- -- -- -- -- 31,258 -- 31,258
Conversions of
Series C
Preferred
Stock,
unaudited...... -- -- -- -- (229) (2) 827,245 8,272 (8,270) -- --
Exercise of
stock options
and warrants,
unaudited...... -- -- -- -- -- -- 764,471 7,645 3,404,126 -- 3,411,771
Employee stock
purchases,
unaudited...... -- -- -- -- -- -- 31,572 316 139,662 -- 139,978
Net loss,
unaudited...... -- -- -- -- -- -- -- -- -- (3,808,234) (3,808,234)
----- ---- ---- ---- ----- ---- ---------- -------- ----------- ------------ ------------
Balance, June 30,
1999,
unaudited....... -- $-- -- $-- -- $-- 24,889,107 $248,891 $50,133,162 $(45,398,889) $ 4,983,164
===== ==== ==== ==== ===== ==== ========== ======== =========== ============ ============
</TABLE>

See Notes to Financial Statements

F-7
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities: $(5,289,684) $(9,823,000) $(14,498,453) $(10,065,653) $(3,808,234)
Net loss
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Provisions for
receivables
allowances........... 164,000 1,028,000 -- -- --
Provision for obsolete
inventories.......... 50,000 1,045,000 4,262,000 4,262,587 --
Writedown of
equipment............ -- 248,953 100,538 -- --
Depreciation and
amortization......... 617,419 1,077,796 1,342,653 629,611 798,951
Changes in current
assets and
liabilities:
Accounts
receivable......... (2,360,117) 1,491,366 1,057,034 621,115 (1,304,987)
Inventories......... (1,926,201) (842,761) (2,814,146) (2,643,510) (829,680)
Prepaid expenses and
other.............. (155,886) 181,751 44,585 (1,329) (377,743)
Accounts payable.... 913,569 (788,937) (514,938) 443,395 465,612
Accrued
liabilities........ (71,200) 323,926 24,686 (69,004) (175,928)
Unearned revenue.... -- 1,000 6,641,919 169,336 2,991,887
----------- ----------- ------------ ------------ -----------
Net cash used in
operating activities... (8,058,100) (6,056,906) (4,354,122) (6,653,452) (2,240,122)
----------- ----------- ------------ ------------ -----------
Investing Activities:
Purchases of equipment.. (2,202,259) (1,334,183) (606,533) (167,820) (501,255)
Purchase of short-term
investments............ (1,003,530) (9,469,670) (17,394,136) (9,942,915) (16,066,786)
Sale of short-term
investments............ 1,300,178 10,473,200 13,423,999 5,979,379 12,113,929
Capitalized software
development costs...... (577,488) (125,035) -- -- --
Other, net.............. (52,569) (70,934) (49,078) (11,070) (94,377)
----------- ----------- ------------ ------------ -----------
Net cash used in
investing activities... (2,535,668) (526,622) (4,625,748) (4,142,256) (4,548,489)
----------- ----------- ------------ ------------ -----------
Financing Activities:
Net proceeds from sale
of preferred stock..... 9,543,534 7,947,747 10,208,186 10,254,747 --
Net proceeds from
exercise of warrants,
exercise of options,
and employee stock
purchases.............. 2,893,428 284,902 414,248 146,037 3,583,007
Principal payments on
long-term debt......... (1,587,628) (154,758) (166,732) (81,593) (79,970)
----------- ----------- ------------ ------------ -----------
Net cash provided by
financing activities... 10,849,334 8,077,891 10,455,702 10,319,191 3,503,037
----------- ----------- ------------ ------------ -----------
Net increase (decrease)
in cash................ 255,566 1,494,363 1,475,832 (476,517) (3,285,574)
Cash, beginning of
period................. 251,475 507,041 2,001,404 2,001,404 3,477,236
----------- ----------- ------------ ------------ -----------
Cash, end of period..... $ 507,041 $ 2,001,404 $ 3,477,236 $ 1,524,887 $ 191,662
=========== =========== ============ ============ ===========
Supplemental Cash Flow
Disclosures
Cash payments for
interest............... $ 63,896 $ 18,717 $ 33,532 $ 20,182 $ 10,824
=========== =========== ============ ============ ===========
Supplemental Schedule of
Noncash Investing and
Financing Activities:
Equipment acquired
under capital lease.. $ 87,280 $ 110,300 $ 222,673 $ 222,673 $ 9,365
=========== =========== ============ ============ ===========
Warrants issued under
license agreement.... $ -- $ -- $ 768,064 $ -- $ --
=========== =========== ============ ============ ===========
</TABLE>

See Notes to Financial Statements

F-8
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

1. Nature of Business and Significant Accounting Policies

Nature of business

Ancor Communications, Incorporated (the Company) operates in one business
segment, the development and marketing of various products for the
communications market. The Company's products are components in fiber-optic
communications networks. The Company also previously designed, produced, and
marketed system components used in United States military communications
systems. Sales are made to customers throughout the United States, in Japan,
and in certain other foreign countries. Credit, including foreign credit, is
determined on an individual customer basis.

Basis of presentation of interim financial statements

The accompanying unaudited financial statements as of June 30, 1999 and for
the six months ended June 30, 1998 and 1999 have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of management, the interim financial statements
include all adjustments necessary for a fair presentation of the results of
operations for the interim periods presented. Operating results for the interim
periods are not necessarily indicative of the operating results for an entire
year.

Accounting estimates

The preparation of the 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 and
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 those estimates.

Revenue recognition

Revenue on firm customer orders is generally recognized at the time product
is shipped or services are provided. Product shipped for customer evaluation is
recorded as consigned inventory. In certain circumstances during 1996, revenue
was recognized upon completion of production under specific contractual
arrangements for billing and delivery. The Company provides an allowance for
product returns based on management's periodic assessment of the need for such
an allowance. License revenue is recognized when all of the following criteria
have been met: there is an executed license agreement, the product has been
shipped to the customer, no significant vendor obligations remain, the license
fee is fixed and payable within twelve months and collection is deemed
probable.

Cash and cash equivalents

For purposes of reporting cash flows, the Company considers all unrestricted
cash and any U.S. Treasury bills, commercial paper, and money market funds with
an original maturity of three months or less to be cash equivalents. The
Company maintains its cash in bank deposit and money market accounts, which, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts.

Short-term investments

Short-term investments consisted primarily of investments in money market
funds and in U.S. government obligations (primarily U.S. Treasury bills).
Short-term investments are recorded at cost which approximates market.

F-9
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company has recorded a reserve for potential obsolete inventory
based primarily on management's estimate of future sales levels of products and
related components in inventory (see Note 9).

Depreciation and amortization

Equipment purchases are stated at cost. Depreciation is computed by the
straight-line method over estimated useful lives of three to five years.
Intangible assets consist principally of patents, prepaid royalties, and cost
in excess of net assets acquired. Amortization is computed by the straight-line
method over estimated useful lives ranging from 5 to 15 years.

The Company reviews its long-lived assets periodically to determine
potential impairment by comparing the carrying value of the long-lived assets
with the estimated future net undiscounted cash flows expected to result from
the use of the assets, including cash flows from disposition. Should the sum of
the expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at that date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets. In
connection with such a review, during 1997 and 1998 management wrote down
certain assets resulting in a loss of $248,953 and $100,538 respectively.

Fair value of financial instruments

The financial statements include the following financial instruments: cash
and cash equivalents, short-term investments, and long-term debt. No separate
comparison of fair values versus carrying values is presented for the
aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts.

Income taxes

Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets and liabilities will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax expense or
benefit would be the tax payable or refundable for the year plus or minus the
change in deferred tax assets and liabilities during the year.

Capitalized software development costs

The Company capitalizes software development costs incurred after the
establishment of technological feasibility. These costs are amortized to cost
of goods sold at the greater of (i) the amount computed using the ratio of
current gross revenues for the product to the total of current and anticipated
future gross revenues, or (ii) the straight-line method over the remaining
estimated economic life of the product. An original estimated economic life
ranging from one to five years is assigned to capitalized software development
costs. It is reasonably possible that those estimates of anticipated future
gross revenues, the remaining estimated economic

F-10
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

life of the product, or both, could be reduced as a result of the rapid
technological changes occurring in the markets in which the Company sells its
products.

Research and development

Research and development costs applicable to both present and future
products are charged to operations as incurred.

Net loss per share

The FASB has issued Statement No. 128, Earnings Per Share, which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a
public market. Those entities that have only common stock outstanding are
required to present basic earnings per-share amounts. Basic per-share amounts
are computed, generally, by dividing net income or loss, as adjusted for by the
weighted-average number of common shares outstanding. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share.

The Company initially applied Statement No. 128 for the year ended December
31, 1997, and, as required by the statement, has restated all per-share
information for the prior years to conform to the statement. In calculating the
basic loss per share, the premium earned by the preferred shareholders
($331,334 in 1996, $344,939 in 1997 and $761,704 in 1998) was added to the net
loss in all years presented. Potential common shares, consisting of options,
warrants and convertible preferred stock for all periods, were not included in
the computation as their effect was anti-dilutive. Basic and diluted loss per-
share amounts are the same in each period presented.

New Accounting Pronouncements

Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" was adopted by the Company
in 1998. This statement establishes standards for the reporting of information
concerning operating segments in the financial statements.

2. Inventories

Inventories consisted of:

<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Raw materials....................... $ 2,398,066 $ 4,031,546 $ 4,349,080
Finished goods consigned to
customers and others............... 527,078 779,054 821,568
Finished goods...................... 663,500 1,289,577 2,116,837
Reserve for obsolescence............ (1,094,922) (4,811,309) (5,168,937)
----------- ----------- -----------
$ 2,493,722 $ 1,288,868 $ 2,118,548
=========== =========== ===========
</TABLE>

During the quarter ended June 30, 1998 the Company recorded the following
special charges relating to excess and obsolete inventory: (i) $4,015,000
provision-for excess or obsolete inventory, (ii) $243,000

F-11
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

provision for future commitments to purchase excess or obsolete inventory, and
(iii) $170,000 fee for canceling an order for excess or obsolete inventory. The
Company made these charges due to its shift in focus from local area networks
to storage area networks, along with a lack of demand in Japan for this old
technology, causing the Company to believe its inventory of certain products
was in excess of market demands.

3. Notes Payable and Long-term Debt

Long-term debt consists of the following at December 31, 1997 and 1998:

<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Note payable to shareholder(1)............................ $ 85,642 $ 81,946
Capital lease obligations(2).............................. 109,205 168,842
-------- --------
194,847 250,788
Less current maturities................................... 65,145 139,791
-------- --------
$129,702 $110,997
======== ========
</TABLE>
- --------
(1) Payments are made to the note holder in an amount equal to 0.94 percent of
Company sales in excess of $4,000,000 in any calendar year.
(2) The Company has capitalized certain equipment held under capital leases
with a capitalized cost of $296,796 and $396,855 and accumulated
depreciation of $99,745 and $133,752 at December 31, 1997 and 1998,
respectively. The related obligations are recorded in the accompanying
financial statements based on the present value of the future minimum lease
payments based on an implicit interest rate of 13%.

Approximate aggregate annual maturities of long-term debt, including capital
lease obligations, at December 31, 1998, are as follows:

<TABLE>
<S> <C>
Years ending December 31:
1999........................................................... $131,000
2000........................................................... 32,000
2001........................................................... 6,000
Note with no specific maturity................................. 82,000
--------
$251,000
========
</TABLE>

4. Major Customers and Concentration of Credit Risk

Major customers

A summary of major customers follows:

<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1996 1997 1998
------------------- ------------------- -------------------
Percent Percent Percent
Customer Sales to Total Sales to Total Sales to Total
-------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Boeing.......... $ 78,000 1% $ 679,000 9% $2,193,000 50%
Netmarks, Inc... -- -- -- -- 967,000 22
Hucom, Inc...... 2,585,000 41 6,983,000 88 174,000 4
Falcon Systems.. 757,000 12 -- -- -- --
</TABLE>

F-12
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

Accounts receivable from major customers totaled approximately $537,000 at
December 31, 1998.

Export net sales totaled approximately $3,277,000, $7,340,000, and
$1,159,000 in 1996, 1997, and 1998, respectively. The Company's Japanese
distributors comprised 79, 95, and 98% of export net sales in 1996, 1997, and
1998, respectively.

5. Income Taxes

Deferred tax assets consist of the following components as of December 31,
1997 and 1998:

<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Loss carryforwards............................. $ 8,594,000 $ 14,711,000
Tax credit carryforwards....................... 694,000 1,042,000
Accrued expenses............................... 51,000 188,000
Allowances for obsolete inventory, product
returns and doubtful accounts................. 833,000 2,317,000
Property, plant and equipment.................. -- (440,000)
Other items.................................... 157,000 --
------------ ------------
10,329,000 17,818,000
Less valuation allowance....................... $(10,329,000) $(17,818,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>

The income tax benefit differed from the statutory federal rate as follows:

<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate applied to loss
before taxes...................... $(1,851,000) $(3,438,000) $(4,929,000)
Current period tax benefits not
utilized.......................... 1,851,000 3,438,000 4,929,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>

At December 31, 1998, the Company has net operating loss, research and
development credit, and investment tax credit carryforwards (under existing tax
laws) as follows:

<TABLE>
<CAPTION>
Net
Operating Tax
Carryforward Expiration Loss Credits
----------------------- ----------- ----------
<S> <C> <C>
1999................................................ $ -- $ 15,000
2000................................................ 900,000 --
2006................................................ 1,100,000 82,000
2007................................................ 3,100,000 117,000
2008................................................ 2,100,000 126,000
2009................................................ 3,000,000 138,000
2010................................................ 3,500,000 82,000
2011................................................ 5,100,000 104,000
2012................................................ 7,400,000 278,000
2018................................................ 10,600,000 100,000
----------- ----------
$36,800,000 $1,042,000
=========== ==========
</TABLE>

F-13
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

Because of the changes in ownership that have occurred in connection with
the company's initial public offering (IPO) in 1994, as well as the sales of
securities that have occurred subsequent to the IPO, the Company's future use
of its net operating loss and tax credit carryforwards are subject to certain
annual limitations.

6. Shareholders' Equity

Preferred stock

The Company has authorized 5,000,000 shares of preferred stock at December
31, 1998. There is one series of preferred stock outstanding at December 31,
1998.

Series A: In 1996, the Board of Directors designated 1,100 shares of the
authorized preferred stock as Series A Preferred Stock. In March 1996, the
Company sold 1,030 shares of Series A Preferred Stock in a private placement
transaction which provided proceeds of $9,543,534, net of issuance costs of
$756,466. In addition, the placement agent was granted warrants to purchase
111,094 shares of common stock at $6.49 per share.

The Series A Preferred Stock had a stated value and liquidation preference
of $10,000, plus an 8 percent per annum premium. The holders of the Series A
Preferred Stock were not entitled to vote or to receive dividends. Each share
of Series A Preferred Stock was convertible into common stock at the option of
the holder based on its stated value at the conversion date divided by a
conversion price. The conversion price was defined as the lesser of $6.49 per
share or 85% of the average closing bid price of the Company's common stock for
the five days preceding the conversion date. During 1996, 1997 and 1998, all
shares of Series A Preferred Stock were converted into 1,894,206 shares of
common stock.

Series B: In 1997, the Board of Directors designated 900 shares of the
authorized preferred stock as Series B Preferred Stock. On March 24, 1997, the
Company completed a private placement transaction by selling 855 shares of
Series B Convertible Preferred Stock which provided proceeds of $7,947,747, net
of issuance costs of $602,253. In conjunction with the transaction, the
placement agent was granted a five-year warrant to purchase 105,556 shares of
common stock at $4.86 per share.

The Series B Preferred Stock had a stated value and liquidation preference
of $10,000, plus a 5 percent per annum premium. The holders of the Series B
Preferred Stock were not entitled to vote or to receive dividends. Each share
of Series B preferred Stock was convertible into common stock at the option of
the holder based on its stated value at the conversion date divided by a
conversion price. The conversion price was defined as the lesser of $4.86 per
share or 85% of the average closing bid price of the Company's common stock for
the five days preceding the conversion date. In addition, the investors
received warrants to purchase common stock equal to 20% of their original
investment not converted to common stock as of March 24, 1998, divided by the
conversion price then in effect, with an exercise price equal to 115 percent of
the average closing bid price for five days ending on the one-year anniversary
date. Based on this calculation, warrants to purchase 181,070 shares of common
stock were issued with an exercise price of $6.67. During 1997 and 1998, all
shares of Series B Preferred Stock were converted into 4,876,359 shares of
common stock.

The Series B Preferred Stock also included provisions for (i) adjustment of
the conversion rate and price in the event of stock splits, stock dividends,
and mergers, (ii) restrictions on the Company's ability to issue capital stock
with distribution or liquidation preferences senior to the Series B Preferred
Stock, (iii) registration rights, and (iv) redemption by the Company in certain
circumstances.

F-14
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

Series C: On February 19, 1998, the Company completed a private placement
transaction by selling 1,100 shares of Series C Preferred Stock, that accretes
at the rate of 8 percent per year which provided proceeds of $10,208,186, net
of issuance costs of $791,814. In conjunction with this transaction, the
placement agent was granted a five-year warrant to purchase 90,644 shares of
common stock at $7.28 per share.

The Series C Preferred Stock is convertible into Common Stock of the
Company, subject to certain restrictions, at a variable conversion rate equal
to the lower of (i) the Maximum Conversion Price (as defined below) or (ii) the
average of the three lowest closing bid prices of the Common Stock during the
applicable Pricing Period (as defined below). The Maximum Conversion Price for
the first year is $11.00. After the first year, the Maximum Conversion Price is
equal to the lesser of $11 per share and the average closing bid price of the
five Wednesdays immediately preceding the first anniversary of the date the
Series C Preferred Stock was issued ($7.575). The applicable Pricing Period is
a number of consecutive trading days immediately preceding the date of
conversion of the Series C Preferred Stock initially equal to twelve and
increased by one additional consecutive trading day for each full calendar
month which has elapsed since February 19, 1998. The Series C Preferred Stock
is junior to the Series A and B Preferred Stock.

The Series C Preferred Stock also includes provisions for (i) adjustment of
the conversion rate and price in the event of stock splits, stock dividends,
and mergers, (ii) restrictions on the Company's ability to issue capital stock
with distribution or liquidation preferences senior to the Series C Preferred
Stock, (iii) registration rights, and (iv) redemption by the Company in certain
circumstances.

Shareholder Rights Plan

The Company declared a dividend of one right for each common share
outstanding on November 10, 1998. Each right will entitle a shareholder to buy
a fraction of a share of a newly authorized series of preferred stock at an
exercise price of $20 per share. On July 21, 1999, the Plan was amended to
increase the purchase price of $200 per share. The rights will become
exercisable in the event that a person or group acquires 15% or more of the
Company's common shares or a tender offer is commenced that would result in
ownership by a person or group of 15% or more of the Company's common shares
(subject to certain exceptions).

If a potential acquiror purchases at least 15% of the Company's outstanding
Common Stock, shareholders other than the acquiror would be able to exercise
the rights issued under the plan to purchase shares of the Company's Common
Stock, or in some cases cash, property or other securities of the Company or
shares of the acquiror's common stock, at a 50% discount from the market price.
In addition, the Board may elect to exchange the rights for the Company's
Common Stock.

The Company's Board of Directors will be entitled to redeem the rights at
$.01 per right at any time prior to an acquiror purchasing 15% or more of the
Company's Common Stock.

The new purchase rights will be distributed as a non-taxable dividend and
will trade with the Company's Common Stock. There will be no rights
certificates issued unless the rights become exercisable. The rights will
expire on November 3, 2008.

Options and warrants

The Company's 1994 Long-Term Incentive and Stock Option plan provides for
the granting of stock options, stock appreciation rights, restricted stock
awards, and performance awards to officers, directors, employees, and
independent contractors of the Company. The options may be granted at an
exercise price of

F-15
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

not less than the fair market value of common stock at the date of grant (110%
for more than 10% shareholders).

In order to retain its employees in a competitive employment market, and
given the price of the Company's common stock at the time, on October 21, 1998,
the Company's Board of Directors voted and approved to reprice outstanding
options to purchase 1,091,333 shares of common stock held by active employees
to an exercise price of $1.78, the closing price of the Company's common stock
on that day. These options were originally issued before May 1, 1998 to
employees at a weighted average exercise price of $7.16. The repriced options
may not be exercised until October 21, 1999, at which point the options are
exercisable subject to the vesting schedule of the original option agreements.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
stock option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for awards in 1996,
1997 and 1998 consistent with the provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated as follows:

<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net loss, as reported............. $(5,289,684) $ (9,823,000) $(14,498,453)
Net loss, pro forma............... (5,781,684) (11,241,000) (16,750,953)
Basic and diluted net loss per
share, as reported............... (0.60) (0.93) (1.04)
Basic and diluted net loss per
share, pro forma................. (0.65) (1.06) (1.19)
</TABLE>

The above pro forma effects on net loss and net loss per share are not
likely to be representative of the effects on reported net income (loss) for
future years because options vest over several years and additional awards
generally are made each year.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996, 1997 and 1998:

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Expected dividend yield................................. $ -- $ -- $ --
Expected stock price volatility......................... 82% 124% 131%
Risk-free interest rate................................. 6.05% 6.30% 5.11%
Expected life of options (years)........................ 2.0 3.0 3.5
</TABLE>

The weighted-average fair value, as determined using the Black-Scholes
option pricing model, of options and warrants granted during 1996, 1997 and
1998 was $4.70, $4.53 and $1.76, respectively.

On September 24, 1998, the Company issued a warrant to purchase 750,000
shares of common stock (the "Warrant") to INRANGE Technologies Corporation
("INRANGE") in connection with a Technology License Agreement entered into
between the Company and INRANGE on such date. The Warrant is exercisable for a
period of five years. Of the 750,000 shares subject to the Warrant, 250,000 may
be purchased at an exercise price of $2.50 per share, 250,000 may be purchased
at an exercise price of $5.00 per share and 250,000 may be

F-16
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

purchased at an exercise price of $10.00 per share. The Warrant was issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Transactions involving stock options and warrants during the three years
ended December 31, 1998, are summarized as follows:

<TABLE>
<CAPTION>
Weighted
Average
Exercise
Price
Per
Warrants Stock Options Share
--------- ------------- --------
<S> <C> <C> <C>
Balance, December 31, 1995................. 685,500 472,166 $4.26
Granted.................................. 111,094 471,000 9.39
Exercised................................ (705,762) (89,791) 3.72
Expired.................................. -- (12,942) 5.00
--------- --------- -----
Balance, December 31, 1996................. 90,832 840,433 7.31
Granted.................................. 105,556 746,500 6.77
Exercised................................ (25,182) (60,808) 4.08
Expired.................................. -- (102,459) 8.71
--------- --------- -----
Balance, December 31, 1997................. 171,206 1,423,666 7.15
Granted.................................. 1,021,704 2,392,591 2.44
Exercised................................ -- (58,020) 3.28
Expired.................................. -- (261,063) 7.05
--------- --------- -----
Balance, December 31, 1998................. 1,192,910 3,497,174 $2.50
========= ========= =====
Currently exercisable...................... 1,192,910 162,497 $5.93
Not currently exercisable.................. -- 3,334,677 2.32
--------- --------- -----
1,192,910 3,497,174 $2.50
========= ========= =====
</TABLE>

The following tables summarize information about stock options and warrants
outstanding as of December 31, 1998:

<TABLE>
<CAPTION>
Options and Warrants Options and Warrants
Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Number of Average
Units Life (in Exercise Units Exercise
Range of Exercise Price Outstanding Years) Price Exercisable Price
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.12- 1.78............. 2,760,674 7.8 $1.76 -- $ --
$2.00- 5.31............. 1,226,459 6.1 4.34 699,625 3.95
$5.37-13.25............. 702,951 3.4 7.97 655,782 8.03
--------- ---------
4,690,084 6.7 $3.37 1,355,407 $5.93
========= ===== =========
</TABLE>

F-17
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

7. Commitments

Operating leases

The Company leases its office facility and certain equipment under operating
leases. The total minimum annual future rentals under these noncancelable
operating leases are approximately $98,000 and $13,000 in 1999 and 2000,
respectively. The office facility lease requires the Company to pay real estate
taxes, insurance and maintenance costs. Total rent expense under the operating
lease-arrangements for 1996, 1997 and 1998, was approximately $439,000,
$391,000, and $361,000, respectively.

Potential contingent consideration

In connection with its 1986 acquisition of Anderson Cornelius Company
(subsequently merged into Ancor Communications, Inc.), the Company agreed to
pay additional contingent consideration. This additional consideration (up to a
remaining maximum of approximately $200,000) is payable annually at 4.0 percent
of Company sales in excess of $4,000,000 in any calendar year and is recorded
as cost in excess of assets acquired. Amounts payable under this arrangement
were not material in any year presented.

Profit sharing plan

The Company has a profit sharing/401(k) plan which provides that an annual
contribution, up to the maximum amount allowed as a deduction by the Internal
Revenue Code, may be contributed by the Company to the plan. Company
contributions to the plan are discretionary as determined by the Board of
Directors. No contributions were made by the Company during 1996, 1997, and
1998.

Major supplier

The Company outsources the manufacturing of its products with a contract
manufacturer. Purchases from this manufacturer were approximately $5,086,000,
$6,480,000, and $4,071,000 in 1996, 1997, and 1998, respectively. Management
believes that alternative contract manufacturers are available.

8. Lawsuits

Ancor was a defendant in a consolidated class action captioned In re Ancor
Communications, Inc. Securities Litigation, Case No. 97-CV-1696 (D. Minn.)
alleging violations of the federal securities laws. The lawsuit was settled in
November 1998 and dismissed by the district court on February 5, 1999. Pursuant
to the terms of the settlement, a fund was created in the amount of $1,650,000.
The Company paid $250,000 of the total settlement and the remaining $1,400,000
was paid by the Company's insurer. The $250,000 payment by the Company was
recorded as an expense in the third quarter of 1998.

The Company is also a defendant in a lawsuit brought by Hoyt Properties,
Inc. ("Hoyt") venued in Hennepin County District Court in the State of
Minnesota. Hoyt claims that the Company breached an agreement which provided
that Hoyt would build and lease to the Company an office building to be located
in Eden Prairie, Minnesota, and asserts damages in excess of $2,500,000. We
assert there was no binding agreement. The Company denies all liability, and
alleges that Hoyt refused to provide improvements desirable and necessary to
the Company's occupancy of the proposed leased space, and multiple
contingencies, conditions, and agreements did not occur. The Company is
vigorously defending the case. There has been limited discovery completed to
date. However, there is no assurance that any judgment, order or decree against

F-18
<PAGE>

ANCOR COMMUNICATIONS, INCORPORATED

NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of and subsequent to June 30, 1999 and for the six
months ended June 30, 1998 and 1999 is unaudited)

the Company arising out of this action will not have a material adverse effect
on the Company or its business. The Company is unable to determine at this time
if there will be a material adverse outcome. No provision has been made for any
loss that may occur as a result of an adverse outcome of the suit.

9. Fourth-Quarter Adjustments

1996 fourth-quarter adjustments

In the fourth quarter of 1996, the Company made significant adjustments
relating to customer cancellations of sales made in prior 1996 quarters, the
recording of product returns reserve (discussed in the accounting policies
relating to revenue recognition), inventory reserves and write-offs, and other
asset write-offs. These adjustments had the effect of increasing the fourth-
quarter net loss and net loss per common share by approximately $944,000 and
$0.09 per share, respectively.

1997 fourth-quarter adjustments

After experiencing further difficulties with the collections from certain of
its customers, most notably the value added resellers, the Company increased
its allowances for both future product returns and bad debts by a total of
$543,000 during the quarter ended December 31, 1997. In addition, in connection
with a revision to its business plan to not actively promote certain of its
products which have been replaced by more technologically advanced versions,
the Company increased its allowance for obsolescence by approximately $482,000.
These adjustments had the effect of reducing fourth-quarter sales by
approximately $530,000 and increasing the fourth-quarter net loss and net loss
per common share by approximately $1,025,000 and $0.09 per share, respectively.

10. Sun Microsystems Agreement

On June 2, 1999, the Company entered into a product purchase agreement with
Sun Microsystems, Inc. (Sun). This agreement provides Sun the ability to
distribute the Company's product for a period of two years with automatic
extensions for one-year periods unless there is written notice of termination
within 180 days of an anniversary date.

In addition, Sun received a warrant to purchase an aggregate 1,500,000
shares of common stock of the Company at an exercise price of $7.30 per share.
Upon Sun purchasing $10,000,000 of the Company's product, the warrant will vest
with respect to 149,253 shares of common stock. Subsequent purchases of the
Company's product will vest quarterly at a rate of one warrant for each $67 of
purchases through September 30, 2002. This warrant expires five years from the
date of the agreement.

F-19
<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1998

<TABLE>
<CAPTION>
Charged to
Cost and
Balance at Expenses Balance at
Beginning or Against End of
Description of Period Net Sales Deductions Period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Deducted in the balance sheet
from the assets to which it
applies:
Allowance for doubtful
accounts:
Year ended December 31,
1998.................... $ 109,000 $ -- $ 69,508 $ 39,492
Allowance for future
product returns:
Year ended December 31,
1998.................... 695,000(1) -- 695,000(2) --
Inventory valuation
reserve:
Year ended December 31,
1998.................... 1,094,922 4,183,180 466,793 4,811,309
</TABLE>
- --------
(1) The amount at the beginning of the period is net of the estimated value of
product returns of $355,000.
(2) The gross sales value of the actual products returned by customers of
$1,152,874 is offset by the actual value of the related products which were
returned of $457,874, resulting in a net deduction to the allowance of
$695,000.

F-20
<PAGE>

[Picture of Ancor GigWorks MKII 8- and 16-port fibre channel switches, with
heading above the picture entitled "Ancor Communications Gigworks MKII-8 and
MKII-16 Fibre Channel Switches."]
<PAGE>

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

2,500,000 Shares

[LOGO OF ANCOR]

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

PROSPECTUS
, 1999

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

Banc of America Securities LLC

Bear, Stearns & Co. Inc.

Morgan Keegan & Company, Inc.

John G. Kinnard and Company, Incorporated

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution

Except as set forth below, the following fees and expenses will be paid by
Ancor in connection with the issuance and distribution of the securities
registered hereby and do not include underwriting commissions and discounts.
All such expenses, except for the SEC registration, NASD filing and Nasdaq
listing fees, are estimated.

<TABLE>
<S> <C>
SEC registration fee............................................... $ 23,029
NASD filing fee.................................................... $ 8,784
Legal fees and expenses............................................ $150,000
Accounting fees and expenses....................................... $ 70,000
Blue sky fees and expenses......................................... $ 5,000
Transfer Agent's and Registrar's fees.............................. $ 5,000
Printing and engraving expenses.................................... $ 45,000
Miscellaneous...................................................... $ 43,187
--------
Total............................................................ $350,000
========
</TABLE>

Item 15. Indemnification of Directors and Officers

Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.

Provisions regarding indemnification of officers and directors of Ancor to
the extent permitted by Section 302A.521 are contained in Ancor's articles of
incorporation and bylaws.

II-1
<PAGE>

Item 16. Exhibits

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.

4.1 Loan and Warrant Purchase Agreement, dated as of June 24, 1992,
between the Company and International Business Machines Incorporated
(Incorporated by reference to the Company's Registration Statement on
Form SB-2 filed March 11, 1994).

4.2 Agreement and Amendment to Loan and Warrant Purchase Agreement, dated
March 10, 1994, by and among the Company, International Business
Machines Corporation and IBM Credit Corporation (Incorporated by
reference to the Company's Registration Statement on Form SB-2 filed
March 11, 1994).

4.3 Second Amendment to Loan and Warrant Purchase Agreement, dated April
25, 1994, by and among the Company, International Business Machines
Corporation and IBM Credit Corporation (Incorporated by reference to
Amendment No. 2 to the Company's Registration Statement on Form SB-2
filed April 28, 1994).

4.4 Shareholders Agreement, dated as of June 24, 1992, among the Company,
International Business Machines Incorporated and the shareholders of
the Company named therein (Incorporated by reference to the Company's
Registration Statement on Form SB-2 filed March 11, 1994).

4.5 Form of Warrant issued April 28, 1995 (Incorporated by reference to
the Company's Form 10-QSB filed for the quarterly period ended March
31, 1995).

4.6 Form of Warrant issued to John G. Kinnard & Company on October 23,
1995 (Incorporated by reference to the Company's Form 10-QSB filed for
the quarterly period ended September 30, 1995).

4.7 Form of Warrant issued to Swartz Investments, Inc. on March 7, 1996
(Incorporated by reference to the Company's Form 10-KSB filed for the
fiscal year ended December 31, 1995).

4.8 Form of Warrant issued to Dunwoody Brokerage Services, Inc. on March
24, 1997 (Incorporated by reference to the Company's (Incorporated by
reference to the Company's Form 10-Q filed for the quarterly period
ended March 31, 1997).

4.9 Form of Warrant issued to Purchasers of the Company's Series B
Preferred Stock (Incorporated by reference to the Company's Form 10-Q
filed for the quarterly period ended March 31, 1997).

4.10 Form of Warrant issued to Dunwoody Brokerage Services, Inc. on
February 19, 1998 (Incorporated by reference to the Company's Form 10-
K filed for the fiscal year ended December 31, 1997).

4.11 Form of Warrant issued to INRANGE Technologies, Inc. on September 24,
1998 (Incorporated by reference to the Company's Form 10-Q filed for
the quarterly period ended September 30, 1998).

4.12 Shareholder Rights Agreement, dated November 3, 1998, between the
Company and Norwest Bank Minnesota, N.A. (Incorporated by reference to
the Company's form 8-K filed November 3, 1998).

* 5.1 Opinion of Dorsey & Whitney LLP.

23.1 Consent of KPMG LLP.

23.2 Consent of McGladrey & Pullen, LLP.

* 23.3 Consent of Dorsey & Whitney LLP (included in Exhibit No. 5.1).

* 24.1 Powers of Attorney.
</TABLE>
- --------
* Previously filed.

II-2
<PAGE>

Item 17. Undertakings

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all if the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on July 23, 1999.

Ancor Communications,
Incorporated

/s/ Kenneth E. Hendrickson
By: _________________________________
Kenneth E. Hendrickson
Chief Executive Officer and
Director

Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-3 has been signed by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Kenneth E. Hendrickson Chief Executive Officer July 23, 1999
______________________________________ and Director
Kenneth E. Hendrickson

/s/ Steven E. Snyder Chief Financial Officer July 23, 1999
______________________________________
Steven E. Snyder

* Director July 23, 1999
______________________________________
Amyl Ahola

* Director July 23, 1999
______________________________________
Thomas F. Hunt, Jr.

* Director July 23, 1999
______________________________________
John F. Carlson

* Director July 23, 1999
______________________________________
Gerald M. Bestler

* Director July 23, 1999
______________________________________
Paul F. Lidsky

* Director July 23, 1999
______________________________________
Michael L. Huntley
</TABLE>

/s/ Steven E. Snyder
* By:____________________________
Attorney-in-Fact

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.

23.1 Consent of KPMG LLP.

23.2 Consent of McGladrey & Pullen, LLP.

</TABLE>

II-5

<PAGE>

Exhibit 1.1

BANC OF AMERICA SECURITIES LLC

2,500,000 SHARES

ANCOR COMMUNICATIONS, INCORPORATED

COMMON STOCK

UNDERWRITING AGREEMENT

dated August __, 1999
<PAGE>

TABLE OF CONTENTS

Page

Section 1. Representations and Warranties of the Company.................... 2
(a) Compliance with Registration Requirements............................ 2
(b) Offering Materials Furnished to Underwriters......................... 3
(c) Distribution of Offering Material By the Company..................... 3
(d) The Underwriting Agreement........................................... 4
(e) Authorization of the Common Shares................................... 4
(f) No Applicable Registration or Other Similar Rights................... 4
(g) No Material Adverse Change........................................... 4
(h) Independent Accountants.............................................. 4
(i) Preparation of the Financial Statements.............................. 5
(j) Incorporation and Good Standing of the Company and its Subsidiaries.. 5
(k) Capitalization and Other Capital Stock Matters....................... 5
(l) Stock Exchange Listing............................................... 6
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required................................. 6
(n) No Material Actions or Proceedings................................... 7
(o) Intellectual Property Rights......................................... 7
(p) All Necessary Permits, etc........................................... 7
(q) Title to Properties.................................................. 8
(r) Tax Law Compliance................................................... 8
(s) Company Not an "Investment Company".................................. 8
(t) Insurance............................................................ 8
(u) No Price Stabilization or Manipulation............................... 9
(v) Related Party Transactions........................................... 9
(w) No Unlawful Contributions or Other Payments.......................... 9
(x) Company's Accounting System.......................................... 9
(y) Compliance with Environmental Laws................................... 9
(z) ERISA Compliance..................................................... 10

-i-
<PAGE>

(aa) Year 2000............................................................ 11
(bb) Exchange Act Compliance.............................................. 11
Section 2. Purchase, Sale and Delivery of the Common Shares................ 11
The Firm Common Shares...................................................... 11
The First Closing Date...................................................... 12
The Optional Common Shares; the Second Closing Date......................... 12
Public Offering of the Common Shares........................................ 13
Payment for the Common Shares............................................... 13
Delivery of the Common Shares............................................... 13
Delivery of Prospectus to the Underwriters.................................. 14
Section 3. Additional Covenants of the Company............................. 14
(a) Representatives' Review of Proposed Amendments and Supplements....... 14
(b) Securities Act Compliance............................................ 14
(c) Amendments and Supplements to the Prospectus and Other Securities Act
Matters.............................................................. 15
(d) Copies of any Amendments and Supplements to the Prospectus........... 15
(e) Blue Sky Compliance.................................................. 15
(f) Use of Proceeds...................................................... 16
(g) Transfer Agent....................................................... 16
(h) Earnings Statement................................................... 16
(i) Periodic Reporting Obligations....................................... 16
(j) Agreement Not To Offer or Sell Additional Securities................. 16
(k) Future Reports to the Representatives................................ 17
(l) Exchange Act Compliance.............................................. 17
Section 4. Payment of Expenses............................................. 17
Section 5. Conditions of the Obligations of the Underwriters............... 18
(a) Accountants' Comfort Letter.......................................... 18

-ii-
<PAGE>

(b) Compliance with Registration Requirements; No Stop Order; No Objection
from NASD............................................................ 18
(c) No Material Adverse Change........................................... 19
(d) Opinion of Counsel for the Company................................... 19
(e) Opinion of Counsel for the Underwriters.............................. 19
(f) Officers' Certificate................................................ 20
(g) Bring-down Comfort Letter............................................ 20
(h) Lock-Up Agreement from Certain Securityholders of the Company........ 20
(i) Additional Documents................................................. 21
Section 6. Reimbursement of Underwriters' Expenses......................... 21
Section 7. Effectiveness of this Agreement................................. 21
Section 8. Indemnification.................................................. 22
(a) Indemnification of the Underwriters.................................. 22
(b) Indemnification of the Company, its Directors and Officers........... 23
(c) Notifications and Other Indemnification Procedures................... 24
(d) Settlements.......................................................... 25
Section 9. Contribution.................................................... 25
Section 10. Default of One or More of the Several Underwriters.............. 27
Section 11. Termination of this Agreement................................... 28
Section 12. Representations and Indemnities to Survive Delivery............. 29
Section 13. Notices......................................................... 29
Section 14. Successors...................................................... 29
Section 15. Partial Unenforceability........................................ 30
Section 16. Governing Law Provisions........................................ 30
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.................... 30
(b) Consent to Jurisdiction.............................................. 30

-iii-
<PAGE>

Section 17. General Provisions.............................................. 30

-iv-

<PAGE>

Underwriting Agreement

[Date]

BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN & COMPANY, INC.
JOHN G. KINNARD AND COMPANY, INCORPORATED
As Representatives of the several Underwriters
c/o BANC OF AMERICA SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111

Ladies and Gentlemen:

Introductory. Ancor Communications, Incorporated, a Minnesota
corporation (the "Company), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of 2,500,000
shares (the "Firm Common Shares") of its Common Stock, par value $.01 per share
(the "Common Stock"). In addition, the Company has granted to the Underwriters
an option to purchase up to an additional 375,000 shares (the "Optional Common
Shares") of Common Stock, as provided in Section 2. The Firm Common Shares and,
if and to the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares". Banc of America Securities LLC
("BAS"), Bear, Stearns & Co. Inc., Morgan Keegan & Company, Inc. and John G.
Kinnard and Company, Incorporated have agreed to act as representatives of the
several Underwriters (in such capacity, the "Representatives") in connection
with the offering and sale of the Common Shares.

The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File No.
333-82947), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including all documents incorporated or
deemed to be incorporated by reference therein and any information deemed to be
a part thereof under the Securities Act or the Securities Exchange Act of 1934
and the rules and regulations promulgated thereunder (collectively, the
"Exchange Act") at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule

-1-
<PAGE>

462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Common Shares, is
called the "Prospectus"; provided, however, if the Company has, with the consent
of BAS, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary prospectus") dated [___] (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under Rules
434 and 424(b) under the Securities Act and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. All references
in this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").

All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement or the Prospectus (and all other references of like
import) shall be deemed to mean and include all such financial statements and
schedules and other information which is or is deemed to be incorporated by
reference in the Registration Statement or the Prospectus, as the case may be;
and all references in this Agreement to amendments or supplements to the
Registration Statement or the Prospectus shall be deemed to mean and include the
filing of any document under the Exchange Act which is or is deemed to be
incorporated by reference in the Registration Statement or the Prospectus, as
the case may be.

The Company hereby confirms its agreement with the Underwriters as
follows:

Section 1. Representations and Warranties of the Company.

The Company hereby represents, warrants and covenants to each
Underwriter as follows:

(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule

-2-
<PAGE>

462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.

Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and (except as may be
permitted by Regulation S-T under the Securities Act), was identical in
content to the copy thereof delivered to the Underwriters for use in
connection with the offer and sale of the Common Shares. Each of the
Registration Statement, any Rule 462(b) Registration Statement and any post-
effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus,
as amended or supplemented, as of its date and at all subsequent times, did
not and will not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately
preceding sentences do not apply to statements in or omissions from the
Registration Statement, any Rule 462(b) Registration Statement, or any post-
effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing
by the Representatives expressly for use therein as set forth in Section
8(b). There are no contracts or other documents required to be described in
the Prospectus or to be filed as exhibits to the Registration Statement
which have not been described or filed as required.

(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives four complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.

(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in

-3-
<PAGE>

connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement.

(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.

(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement, will be validly issued, fully
paid and nonassessable.

(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included
in the offering contemplated by this Agreement.

(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business of the Company (any such
change is called a "Material Adverse Change"); (ii) the Company has not
incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business;
and (iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of capital stock or repurchase or
redemption by the Company of any class of capital stock.

(h) Independent Accountants. KPMG Peat Marwick LLP and McGladrey &
Pullen, LLP, who have expressed their opinion with respect to the financial
statements (which term as used in this Agreement includes the related notes
thereto) and supporting schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus, are

-4-
<PAGE>

independent public or certified public accountants as required by the
Securities Act and the Exchange Act.

(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the financial position of the
Company as of and at the dates indicated and the results of their operations
and cash flows for the periods specified. The supporting schedules included
in the Registration Statement present fairly the information required to be
stated therein. Such financial statements and supporting schedules have been
prepared in conformity with generally accepted accounting principles as
applied in the United States, applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related notes
thereto. No other financial statements or supporting schedules are required
to be included in the Registration Statement. The financial data set forth
in the Prospectus under the captions "Prospectus Summary--Summary Financial
Data", "Selected Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.

(j) Incorporation and Good Standing of the Company and its Subsidiaries.
The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation and has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement. The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change. The Company has no subsidiaries.

(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans or upon exercise of
outstanding options or warrants). The Common Stock (including the Common
Shares) conforms in all material respects to the description thereof
contained in the Prospectus. All of the issued and outstanding shares of
Common Stock have been duly authorized and validly issued, are fully paid

-5-
<PAGE>

and nonassessable and have been issued in compliance with federal and state
securities laws. None of the outstanding shares of Common Stock were issued
in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There
are no authorized or outstanding options, warrants, preemptive rights,
rights of first refusal or other rights to purchase, or equity or debt
securities convertible into or exchangeable or exercisable for, any capital
stock of the Company or any of its subsidiaries other than those set forth
in the Prospectus.

(l) Stock Exchange Listing. The Common Stock (including the Common
Shares) is registered pursuant to Section 12(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") and is listed on the Nasdaq National Market
and the Pacific Stock Exchange and the Company has taken no action designed
to, or likely to have the effect of, terminating the registration of the
Common Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market nor has the Company received any notification that
the Commission or the National Association of Securities Dealers, LLC (the
"NASD") or the Pacific Stock Exchange is contemplating terminating such
registration or listing.

(m) Non-Contravention of Existing Instruments; No Further Authorizations
or Approvals Required. The Company is not in violation of its charter or by-
laws or in default (or, with the giving of notice or lapse of time, would be
in default) ("Default") under any indenture, mortgage, loan or credit
agreement, note, contract, franchise, lease or other instrument to which the
Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in the
aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus (i) have been duly
authorized by all necessary corporate action and will not result in any
violation of the provisions of the charter or by-laws of the Company, (ii)
will not conflict with or constitute a breach of, or Default under, or
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to, or require the consent of
any other party to, any Existing Instrument, except for such conflicts,
breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and
(iii) will not result in any violation of any law, administrative regulation
or administrative or court decree applicable to the Company. No consent,
approval, authorization or

-6-
<PAGE>

other order of, or registration or filing with, any court or other
governmental or regulatory authority or agency is required for the Company's
execution, delivery and performance of this Agreement and consummation of
the transactions contemplated hereby and by the Prospectus, except such as
have been obtained or made by the Company and are in full force and effect
under the Securities Act, applicable state securities or blue sky laws and
from the National Association of Securities Dealers, Inc. (the "NASD").

(n) No Material Actions or Proceedings. Except as otherwise disclosed in
the Prospectus, there are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened
(i) against or affecting the Company, (ii) which has as the subject thereof
any officer or director of, or property owned or leased by, the Company or
(iii) relating to environmental or discrimination matters, where in any such
case (A) there is a reasonable possibility that such action, suit or
proceeding might be determined adversely to the Company and (B) any such
action, suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement. No material
labor dispute with the employees of the Company exists or, to the best of
the Company's knowledge, is threatened or imminent.

(o) Intellectual Property Rights. The Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct its business
as now conducted; and the expected expiration of any of such Intellectual
Property Rights would not result in a Material Adverse Change. The Company
has not received any notice of infringement or conflict with asserted
Intellectual Property Rights of others, which infringement or conflict, if
the subject of an unfavorable decision, would result in a Material Adverse
Change.

(p) All Necessary Permits, etc. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to conduct
its business, and the Company has not received any notice of proceedings
relating to the revocation or modification of, or non-compliance with, any
such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could result
in a Material Adverse Change.

-7-
<PAGE>

(q) Title to Properties. The Company has good and marketable title to
all the properties and assets reflected as owned in the financial statements
referred to in Section 1(i) above, in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims and
other defects, except such as do not materially and adversely affect the
value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company. The real property,
improvements, equipment and personal property held under lease by the
Company are held under valid and enforceable leases, with such exceptions as
are not material and do not materially interfere with the use made or
proposed to be made of such real property, improvements, equipment or
personal property by the Company.

(r) Tax Law Compliance. The Company has filed all necessary federal,
state and foreign income and franchise tax returns and paid all taxes
required to be paid by it and, if due and payable, any related or similar
assessment, fine or penalty. The Company has made adequate charges, accruals
and reserves in the applicable financial statements referred to in Section
1(i) above in respect of all federal, state and foreign income and franchise
taxes for all periods as to which the tax liability of the Company has not
been finally determined.

(s) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after
receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.

(t) Insurance. The Company is insured by recognized, financially sound
and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for its businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company against
theft, damage, destruction, and acts of vandalism. The Company has no reason
to believe that it will not be able (i) to renew its existing insurance
coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to
conduct its business as now conducted and at a cost that would not result in
a Material Adverse Change. The Company has not been denied any insurance
coverage which it has sought or for which it has applied.

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<PAGE>

(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock or any other security of the
Company to facilitate the sale or resale of the Common Shares.

(v) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any other person (i)
required to be described in the Prospectus which have not been described as
required, or (ii) would have been required to be disclosed in the Company's
Proxy Statement for its 1999 Annual Meeting except that such relationship or
transaction arose or occurred after the date of the Proxy Statement for such
Annual Meeting.

(w) No Unlawful Contributions or Other Payments. Neither the Company
nor, to the best of the Company's knowledge, any employee or agent of the
Company, has made any contribution or other payment to any official of, or
candidate for, any federal, state or foreign office in violation of any law
or of the character required to be disclosed in the Prospectus.

(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
the Company is not in violation of any federal, state, local or foreign law
or regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including
without limitation, laws and regulations relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances, petroleum and petroleum
products (collectively, "Materials of Environmental Concern"), or otherwise
relating

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<PAGE>

to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental
authorizations required for the operation of the business of the Company
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company received any written communication,
whether from a governmental authority, citizens group, employee or
otherwise, that alleges that the Company is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location owned,
leased or operated by the Company, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any person or entity whose liability for
any Environmental Claim the Company has retained or assumed either
contractually or by operation of law; and (iii) to the best of the Company's
knowledge, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge, presence or disposal of any Material of Environmental
Concern, that reasonably could result in a violation of any Environmental
Law or form the basis of a potential Environmental Claim against the Company
or against any person or entity whose liability for any Environmental Claim
the Company has retained or assumed either contractually or by operation of
law.

(z) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act
of 1974, as amended, and the regulations and published interpretations
thereunder (collectively, "ERISA")) established or maintained by the
Company, or its "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to
the Company, any member of any group of organizations described in Sections
414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and
the regulations and published interpretations thereunder (the "Code") of
which the Company is a member. No "reportable event" (as defined under
ERISA) has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained

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<PAGE>

by the Company or any of its ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company or any of its ERISA Affiliates, if
such "employee benefit plan" were terminated, would have any "amount of
unfunded benefit liabilities" (as defined under ERISA). Neither the Company
nor any of its ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971,
4975 or 4980B of the Code. Each "employee benefit plan" established or
maintained by the Company or any of their ERISA Affiliates that is intended
to be qualified under Section 401(a) of the Code is so qualified and nothing
has occurred, whether by action or failure to act, which would cause the
loss of such qualification.

(aa) Year 2000. All disclosure regarding year 2000 compliance that is
required to be described under the Securities Act (including disclosures
required by Staff Legal Bulletin No. 5) has been included in the Prospectus.
The Company believes that it will not incur significant operating expenses
or costs to ensure that its information systems will be year 2000 complaint.

(bb) Exchange Act Compliance. The documents incorporated or deemed to be
incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time the
Registration Statement and any amendments thereto become effective and at
the First Closing Date and the Second Closing Date, as the case may be, will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the facts
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.

Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.

Section 2. Purchase, Sale and Delivery of the Common Shares.

The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective

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<PAGE>

number of Firm Common Shares set forth opposite their names on Schedule A. The
purchase price per Firm Common Share to be paid by the several Underwriters to
the Company shall be $[___] per share.

The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of BAS, 600 Montgomery Street, San Francisco, California (or such
other place as may be agreed to by the Company and the Representatives) at 6:00
a.m. San Francisco time, on [___],or such other time and date not later than
10:30 a.m. San Francisco time, on the tenth business day following the
originally contemplated First Closing Date as the Representatives shall
designate by notice to the Company (the time and date of such closing are called
the "First Closing Date"). The Company hereby acknowledges that circumstances
under which the Representatives may provide notice to postpone the First Closing
Date as originally scheduled include, but are in no way limited to, any
determination by the Company or the Representatives to recirculate to the public
copies of an amended or supplemented Prospectus or a delay as contemplated by
the provisions of Section 10.

The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 375,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each

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<PAGE>

Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Representatives may determine) that bears the same proportion to
the total number of Optional Common Shares to be purchased as the number of Firm
Common Shares set forth on Schedule A opposite the name of such Underwriter
bears to the total number of Firm Common Shares. The Representatives may cancel
the option at any time prior to its expiration by giving written notice of such
cancellation to the Company.

Public Offering of the Common Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.

Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.

It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. The Representatives individually and not as the Representatives of
the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.

Delivery of the Common Shares. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the receipt of satisfactory evidence of the irrevocable release of a
wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company shall also deliver, or cause to be delivered, to
the Representatives for the accounts of the several Underwriters, certificates
for the Optional Common Shares the Underwriters have agreed to purchase at the
First Closing Date or the Second Closing Date, as the case may be, against the
receipt of satisfactory evidence of

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<PAGE>

the irrevocable release of a wire transfer of immediately available funds for
the amount of the purchase price therefor. The certificates for the Common
Shares shall be in definitive form and registered in such names and
denominations as the Representatives shall have requested at least two full
business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.

Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are first
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered, copies of the Prospectus in such quantities and at
such places as the Representatives shall request.

Section 3. Additional Covenants of the Company. The Company further
covenants and agrees with each Underwriter as follows:

(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus (including any amendment or supplement
through incorporation by reference of any report filed under the Exchange
Act), the Company shall furnish to the Representatives for review a copy of
each such proposed amendment or supplement, and the Company shall not file
any such proposed amendment or supplement to which the Representatives
reasonably objects.

(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission relating to the Registration Statement,
(ii) of the time and date of any filing of any post-effective amendment to
the Registration Statement or any amendment or supplement to any preliminary
prospectus or the Prospectus, (iii) of the time and date that any post-
effective amendment to the Registration Statement becomes effective and (iv)
of the

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<PAGE>

issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings within one (1) year of the date of this
Agreement to remove, suspend or terminate from listing or quotation the
Common Stock from any securities exchange upon which it is listed for
trading or included or designated for quotation, or of the threatening or
initiation of any proceedings for any of such purposes. If the Commission
shall enter any such stop order at any time, the Company will use its best
efforts to obtain the lifting of such order at the earliest possible moment.
Additionally, the Company agrees that it shall comply with the provisions of
Rules 424(b), 430A and 434, as applicable, under the Securities Act and will
use its reasonable efforts to confirm that any filings made by the Company
under such Rule 424(b) were received in a timely manner by the Commission.

(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(a) hereof), file with the Commission and furnish at
its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.

(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements (including any documents incorporated or deemed
incorporated by reference therein) thereto as the Representatives may
request.

(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or Canadian provincial Securities

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<PAGE>

laws of those jurisdictions designated by the Representatives, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.

(f) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.

(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.

(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending September 30, 2000 that satisfies the provisions of Section
11(a) of the Securities Act.

(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market and the Pacific Stock Exchange all reports and
documents required to be filed under the Exchange Act. Additionally, the
Company shall report the use of proceeds from the issuance of the Common
Shares as may be required under Rule 463 under the Securities Act.

(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 120 days following the date of the Prospectus, the Company will
not, without the prior written consent of BAS (which consent may be withheld
at the sole discretion of BAS), directly or indirectly, sell, offer,
contract or grant any option to sell, pledge, transfer or establish an open
"put equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of or transfer, or announce the offering
of, or file any registration statement under the Securities Act in respect
of,

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<PAGE>

any shares of Common Stock, options or warrants to acquire shares of the
Common Stock or securities exchangeable or exercisable for or convertible
into shares of Common Stock (other than as contemplated by this Agreement
with respect to the Common Shares); provided, however, that the Company may
issue shares of its Common Stock or options to purchase its Common Stock
pursuant to any of its currently existing stock option, stock bonus or other
stock plans or arrangements, or Common Stock upon exercise of outstanding
options or warrants.

(k) Future Reports to the Representatives. During the period of two
years hereafter the Company will furnish to BAS at 600 Montgomery Street,
San Francisco, CA 94111, Attention: Mark Kuperschmid, as soon as available,
copies of any report or communication of the Company mailed generally to
holders of its capital stock.

(l) Exchange Act Compliance. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and
within the time periods required by the Exchange Act.

BAS, on behalf of the several Underwriters, may, in its sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.

Section 4. Payment of Expenses. The Company agrees to pay all costs, fees and
expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the

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<PAGE>

Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with including the Common Shares on the Nasdaq National Market, and
(ix) all other fees, costs and expenses referred to in Item 14 of Part II of the
Registration Statement. Except as provided in this Section 4, Section 6, Section
8 and Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.

Section 5. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Common Shares as
provided herein on the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Optional Common Shares, as of the Second Closing
Date as though then made, to the timely performance by the Company of its
covenants and other obligations hereunder, and to each of the following
additional conditions:

(a) Accountants' Comfort Letter. On the date hereof, the Representatives
shall have received from KPMG Peat Marwick LLP and McGladrey & Pullen LLP,
independent public or certified public accountants for the Company, letters
dated the date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall
have received additional conformed copies of such accountants' letters for
each of the several Underwriters).

(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:

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<PAGE>

(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities
Act) in the manner and within the time period required by Rule 424(b)
under the Securities Act; or the Company shall have filed a post-
effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);

(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration Statement, shall be in effect and no
proceedings for such purpose shall have been instituted or threatened by
the Commission; and

(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.

(c) No Material Adverse Change. For the period from and after the date
of this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date in the judgment of the
Representatives there shall not have occurred any Material Adverse Change.

(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received the
favorable opinion of Dorsey & Whitney LLP, counsel for the Company, dated as
of such Closing Date, the form of which is attached as Exhibit A (and the
Representatives shall have received additional conformed copies of such
counsel's legal opinion for each of the several Underwriters).

(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, a Professional Corporation, counsel for the Underwriters, dated as
of such Closing Date, with respect to the matters set forth in
paragraphs[(i), (vii) (with respect to subparagraph (i) only, (viii), (ix),
(x), (xi) and (xiii) (with respect to the captions "Description of Capital
Stock" and "Underwriting" under subparagraph (i) only), (xii),] and [the
next-to-last paragraph] of Exhibit A (and the Representatives shall have
received

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<PAGE>

additional conformed copies of such counsel's legal opinion for each of the
several Underwriters).

(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chief Executive Officer of the Company and the
Chief Financial Officer of the Company, dated as of such Closing Date, to
the effect set forth in subsections (b)(ii) of this Section 5, and further
to the effect that:

(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;

(ii) the representations, warranties and covenants of the Company
set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such Closing
Date; and

(iii) the Company has complied with all the agreements hereunder
and satisfied all the conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date.

(g) Bring-down Comfort Letter. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received from KPMG Peat
Marwick LLP and McGladrey & Pullen LLP, independent public or certified
public accountants for the Company, a letter dated such date, in form and
substance satisfactory to the Representatives, to the effect that they
reaffirm the statements made in the letter furnished by them pursuant to
subsection (a) of this Section 5, except that the specified date referred to
therein for the carrying out of procedures shall be no more than three
business days prior to the First Closing Date or Second Closing Date, as the
case may be (and the Representatives shall have received additional
conformed copies of such accountants' letter for each of the several
Underwriters).

(h) Lock-Up Agreement from Certain Securityholders of the Company . On
the date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit B hereto from the executive officers and
directors and certain employees of the Company, and such agreement shall be
in full force and effect on each of the First Closing Date and the Second
Closing Date.

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<PAGE>

(i) Additional Documents. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for
the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling
them to pass upon the issuance and sale of the Common Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.

If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.

Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 5 or Section 7, or if the
sale to the Underwriters of the Common Shares on the First Closing Date is not
consummated because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or to comply with any provision hereof,
the Company agrees to reimburse the Representatives and the other Underwriters
(or such Underwriters as have terminated this Agreement with respect to
themselves), severally, upon demand for all out-of-pocket expenses that shall
have been reasonably incurred by the Representatives and the Underwriters in
connection with the proposed purchase and the offering and sale of the Common
Shares, including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.

Section 7. Effectiveness of this Agreement.

This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.

Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part (a) of the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the

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<PAGE>

provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.

Section 8. Indemnification.

(a) Indemnification of the Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each
person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as
such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading; or (ii) upon any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in
the representations and warranties of the Company contained herein; or (iv)
in whole or in part upon any failure of the Company to perform its
obligations hereunder or under law; and to reimburse each Underwriter and
each such controlling person for any and all expenses (including the fees
and disbursements of counsel chosen by BAS) as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of
or based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and provided, further,

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<PAGE>

that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the
person asserting any loss, claim, damage, liability or expense purchased
Common Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the
sale of the Common Shares to such person, and if the Prospectus (as so
amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage, liability or expense. The indemnity agreement set forth
in this Section 8(a) shall be in addition to any liabilities that the
Company may otherwise have.

(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who signed
the Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act, against any
loss, claim, damage, liability or expense, as incurred, to which the
Company, or any such director, officer or controlling person may become
subject, under the Securities Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below)
arises out of or is based upon any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
arises out of or is based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
preliminary prospectus, the Prospectus (or any amendment or supplement
thereto), in reliance upon and in conformity with written information
furnished to the Company by the Representatives expressly for use therein;
and to reimburse the Company, or any such director, officer or controlling
person for any and all expenses (including the fees and disbursements of
counsel chosen by the Company) as such expenses are reasonably incurred by
the Company, or any such director, officer or controlling person in
connection with investigating, defending,

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<PAGE>

settling, compromising or paying any such loss, claim, damage, liability,
expense or action. The Company hereby acknowledges that the only information
that the Underwriters have furnished to the Company expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto) are the statements set forth in the table
in the first paragraph and the second, seventh, eighth, ninth, tenth,
eleventh and twelfth paragraphs under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct.
The indemnity agreement set forth in this Section 8(b) shall be in addition
to any liabilities that each Underwriter may otherwise have.

(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in
this Section 8 or to the extent it is not prejudiced as a proximate result
of such failure. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate
in, and, to the extent that it shall elect, jointly with all other
indemnifying parties similarly notified, by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if the defendants
in any such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that a
conflict may arise between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the indemnifying
party, the indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to otherwise participate
in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such
indemnified party of such indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the

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<PAGE>

defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall
not be liable for the expenses of more than one separate counsel (together
with local counsel), approved by the indemnifying party (BAS in the case of
Section 8(b) and Section 9), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the fees and expenses of counsel shall be
at the expense of the indemnifying party.

(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than
30 days after receipt by such indemnifying party of the aforesaid request
and (ii) such indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of such settlement.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement, compromise or consent to the entry
of judgment in any pending or threatened action, suit or proceeding in
respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.

Section 9. Contribution.

If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses,

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<PAGE>

claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, from the
offering of the Common Shares pursuant to this Agreement or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, on
the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company, on the one hand, and the Underwriters, on the other
hand, in connection with the offering of the Common Shares pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is used,
the corresponding location on the Term Sheet) bear to the aggregate public
offering price of the Common Shares as set forth on such cover. The relative
fault of the Company, on the one hand, and the Underwriters, on the other hand,
shall be determined by reference to, among other things, whether any such untrue
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company, on
the one hand, or the Underwriters, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.

The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.

The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or

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<PAGE>

by any other method of allocation which does not take account of the equitable
considerations referred to in this Section 9.

Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.

Section 10. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Common Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9

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<PAGE>

shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.

As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.

Section 11. Termination of this Agreement. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq National Market or the Pacific Stock Exchange; (ii) trading in securities
generally on either the Nasdaq Stock Market or the New York Stock Exchange shall
have been suspended or limited, or minimum or maximum prices shall have been
generally established on any of such stock exchanges by the Commission or the
NASD; (iii) a general banking moratorium shall have been declared by any of
federal, New York or California authorities; (iv) there shall have occurred any
outbreak or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Representatives is material and adverse
and makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (v) in the judgment of the Representatives there shall have occurred
any Material Adverse Change; or (vi) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Representatives may interfere materially with the conduct
of the business and operations of the Company regardless of whether or not such
loss shall have been insured. Any termination pursuant to this Section 11 shall
be without liability on the part of (a) the Company to any Underwriter, except
that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof if this
Agreement is terminated as a result of clause (i), (v) or (vi) of this Section
11, (b) any Underwriter to the Company, or (c) of any party hereto to any other
party except

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<PAGE>

that the provisions of Section 8 and Section 9 shall at all times be effective
and shall survive such termination.

Section 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.

Section 13. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:

If to the Representatives:

Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-913-5558
Attention: Richard A. Smith

with a copy to:

Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 913-5553
Attention: Jeffrey R. Lapic, Esq.

If to the Company:

Ancor Communications, Incorporated
6130 Blue Circle Drive
Minnetonka, Minnesota 55343
Attention: Kenneth E. Hendrickson

Any party hereto may change the address for receipt of communications by giving
written notice to the others.

Section 14. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant

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<PAGE>

to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.

Section 15. Partial Unenforceability. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.

Section 16. Governing Law Provisions.

(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND
TO BE PERFORMED IN SUCH STATE.

(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of
the United States of America located in the City and County of San Francisco
or the courts of the State of California in each case located in the City
and County of San Francisco (collectively, the "Specified Courts"), and each
party irrevocably submits to the exclusive jurisdiction (except for
proceedings instituted in regard to the enforcement of a judgment of any
such court (a "Related Judgment"), as to which such jurisdiction is non-
exclusive) of such courts in any such suit, action or proceeding. Service of
any process, summons, notice or document by certified mail to such party's
address set forth above shall be effective service of process for any suit,
action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue
of any suit, action or other proceeding in the Specified Courts and
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any
such court has been brought in an inconvenient forum.

Section 17. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with

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<PAGE>

respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.

Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.

If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.

Very truly yours,

ANCOR COMMUNICATIONS, INCORPORATED

By:__________________________

The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.

BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN & COMPANY
JOHN G. KINNARD AND COMPANY, INCORPORATED

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<PAGE>

Acting as Representatives of the
several Underwriters named in
the attached Schedule A.

By BANC OF AMERICA SECURITIES LLC

________________________________

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<PAGE>

SCHEDULE A

Number of
Firm Common
Shares
Underwriters to be Purchased

Banc of America Securities LLC................ [___]
Bear, Stearns & Co. Inc....................... [___]
Morgan Keegan & Company, Inc.................. [___]
John G. Kinnard & Company..................... [___]
Total.................................... [___]

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<PAGE>

EXHIBIT A

The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.

Opinion of counsel for the Company to be delivered pursuant to Section
5(d) of the Underwriting Agreement.

References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.

(i) The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Minnesota with corporate
power to own, lease and operate its properties and to conduct its business
as described in the Prospectus. The Company has the corporate authority to
enter into and perform its obligations under the Underwriting Agreement.

(ii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in the State of California.

(iii) The authorized issued and outstanding capital stock of the Company
(including the Shares) and preferred stock purchase rights conform to the
descriptions thereof set forth in the Prospectus under the headings
"Description of Capital Stock - Common Stock, - Preferred Stock and -
Shareholder Rights Plan." All of the outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable.
The outstanding shares of Common Stock issued since May 3, 1994 have been
issued in compliance with (or pursuant to an exemption from) the
registration and qualification requirements of federal and all applicable
state securities laws. The form of certificate used to evidence the Common
Stock is in proper form under the Minnesota Business Corporation Act.

(iv) No shareholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe
for or purchase securities of the Company arising (i) by operation of the
Articles of Incorporation or bylaws of the Company or the Minnesota Business
Corporation Act or (ii) under any agreement known to us to which the Company
is a party.

(v) The Underwriting Agreement has been duly authorized by all requisite
corporate action, executed and delivered by, and
<PAGE>

constitutes the valid and binding obligation of, the Company, enforceable in
accordance with its terms.

(vi) The Shares have been duly authorized for issuance and sale pursuant
to the Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.

(vii) The Registration Statement has been declared effective by the
Securities and Exchange Commission (the "Commission") under the Securities
Act. To our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued under the Securities Act and no
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission.

(viii) The Prospectus has been filed as required and within the time
periods required by Rule 424(b) under the Securities Act.

(ix) The Registration Statement, the Prospectus, including the documents
incorporated by reference therein, and each amendment or supplement to the
Registration Statement and the Prospectus including the documents
incorporated by reference therein, as of their respective dates (other than
the financial statement and supporting schedules included or incorporated by
reference therein or in exhibits to the Registration Statement, as to which
we express no opinion) comply as to form in all material respects with the
applicable requirement of the Securities Act and the Exchange Act.

(x) The Company's Common Stock is listed on the Nasdaq National Market.

(xi) The statements in the Prospectus under the captions "Description of
Capital Stock - Common Stock, - Preferred Stock, - Shareholder Rights Plan
and -Provisions of our Restated Articles and Bylaws and State Law Provisions
with Potential Antitakeover Effects," "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Litigation," and (ii)
Item 15 of the Registration Statement, insofar as such statements constitute
matters of law or summaries of legal matters, the Company's Articles of
Incorporation or Bylaws, documents or legal proceedings, fairly present, in
all material respects, the matters referred to therein.

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<PAGE>

(xii) To our knowledge, there are no legal or governmental actions,
suits or proceedings pending or threatened against the Company which are
required to be disclosed in the Registration Statement (including the
documents incorporated by reference therein), other than those disclosed
therein.

(xiii) To our knowledge, there are no agreements or instruments to which
the Company is a party required to be described or referred to in the
Registration Statement (including the documents incorporated by reference
therein) or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits
thereto.

(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of
the Underwriting Agreement and the consummation of the transactions
contemplated thereby and by the Prospectus, except such as have been
obtained or made and such as are required under the Securities Act,
applicable state securities or blue sky laws or from the NASD.

(xv) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder (i)
will not result in any violation of the provisions of the Articles of
Incorporation or Bylaws of the Company, (ii) will not constitute a breach of
or default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company, pursuant
to any agreement filed as an exhibit to the Company's 10-K for the year
ended December 31, 1998, the Company's 10-Q for the quarter ended March 31,
1999, the Company's 10-Q for the quarter ended June 30, 1999 and the
Company's 8-K filed on June __, 1999, and (iii) to our knowledge, will not
result in any violation of any law, administrative regulation or
administrative or court decree of the United States or the State of
Minnesota applicable to the Company.

(xvi) The Company is not, and after receipt of payment for the Shares,
will not be an investment company within the meaning of the Investment
Company Act of 1940 .

(xvii) Except as disclosed in the Prospectus, to our knowledge, there
are no persons with registration or other similar rights to have any

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<PAGE>

equity or debt securities registered for sale under the Registration Statement
or included in the offering contemplated by the Underwriting Agreement.

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<PAGE>

EXHIBIT B

Banc of America Securities LLC
Bear, Stearns & Co. Inc.
Morgan Keegan & Company, Inc.
John G. Kinnard & Company, Incorporated
As Representatives of the Several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111

RE: Public Offering of the Common Stock of Ancor Communications, Incorporated
(the "Company")

Ladies & Gentlemen:

The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives (the "Representatives") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters
are relying on the representations and agreements of the undersigned contained
in this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.

In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Banc of America
Securities LLC (which consent may be withheld in its sole discretion), directly
or indirectly, sell, offer, contract or grant any option to sell (including,
without limitation, any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, as amended, or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing (except that the undersigned may exercise stock options held by the
undersigned provided that the shares of Common Stock issued upon such exercise
shall be subject to the terms of this agreement as if owned on the date hereof)
for a period commencing on the date hereof and continuing to a date 120 days
after the first date any of the Common Stock to be sold in the Offering is
released by you for sale to the public. The undersigned also agrees and consents
to the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.

This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.

Dated: July ____, 1999

____________________________________________________________
Printed Name of Holder
By: _________________________________________________________
Signature
_____________________________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if signing
as custodian, trustee, or on behalf of an entity)

-1-

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Exhibit 23.1

Independent Auditors' Consent

The Board of Directors
Ancor Communications, Inc.:

We consent to the use of our reports included herein and incorporated herein by
reference and to the reference to our firm under the headings "Selected
Financial Data" and "Experts" in the prospectus.

/s/ KPMG LLP

Minneapolis, Minnesota
July 22, 1999

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Exhibit 23.2

CONSENT OF INDEPENDENT ACCOUNTANT

We hereby consent to use in this Registration Statement on Form S-3 of our
report dated February 19, 1998 relating to the financial statements of Ancor
Communications, Incorporated, as of December 31, 1997 and for each of the two
years in the period ended December 31, 1997, and to the references to our Firm
under the captions "Experts" and "Selected Financial Data" in the Prospectus.

/s/ McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP

Minneapolis, Minnesota
July 23, 1999