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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

COMMISSION FILE NUMBER: 0-13994

COMPUTER NETWORK TECHNOLOGY CORPORATION

6000 Nathan Lane North, Minneapolis, Minnesota 55442

Telephone Number: (763) 268-6000

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

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

As of May 30, 2003, the registrant had 27,008,895 shares of $.01 par value common stock issued and outstanding.

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COMPUTER NETWORK TECHNOLOGY CORPORATION

INDEX

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PART I

Item 1.

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

See accompanying notes to Consolidated Financial Statements

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

See accompanying notes to Consolidated Financial Statements

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

See accompanying notes to Consolidated Financial Statements

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

(1) BASIS OF PRESENTATION

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

(2) MARKETABLE SECURITIES

     During the first quarter of fiscal 2003, the Company sold marketable securities totaling $122 million, resulting in a net pre-tax gain of approximately $747. No significant gains or losses from the sale of marketable securities were recorded during the first quarter of fiscal 2002.

     The Company’s investments in marketable securities primarily consist of U.S. government and agency securities, corporate debt securities and bank certificates of deposit. The Company also has 41,031 shares of webMethods stock received in connection with the sale of IntelliFrame.

(3) INVENTORIES

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

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(4) ACQUISITIONS

Inrange (subsequent event)

     On April 6, 2003, the Company entered into an agreement where a wholly owned subsidiary of the Company would acquire all of the shares of Inrange Technologies Corporation (Inrange) that were owned by SPX Corporation. The shares acquired constituted approximately 91% of the issued and outstanding shares of Inrange for a purchase price of approximately $2.31 per share and $173 million in the aggregate. On May 5, 2003 the Company completed the acquisition of Inrange and pursuant to the agreement the subsidiary merged into Inrange, and the remaining capital stock owned by the other Inrange shareholders was converted into the right to receive approximately $2.31 per share in cash, resulting in a total payment of $190 million for both the stock purchase and merger. The Company expects to record an integration charge during the fiscal second quarter ending July 31, 2003 for severance costs related to termination of the Company’s employees, professional fees and travel costs related to the integration. Other possible integration charges include inventory and asset write-downs related to discontinued product lines. The Company may also record a charge for in-process research and development pending completion of the purchase price allocation analysis. The size and scope of any charges will not be known until the Company’s integration planning is complete.

     The following table presents the unaudited pro forma consolidated results of operations of the Company for the first quarter of fiscal 2003 and 2002 as if the acquisition of Inrange took place on February 1, 2003 and 2002, respectively:

     The unaudited pro forma results are for comparative purposes only and do not necessarily reflect the results that would have been recorded had the acquisition occurred at the beginning of the period presented or the results which might occur in the future. The allocation of the purchase price to the acquired assets and liabilities of Inrange is subject to adjustment pending completion of a purchase price allocation study and will likely result in changes to the pro forma net loss amounts.

BI-Tech

     On June 24, 2002, the Company acquired all the outstanding stock of Business Impact Technology Solutions Limited (BI-Tech), a leading provider of storage management solutions and services, for $12 million in cash plus the assumption of approximately $3.6 million of liabilities and the acquisition of approximately $8.7 million of tangible assets. The Company allocated $6.5 million, $1.1 million and $250 of the purchase price to goodwill, customer list and non-compete agreements, respectively. The customer list and non-compete agreements are amortized over periods of ten and two years, respectively. The accompanying financial statements include the results of BI-Tech since June 24, 2002.

     The purchase agreement requires payment of additional consideration to the former stockholders and the BI-Tech employees based on achievement of certain earnings for each of the two years beginning July 1, 2002. The purchase agreement required the Company to pay this additional consideration at its option, in the form of a note payable or the Company’s stock to the former stockholders, and in cash to the BI-Tech employees. The portion payable to the former stockholders is recorded as goodwill. The portion payable to BI-Tech employees is recorded as compensation expense. During the first quarter of 2003 and based on BI-Tech’s operations since July 1, 2002, an additional $719 and $4.3 million, respectively, was added to goodwill and $312 and $1.1 million, respectively, was recorded as compensation expense and a corresponding liability was recorded.

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(5) GOODWILL AND INTANGIBLE ASSETS

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

     The components of other amortizable intangible assets were as follows: