FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

ANCOR COMMUNICATIONS (NASDAQ/SC: ANCR)
6130 Blue Circle Dr.
Minnetonka, MN 55343
(612) 932-4000
http://www.ancor.com

ALEXANDRIA, Va., Nov. 9, 1996 /FOOLWIRE/-- Ancor Communications, Inc. announced on November 7 financial results for the third quarter ended September 30, 1996.

Sales for the third quarter were $1.86 million, a 42% increase from sales of $1.31 million in the 1995 third quarter. Sales for the 1996 first three quarters totaled $5.37 million, an increase of 77% from the 1995 first three quarters sales of $3.04 million The net loss for the quarter was $1.193 million or 12 cents loss per share, compared with a net loss of $604,725, or 8 cents loss per share, for the third quarter of 1995. The net loss for the first three quarters of 1996 was $2.899 million, or 32 cents loss per share, versus a net loss of $2.537 million, or 35 cents loss per share, for the first three quarters of 1995. Gross profit in the third quarter of 1996 was 50.1% of sales, compared to 52.4% of sales in the comparable 1995 quarter. Gross profit in the 1996 first 9 months improved to 47.2% of sales, compared to 43.7% of sales in the first 9 months of 1995.

Stephen O'Hara, Ancor's president and chief executive officer, said the Fibre Channel revenue growth in the third quarter was driven by significant marketing wins in Ancor's international sectors. "Ancor's international strength was clearly exhibited in the Nippon Telephone and Telegraph (NTT) joint development and marketing initiative to integrate Ancor's Fibre Channel local and metropolitan network foundation into NTT's wide area SONET implementations," said O'Hara. "We continue to see the Pacific markets leading the way with Fibre Channel installations. Those markets have fewer legacy network impediments to pursuing future networking technology upgrades."

FINANCIAL COMMENTS

Ancor has shipped over 250 switches to over 105 customers since the beginning of the company's fibre channel efforts. While total sales were up over 70% vs. 1995, fibre channel sales were up over 100% over the first nine months of 1995. Higher shipment volumes and efficiencies accounted for the 350 basis point (1 basis point = 1/100th of a percentage point) increase in gross margins through the third quarter of 1997. While operating expenses as a percentage of sales were up in the third quarter, in the fiscal year to date that percentage has decreased compared to last year. Operating expenses increased due primarily to programmed increases in sales & marketing and engineering personnel. "Intensive" R&D spending on next-generation switch programs and stepped-up fibre channel PR and awareness programs also increased operating expenses.

Balance sheet changes consisted of increased accounts/receivable and inventory levels supporting the company's aggressive market penetration plans through extended terms and loaned evaluation inventories. Additional paid-in-capital was realized through warrant and options exercises of a little over 250,000 shares. Less than 25% of the March Regulation S stock offering is outstanding. Outstanding common shares stand at approximately 10,230,000 shares.

"We continue to monitor the non-cash invested capital turnover." With higher quarter-end receivables and inventory, capital turnover decreased to 0.8 times in Q3 1996 compared to 1.2 times last quarter. Inventory turned 1.1 times in Q3 vs. 1.8 in the previous quarter. These ratios reflect the amount of inventory currently in test-bed evaluation trials. Record gross shipments levels were achieved in the 1996 third quarter at $2.6 million. However, these shipments were offset by a significant credit of $700,000 following a distributor customer's decision to radically change its hardware/network configuration. Rather than refuse the credit, Ancor decided to preserve its reputation, taking the product back to keep the distributor and the customer happy.

Adjusting for the abnormal international credit, accounts/receivable days-sales-outstanding (DSO) was up slightly to 155 days from 149 days one quarter ago. This DSO number is due to the company's aggressive market penetration strategy of granting extended payments terms to many significant accounts.

The company chooses not to provide forward guidance. Though the Federal Reserve put Ancor's stock on its "marginable" list this summer, Nasdaq's approval process is moving slowly -- the company forwarded further financial statements to that body on the day of its Q3 earnings release.

SECOND HALF 1996 REVIEW AND Q4 PLANS

During the quarter, Ancor added two new marketing and communications specialists. The company has begun its advertising creative work -- these ads will appear in general trade and industry-specific publications in the December-January timeframe. Aggressive development of the seminar program continues; the company has completed six seminars in major East Coast cities in October-November. These have yielded several multi-million dollar opportunities. In domestic sales, two representatives have been added in the South and West. The company now has five field sales reps compared with two a year ago.

In the movie production market, Ancor has constructed a test-bed metropolitan area network to provide fibre channel productivity between two sites of a leading post-production house. The test is being conducted with a telecommunications firm which is providing dark fiber in the Hollywood area. Furthermore, this test is running fibre channel up to 20 kilometers using special repeaters -- initial test results are encouraging. This test should run for another 3-4 weeks. When complete, this will be the fastest metropolitan area network available to date. Approximately 30 other post-production sites have been identified as having interest in being connected to this network.

In the broadcast market, Ancor is developing the industry standard with SMPTI. In conjunction with SMPTI, Ancor recently presented fibre channel to the EBU, or European Broadcast Union. During the third quarter, the company signed an agreement with a major re-seller in the broadcast market, AVDiGiTAL; furthermore, the company expects to sign another major re-seller in the fourth quarter. Together, these two re-sellers have significant reach in the worldwide broadcast market. In the next 90 days, the company expects to install a production system in a major-revenue-market television station and a testbed in a major television network. Both should lead to significant business in 1997.

In the financial market, the company should complete the installation of a data backup testbed in a major brokerage firm by the end of the year, which should lead to revenues in FY 1997.

In the oil and gas industry, two testbeds are preceding with very encouraging results. Ancor products will be integrated into a system used to gather real-time seismic information from ships or land vehicles analyzing and mapping the ocean floor or land masses. This information, along with warehouses of data -- to data unusable due to volume -- will now be analyzed using Cray Computers. "Good hits" are sent to Sun Servers and workstation clusters via Ancor's fibre channel networks for further analysis. Ancor's networks solved the customer's bandwidth bottleneck problems. The two companies with testbeds are major systems integrators in the geoseismic market, controlling a large majority of the market. In 1997, in conjunction with these systems integrators, Ancor expects to propose fibre channel systems to 15-20 major oil companies.

In the third quarter, the company signed an agreement with ST Computing, a subsidiary of Singapore Technologies, to give the company coverage in Asia. The company also expects to sign a German distributor in the fourth quarter. Ancor's work with NTT in developing an STM-ATM fibre channel interface is progressing well. The company presented the draft specification to FCA-Japan on November 6 and will be approaching ANSI and FCA over the next two months. The company aims to have a prototype to begin work on in early 1997. This system will allow NTT to offer gigabit fibre channel in the LAN connected directly through the WAN. Targeted applications will include universities, hospitals, CAD/CAM centers, weather forecasting, and general multimedia applications.

In the gigabit ethernet area, Ancor is continuing its efforts to influence the Gigabit Ethernet Alliance and standard. The Alliance is recommending a buffer-to-buffer flow control and now Ancor, along with others, are recommending an end-to-end method. End-to-end flow control provides congestion control which the 802.3X buffer-to-buffer flow control does not. Companies are beginning to realize that end-to-end flow control is the only way a scaleable gigabit ethernet backbone can be designed. Ancor is jointly presenting a paper on this subject at the November 10 Vancouver IEEE 802.3Z meeting next week.

During the third quarter, there was a slight schedule slip in the systems integration process with Sequent. Ancor is working Sequent and its partners to complete the systems integration work and continue to move the process forward. Sequent is strongly committed to the fibre channel version for their route to scalability. The company believes that its fourth quarter shipment will be delayed but expects to commence with volume shipments in Q1 1997.

NEW PROJECTS

The first project to come out of the seminar series is a joint armed forces project. Ancor's products have passed the first stage of the prototype phase and the company expects to pass the second stage this year. Once this phase is complete, the company's products will be speced into a bid by mid-1997, moving toward a project completion by 1998. Ancor expects the project to be valued at $8-13 million and implementation to start in the second half of 1997.

On November 6, the company announced a $7.4 million contract through its Japanese distributor, Hucom, in which Ancor's products will be the backbone network for a major company's new design center. The company did not want its name to be released as the design center is giving them a competitive advantage. They are building a CAD/CAM design center for several hundred engineers with SGI workstations and IBM SP2 servers. Ancor fibre channel will provide the campus backbone and desktop network in four phases. O'Hara said an initial $1.7 million order for Ancor switches, adapters and Fibre Channel network management software will be shipped in the fourth quarter of 1996. He said the company expects to ship three more orders of Ancor Fibre Channel network products totaling an additional $5.4 million throughout the first three quarters of 1997. When complete, the network will include 100 Ancor Fibre Channel switches and 1,000 Ancor Fibre Channel adapters.

QUESTION AND ANSWER SESSION

The Sequent deal is absolutely going forward but the initial $1.8 million order is expected move into Q1 1997. The delay is to be expected for such a large systems integration with such a large number of vendors participating in the project.

The Japanese LAN-backbone deal does involve NTT and has been going on for about seven months. The customer looked at the work being done at Kobe University, which is one of the reason that testbeds are so important. NTT is involved in the role of systems integrator. The prospect are very good for other of this customer's facilities implementing a similar system or tying into this center.

The $700,000 order taken back in this quarter was booked in the second quarter and was not a product issue. That customer simply re-thought their system needs and came up with a configuration for which fibre channel was not the best choice.

R&D is up because of programmed increases due to switch development and increased outsourcing for "mercenary engineering" needs. R&D will run at about this rate going forward.

$1.2 million is the basic burn rate per quarter going forward.

AVDiGiTal is the re-seller that helped the company put together the Hollywood metropolitan area network and is working on getting Ancor into the demonstration room of a major workstation player in that market. AVDiGiTal offers Ancor the entree into a number of different studios and networks which Ancor alone does not have.

The company had a good switch-to-adaptor ratio, but does not break it out specifically, which allowed the 50%+ gross profit level.

Most gigabit ethernet developers are working on a what O'Hara calls an "access switch," which aggregate 12-24 10-100 ethernets up to 1 or 2 gigabit pipes coming off that switch. 2 or 3 of those switches will allow a 36-72 node network. Ancor is more interested in the enterprise backbone market, which is the way to build large systems, how to scale large systems and connect 5 or 50 of these switches. Those systems with 1 or 2 ports will become commodity items very quickly as soon as the market evolves.

The company expects significant portions of accounts/receivable and inventory to convert to cash this quarter. Lee Lewis expressed comfort with these working capital items, put together with their $3.6 million in cash, to provide adequate capital support in the near-term.

The Fibre Channel workgroup will have big presence at Comdex -- Ancor will be participating in the workgroup's numerous events at the show. Ancor does believe in arbitrated loop and its excellence in the storage industry and does believe that it can add to arbitrated loop scalability.

NTT is the phone company in Japan -- there's only one infrastructure company to penetrate, as compared to the US where there are RBOCs, CLECs, long-distance, and other sorts of companies to deal with. Hucom has done an excellent job with getting Ancor into NTT, which has the tacit mandate of the Japanese government to develop network infrastructure throughout that country. There are fewer routers in Japan and it's easier to flatten networks with the relative lack of legacy systems to deal with. Finally, NTT may be willing to take a little more risk in developing networks.

With the NUMA-Q architecture, that is a box of processors connected via fibre channel to disks running SCSI. The Sequent application allows any processor to access any disk directly rather than running through a chain -- the switch is so important in allowing for this scalability.

The company will be at the Society of Exploration Geologists' meeting, November 10-13 in Denver, at the Sun Microsystems booth participating in a geoseismic demonstration.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.