<PAGE>   1


================================================================================



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-Q

                                   ----------

        (Mark One)
        [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       OR

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

                FOR THE TRANSITION PERIOD FROM         TO
                                               -------    -------

                        COMMISSION FILE NUMBER 000-31257

                               MCDATA CORPORATION
             (Exact name of registrant as specified in its charter)

               DELAWARE                               84-1421844
 (State or other jurisdiction of         (I.R.S. Employer Identification No.)
  incorporation of organization)

               310 INTERLOCKEN PARKWAY, BROOMFIELD, COLORADO 80021
               ---------------------------------------------------
               (Address of principal executive offices)(zip code)

                                 (303) 460-9200
                                 --------------
              (Registrant's telephone number, including area code)

                                      NONE
                                      ----
              (Former name, former address and former fiscal year,
                          if changed since last report)

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

At April 27, 2001, 81,000,000 shares of the registrant's Class A Common Stock
were outstanding and 30,206,680 shares of the registrant's Class B Common Stock
were outstanding.

================================================================================

<PAGE>   2


                               MCDATA CORPORATION

                                    FORM 10-Q
                          QUARTER ENDED MARCH 31, 2001

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM                                                                      PAGE
----                                                                      ----
                         PART 1 - FINANCIAL INFORMATION
<S>   <C>                                                                <C>

1.    Financial Statements

        Consolidated Balance Sheets -
           March 31, 2001 (unaudited) and December 31, 2000.............    1

        Consolidated Income Statements -
           Three Months ended March 31, 2001 (unaudited) and
           March 31, 2000 (unaudited)...................................    2

        Consolidated Statements of Cash Flows - Three Months ended
           March 31, 2001 (unaudited) and
           March 31, 2000 (unaudited)...................................    3

        Notes to Consolidated Financial Statements (unaudited)..........    4

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

3.    Quantitative and Qualitative Disclosures About Market Risks.......   16

                           PART II - OTHER INFORMATION

1.    Legal Proceedings.................................................   18

2.    Changes in Securities and Use of Proceeds.........................   18

3.    Defaults Upon Senior Securities...................................   18

4.    Submission of Matters to A Vote of Security Holders...............   18

5.    Other Information.................................................   18

6.    Exhibits and Reports on Form 8-K..................................   18
</TABLE>



<PAGE>   3


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Some of the information presented in this Quarterly Report contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Although McDATA Corporation
("McDATA" or the "Company", which may also be referred to as "we," "us" or
"our") believes that its expectations are based on reasonable assumptions within
the bounds of its knowledge of its businesses and operations, there can be no
assurance that actual results will not differ materially from our expectations.
Factors that could cause actual results to differ materially from expectations
include:

o    changes in our relationship with EMC Corporation ("EMC") and International
     Business Machines Corporation ("IBM") and the level of their orders;

o    the economic slowdown experienced in late 2000 and early 2001 that may
     continue and delay purchasing decisions by customers;

o    additional manufacturing costs that we may continue to experience as we
     continue the transition to new products;

o    our ability to secure additional chassis supply sources for our mid- and
     low-end products and the financial strength of our current chassis supplier
     for such products;

o    the transition to the contract manufacturer of our director products as
     contract manufacturer for our mid- to low-end products;

o    significant growth in sales of our products through system integrator sales
     channels;

o    a loss of any of our key customers, distributors, resellers or our
     manufacturers;

o    our ability to expand our product offerings and any transition to new
     products;

o    component quality and availability;

o    the development of the storage area network and switch markets;

o    any change in business conditions, our sales strategy or product
     development plans;

o    competition in the storage area network and switch markets (including
     competitive pricing pressures);

o    our ability to attract and retain highly skilled individuals;

o    continued market acceptance of our product, name recognition of our
     products and changes in customer buying patterns;

o    delays in the development of new products and new technology; and

o    one-time events and other important risks and factors disclosed previously
     and from time to time in our filings with the U.S. Securities and Exchange
     Commission, including the risk factors discussed in this Quarterly Report.

<PAGE>   4


         You should not construe these cautionary statements as an exhaustive
list or as any admission by us regarding the adequacy of the disclosures made by
us. We cannot always predict or determine after the fact what factors would
cause actual results to differ materially from those indicated by our
forward-looking statements or other statements. In addition, you are urged to
consider statements that include the terms "believes," "belief," "expects,"
"plans," "objectives," "anticipates," "intends," or the like to be uncertain and
forward-looking. All cautionary statements should be read as being applicable to
all forward-looking statements wherever they appear. We do not undertake any
obligation to publicly update or revise any forward-looking statements.




<PAGE>   5



PART I - FINANCIAL INFORMATION

                               MCDATA CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                MARCH 31,   DECEMBER 31,
                                                                                  2001          2000
                                                                               ----------   ------------
                                                                              (UNAUDITED)
<S>                                                                            <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents ...............................................   $  128,339    $  174,630
   Short-term investments ..................................................      168,979       191,060
   Accounts receivable, net ................................................       69,055        58,797
   Inventories, net ........................................................       44,411        23,105
   Deferred tax asset ......................................................       10,328         9,232
   Prepaid expenses and other current assets ...............................        5,111         3,467
                                                                               ----------    ----------
Total current assets .......................................................      426,223       460,291
Property and equipment, net ................................................       31,569        26,894
Long-term investments ......................................................       49,559        22,378
Restricted investments .....................................................       16,971            --
Other assets, net ..........................................................        1,830         1,806
                                                                               ----------    ----------
            Total assets ...................................................   $  526,152    $  511,369
                                                                               ==========    ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable ........................................................   $   29,981    $   26,547
   Accrued liabilities .....................................................        9,449         9,058
   Deferred revenue ........................................................        8,582         7,778
   Income taxes payable ....................................................        3,794        10,103
   Obligations under capital leases ........................................        2,639         2,446
                                                                               ----------    ----------
Total current liabilities ..................................................       54,445        55,932
Obligations under capital leases ...........................................        1,910         1,624
                                                                               ----------    ----------
            Total liabilities ..............................................       56,355        57,556
                                                                               ----------    ----------

Commitments and Contingencies (Notes 6 and 7)

Stockholders' Equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares
   issued or outstanding ...................................................           --            --
Common stock, Class A, $0.01 par value, 250,000,000 shares
   authorized, 81,000,000 shares issued and outstanding ....................          810           810
Common stock, Class B, $0.01 par value, 200,000,000 shares authorized,
   30,150,075 and 28,907,689 shares issued and outstanding
   at March 31, 2001 (unaudited) and December 31, 2000, respectively .......          302           289
Additional paid-in capital .................................................      460,073       454,009
Deferred compensation ......................................................      (22,631)      (24,850)
Accumulated other comprehensive income .....................................          263           117
Retained earnings ..........................................................       30,980        23,438
                                                                               ----------    ----------
Total stockholders' equity .................................................      469,797       453,813
                                                                               ----------    ----------
            Total liabilities and stockholders' equity .....................   $  526,152    $  511,369
                                                                               ==========    ==========
</TABLE>


              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.



                                       1
<PAGE>   6


                               MCDATA CORPORATION

                         CONSOLIDATED INCOME STATEMENTS
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                  MARCH 31,
                                                           ------------------------
                                                              2001          2000
                                                           ----------    ----------
<S>                                                        <C>           <C>

Revenue ................................................   $   83,035    $   47,134
Cost of revenue ........................................       45,571        22,610
                                                           ----------    ----------
      Gross profit .....................................       37,464        24,524

Operating expenses:
Research and development ...............................       10,093         7,644
Selling and marketing ..................................       13,819         5,856
General and administrative .............................        4,542         1,357
Amortization of deferred compensation
     (excludes amortization of deferred compensation
     included in costs of revenue of $496 and
     $439, respectively.) ..............................        1,723         1,336
                                                           ----------    ----------
      Operating expenses ...............................       30,177        16,193
                                                           ----------    ----------
Income from operations .................................        7,287         8,331

Interest income ........................................        4,781           109
Interest expense .......................................          (97)         (144)
                                                           ----------    ----------
Income before income taxes .............................       11,971         8,296
Income tax expense .....................................        4,429         3,448
                                                           ----------    ----------
Net income .............................................   $    7,542    $    4,848
                                                           ==========    ==========


Basic net income per share .............................   $     0.07    $     0.05
                                                           ==========    ==========

Shares used in computing basic net income per share ....      110,687        93,395
                                                           ==========    ==========


Diluted net income per share ...........................   $     0.06    $     0.05
                                                           ==========    ==========

Shares used in computing diluted net income per share ..      117,587        99,692
                                                           ==========    ==========
</TABLE>



              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.



                                       2
<PAGE>   7


                               MCDATA CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED
                                                                                  MARCH 31,
                                                                            ----------------------
                                                                               2001         2000
                                                                            ---------    ---------
<S>                                                                         <C>          <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..............................................................   $   7,542    $   4,848
Adjustments to reconcile net income to cash flows from
    operating activities:
      Depreciation and amortization .....................................       3,254        2,057
      Inventory provision ...............................................         900          302
      Deferred income taxes .............................................      (1,374)        (782)
      Noncash compensation expense ......................................       2,219        1,776
      Tax benefit from stock options exercised ..........................       4,495           95
Changes in assets and liabilities:
      Accounts receivable, net ..........................................     (10,258)      (8,879)
      Inventories .......................................................     (22,801)       1,023
      Prepaid expenses and other current assets .........................      (1,644)       1,064
      Other assets, net .................................................          32          124
      Accounts payable ..................................................       3,434         (256)
      Accrued liabilities ...............................................         391          587
      Deferred revenue ..................................................         804        1,560
      Income taxes payable ..............................................      (6,309)          --
                                                                            ---------    ---------
Net cash (used) provided by operating activities ........................     (19,315)       3,519
                                                                            ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net ................................      (5,929)      (1,641)
Purchases of investments ................................................    (306,369)          --
Maturities of investments ...............................................     284,558           --
                                                                            ---------    ---------
Net cash used in investing activities ...................................     (27,740)      (1,641)
                                                                            ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of obligations under capital leases .............................        (818)        (706)
Proceeds from exercise of stock options .................................       1,582          713
                                                                            ---------    ---------
Net cash provided by (used in) financing activities .....................         764            7
                                                                            ---------    ---------

Net (decrease) increase in cash and cash equivalents ....................     (46,291)       1,885
Cash and cash equivalents, beginning of period ..........................     174,630        6,897
                                                                            ---------    ---------
Cash and cash equivalents, end of period ................................   $ 128,339    $   8,782
                                                                            =========    =========

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred ......................................   $   1,297    $     852
                                                                            =========    =========

Transfer of inventory to fixed assets ...................................   $     595    $     150
                                                                            =========    =========
</TABLE>



              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.



                                       3
<PAGE>   8


                               MCDATA CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION

     McDATA Corporation ("McDATA" or "the Company") designs, develops,
manufactures and sells Fibre Channel switching devices that enable
enterprise-wide high performance storage area networks. The Company sells its
products through original equipment manufacturers ("OEM") and resellers,
including EMC Corporation ("EMC"), Hitachi Data Systems, Hewlett-Packard Co.,
and IBM, as well as systems integrators. The Company also provides services for
EMC's ESCON switch business under a service agreement with EMC.

     As of December 31, 2000, EMC owned 81 million shares of the Company's Class
A common stock, or approximately 74% of the outstanding common stock of the
Company. Each share of the Company's Class A common stock entitles its holder to
one vote, and each share of the Company's Class B common stock entitles its
holder to one-tenth (1/10) of one vote per share. Therefore, EMC's ownership of
the Class A common stock as of December 31, 2000 represented approximately 97%
of the combined voting power of the Company's Class A and B common stock.

     On February 7, 2001, EMC distributed its shares in McDATA Class A common
stock to EMC's shareholders of record as of January 24, 2001. EMC has received a
ruling from the Internal Revenue Service that the distribution to EMC
stockholders will be tax free for U.S. federal income tax purposes. The Company
currently believes that the distribution of its Class A common stock by EMC was
tax free. The Class A stock now trades on the NASDAQ National Market under the
symbol "MCDTA". As a result of this distribution, EMC no longer has any
ownership or voting power in McDATA and, therefore, is no longer considered a
related party.

     The accompanying consolidated financial statements of McDATA and its
subsidiaries have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in the Company's annual consolidated
financial statements have been condensed or omitted. The consolidated balance
sheet as of December 31, 2000 has been derived from the audited financial
statements as of that date, but does not include all disclosures required by
generally accepted accounting principles. For further information, please refer
to and read these interim consolidated financial statements in conjunction with
the Company's audited financial statements for the year ended December 31, 2000.

     Certain amounts in the consolidated balance sheet as of December 31, 2000
and certain amounts in the consolidated income statement for the three months
ended March 31, 2000 have been reclassified in order to conform to the current
presentation.

     The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and cash flows of the Company for the periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the entire fiscal year or future
periods.













                                       4
<PAGE>   9

NOTE 2 - NET INCOME PER SHARE

         Calculation of net income per share (in thousands, except per share
information):

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                 MARCH 31,
                                                          -----------------------
                                                             2001         2000
                                                          ----------   ----------
<S>                                                       <C>          <C>

Net income ............................................   $    7,542   $    4,848
                                                          ==========   ==========

Weighted average shares of common stock outstanding
    used in computing basic net income per share ......      110,687       93,395
Effect of dilutive stock options ......................        6,900        6,297
                                                          ----------   ----------
Weighted average shares of common stock outstanding
    used in computing diluted net income per share ....      117,587       99,692
                                                          ==========   ==========

Basic net income per share ............................   $     0.07   $     0.05
                                                          ==========   ==========

Diluted net income per share ..........................   $     0.06   $     0.05
                                                          ==========   ==========
</TABLE>


NOTE 3 - RESTRICTED INVESTMENTS

         On February 9, 2001, the Company entered into a lease for an
approximately 167,000 square foot multi-story office and engineering building to
be constructed on a 109 acre parcel of land located in Broomfield, Colorado (see
note 7). As part of the lease, the Company has agreed to restrict a portion of
its investment securities as collateral for specified obligations under the
lease. As of March 31, 2001, the Company had restricted investments totaling
$16,971,000.

NOTE 4 - COMPREHENSIVE INCOME

         Comprehensive income consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED
                                                        MARCH 31,
                                                 -----------------------
                                                    2001         2000
                                                 ----------   ----------
<S>                                              <C>          <C>

Net income ...................................   $    7,542   $    4,848
Unrealized gain on investments, net of tax ...          146           --
                                                 ----------   ----------
Comprehensive income .........................   $    7,688   $    4,848
                                                 ==========   ==========
</TABLE>


NOTE 5 - INVENTORIES

         The components of inventory were as follows (in thousands):

<TABLE>
<CAPTION>
                                     MARCH 31,   DECEMBER 31,
                                       2001          2000
                                    ----------   ------------
<S>                                 <C>           <C>

Raw materials ...................   $   34,231    $   19,058
Work-in-progress ................        4,942           872
Finished goods ..................       10,449         7,490
                                    ----------    ----------
   Total inventories at cost ....       49,622        27,420
Less reserves ...................       (5,211)       (4,315)
                                    ----------    ----------
   Total inventories, net .......   $   44,411    $   23,105
                                    ==========    ==========
</TABLE>


                                       5

<PAGE>   10



NOTE 6 - CONTINGENCIES

         From time to time, the Company is subject to claims arising in the
ordinary course of business. In the opinion of management, no such matter,
individually or in the aggregate, exists which is expected to have a material
effect on the Company's consolidated results of operations, financial position
or cash flows.

         The Company has contracted with various manufacturers for the
manufacture of printed circuit boards and box build assembly for specific Fibre
Channel directors and switches. The agreement with these entities require the
Company to submit purchasing forecasts, place orders and reschedule orders for
products as necessary. At March 31, 2001 and December 31, 2000, the entities had
on hand materials purchased on behalf of McDATA valued at approximately
$43,364,000 and $33,205,000. In addition, these entities have purchase
commitments related to materials that they have also ordered on McDATA's behalf.
The Company may be liable for materials purchased on McDATA's behalf if the
Company's actual requirements do not meet or exceed its forecasts and those
materials cannot be redirected to other uses. Management does not expect this
commitment to have a material adverse effect on the Company's business, results
of operations, financial position or cash flows. The agreements renew monthly
and all parties have customary termination rights.

         The Company has various commitments for sales, purchases and employee
benefit plans in the ordinary course of business. In the aggregate, such
commitments do not differ significantly from current market prices or
anticipated usage requirements.

NOTE 7 - COMMITMENTS

         On February 9, 2001, the Company entered into a lease for an
approximately 167,000 square foot multi-story office and engineering building to
be constructed on a 109 acre parcel of land located in Broomfield, Colorado.
Construction of the building is anticipated to commence in the first half of
2001 and is scheduled to be completed no later than February 2003. The initial
term of the lease is for 78 months, with an option to renew the lease for
additional 12 month terms, subject to certain conditions. The Company, at its
option, may purchase the facility during or at the end of the term of the lease
for approximately the amount expended by the lessor to acquire the land and
construct the building (approximately $60 million). If the Company does not
renew the lease, exercise the purchase option by the end of the lease, or
arrange for the sale of the property to a third-party, the Company has
guaranteed a residual value of the facility as a percentage of the original
costs (approximately 85% of such original costs). As part of the lease, the
Company has agreed to restrict up to $60 million (plus 5 percent) of its
investment securities as collateral for specified obligations under the lease.
In addition, the lease agreement requires that the Company maintain compliance
with certain affirmative and negative covenants, representations and warranties,
including certain defined financial covenants.

         Subsequent to March 31, 2001, the Company's die-cast chassis supplier
for its new low-end and mid-range switch products has experienced financial
difficulties. To ensure continued product supply, the Company has provided an
interim financing guarantee in the amount of $500,000 to the lender of that
supplier. The Company's obligation to pay amounts due under the guarantee when,
and if, it is drawn upon is fully secured by cash collateral on deposit with an
escrow agent. The Company is not obligated to provide any additional financing
for the benefit of the supplier and will evaluate the need to do so based on the
ability to secure additional chassis supply sources.




                                       6
<PAGE>   11



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         You should read the following discussion and analysis in conjunction
with the consolidated financial statements and notes thereto included in Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report
filed on Form 10-K with the Securities and Exchange Commission on March 2, 2001.


RESULTS OF OPERATIONS

         The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED
                                                         MARCH 31,
                                                ------------------------
                                                   2001          2000
                                                ----------    ----------
<S>                                             <C>           <C>

Revenue .....................................        100.0%        100.0%
Cost of revenue .............................         54.9          48.0
                                                ----------    ----------
Gross profit ................................         45.1          52.0
                                                ----------    ----------

Operating expenses:
   Research and development .................         12.1          16.2
   Selling and marketing ....................         16.6          12.4
   General and administrative ...............          5.5           2.9
   Amortization of deferred compensation ....          2.1           2.8
                                                ----------    ----------
            Total operating expenses ........         36.3          34.3
                                                ----------    ----------

Income from operations ......................          8.8          17.7
Interest income (expense), net ..............          5.6           (.1)
                                                ----------    ----------
Income before income taxes ..................         14.4          17.6
Income tax expense ..........................          5.3           7.3
                                                ----------    ----------
Net income ..................................          9.1%         10.3%
                                                ==========    ==========
</TABLE>

         Revenues

         Total revenue increased by approximately 76% to $83.0 million for the
quarter ended March 31, 2001 from $47.1 million for the quarter ended March 31,
2000. For the quarter ended March 31, 2001, approximately 68% of our revenues
came from sales to EMC, excluding ESCON service revenues. Although we anticipate
this percentage to decrease as we increase our revenue from other sources, we
expect a majority of our revenues in the foreseeable future to be derived from
EMC.

         Approximately 94% of the increase in revenues from March 31, 2000
relates to product revenue, which increased to $74.9 million for the quarter
ended March 31, 2001 from $41.0 million for the quarter ended March 31, 2000.
This increase reflects our continued leadership in the Director-class products,
as well as acceptance of our new products that drive our Enterprise-to-Edge
strategy.



                                       7
<PAGE>   12


Software and professional services revenue increased 79% to $3.7 million for the
quarter ended March 31, 2001 from $2.0 million for the quarter ended March 31,
2000. Other revenues for the quarter, including the ESCON service fee, increased
9% to $4.4 million for the first quarter of 2001 from $4.1 million in the first
quarter of 2000. We anticipate that service revenue from EMC under the ESCON
service agreement will decrease in the future. As ESCON revenue continues to
decrease we anticipate that it will represent an increasingly smaller percentage
of total revenue.

         Gross Profit

         Gross profit increased by approximately 53% to $37.5 million for the
quarter ended March 31, 2001 from $24.5 million for the quarter ended March 31,
2000. The gross profit percentage decreased to 45% at March 31, 2001 from 52% at
March 31, 2000. This decrease in gross profit percentage was attributable
primarily to increased manufacturing and inventory costs related to our new
products, including some additional costs associated with the expedited delivery
of certain components.

         Operating Expenses

         Research and Development. Research and development expenses were $10.1
million in the three months ended March 31, 2001 compared with $7.6 million, in
the three months ended March 31, 2000. The $2.5 million or 32% increase in
expenses was primarily attributable to increased staffing levels, and to
expenditures for prototype materials, design consulting services and other
materials and services related to the design and development of new technology,
new products and enhancements to our existing products.

         Selling and Marketing Expenses. Selling and marketing expenses
increased by approximately 136% to $13.8 million for the first quarter of 2001
from $5.9 million for the first quarter of 2000. This increase was primarily
attributable to increased sales force staffing, as the number of selling
employees increased to 153 at March 31, 2001 from 56 at March 31, 2000. There
were also increases in costs of marketing and public relations programs and
expansion of our field offices and labs used for product demonstration and
systems integration testing.

         General and Administrative Expenses. General and administrative
expenses increased by approximately 235% to $4.5 million for the first quarter
of 2001 from $1.4 million for the first quarter of 2000. This increase was due
primarily to increased staffing levels, expenses related to the distribution of
McDATA common stock by EMC, and costs of operating as a public company.

         Amortization of Deferred Compensation. In prior periods, we recorded
deferred compensation in connection with stock options grants. We are amortizing
these amounts on a straight-line basis over the vesting period of the applicable
options, resulting in amortization expense of $2.2 million during the first
quarter of 2001 and $1.8 million during the first quarter of 2000 (of which
approximately $0.5 million and $0.4 million, respectively, was included in cost
of revenue).

         Interest Income, net. Interest income consisted primarily of interest
earnings on our cash, cash equivalents and various investment holdings.
Increases in interest income were due primarily from the investment of the net
proceeds from our initial public offering in August 2000. Net interest income
increased to $4.7 million for the first quarter of 2001 from net interest
expense of approximately $35,000 for the first quarter of 2000.

         Provision for Income Taxes. The effective tax rates for the quarters
ended March 31, 2001 and 2000 were 37.0% and 41.6%, respectively. The effective
tax rate in 2001 decreased primarily due to a higher percentage of our
investments held in tax-exempt instruments.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash used by operating activities was $19.3 million for the quarter
ended March 31, 2001, reflecting net income for the quarter offset by net
increases in working capital components consistent with growth of the business.



                                       8
<PAGE>   13


     Net cash used in investing activities during the quarter ended March 31,
2001 was $27.7 million, primarily related to purchases of short-term and
long-term investments, purchases of equipment for use by our employees and for
developing, testing and demonstrating our products, and expansion of our
facilities.

     Net cash provided by financing activities during the quarter ended March
31, 2001 totaled $0.8 million, reflecting proceeds from the exercise of employee
stock options, partially offset by repayment of capital lease obligations.

     Our principal sources of liquidity at March 31, 2001 consisted of our cash
and short-term investment securities on hand, which totaled approximately $297.3
million, and our equipment financing arrangements, which totaled approximately
$4.5 million. Borrowings under our equipment financing arrangements are secured
by the related capital equipment and are payable through 2004. In addition, we
hold approximately $49.6 million in long-term investments, which have a maturity
of more than one year, and approximately $17 million of restricted investments.
Restricted investments represent collateral for a lease related to our new
corporate campus.

     We believe our existing cash and short-term investment balances, will be
sufficient to meet our capital and operating requirements at least through the
next twelve months, although we could be required, or could elect, to seek
additional funding prior to that time.

     On February 9, 2001, we entered into a lease and associated agreements with
Deutsche Bank AG, New York Branch ("Deutsche Bank") for the lease of a 167,000
(approx.) square foot multi-story office and engineering building to be
constructed on a 109 acre parcel of land located in Broomfield, Colorado.
Construction must be completed no later than February 2003. As part of the
transaction, we have guaranteed a residual value of the facility to Deutsche
Bank of approximately 85% of the total original cost. We have agreed to restrict
up to $60 million (plus 5 percent) of our investment securities as collateral
for our specified obligations under the lease. These investment securities are
restricted as to withdrawal and are managed by a third party subject to certain
limitations. In addition, the lease agreement requires that the Company maintain
compliance with certain affirmative and negative covenants, representations and
warranties, including certain defined financial covenants.

     Our future capital requirements will depend on many factors, including our
rate of revenue growth, the timing and extent of spending to support development
of new products and expansion of sales and marketing, the timing of new product
introductions and enhancements to existing products, and market acceptance of
our products.

RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Recent risks related to the economy and manufacturing.

     During late 2000 and early 2001, the U.S. economy experienced a slowdown,
which may continue and could delay purchasing decisions by our customers. During
the first quarter of 2001, we experienced increased manufacturing and inventory
costs related to our new products. For example, we incurred costs and delays
related to some mechanical features of our new low-end and mid-range switch
products in the first quarter. Specifically, we had additional delays and costs
related to our new die-cast chassis for such products. Also, the Company's die
cast chassis supplier for its new low-end and mid range switch products has
experienced financial difficulties and, subsequent to March 31, 2001, we have
had to supply an interim financing guarantee in the amount of $500,000 to the
lender of that supplier. The Company's obligation to pay amounts due under the
guarantee when and if it is drawn upon is fully secured by cash collateral on
deposit with an escrow agent. We plan to secure additional chassis supply
sources.

We may not be able to sustain our revenue growth rates or profitability in the
future.

     We have been profitable for the six most recent fiscal quarters. We cannot
be certain that we can sustain our revenue growth rates or that we can sustain
profitability. Our future operating results will depend on many factors,
including the growth of the Fibre Channel market, market acceptance of new
products, demand for our products and levels of product and price competition.
In addition, we expect to incur continued significant product development, sales
and marketing, and general and administrative expenses and, as a result, we may
not be able to sustain profitability.



                                       9
<PAGE>   14



We depend on two key distribution relationships for most of our revenue, and the
loss of either of them could significantly reduce our revenues.

     We depend on EMC for most of our total revenue. Sales to EMC, which is an
original equipment manufacturer customer, represented approximately 68% of our
revenue, excluding ESCON service revenue, for the quarter ended March 31, 2001.
In addition, IBM represented approximately 14% of our total revenue for the same
period. We anticipate that our future operating results will continue to depend
heavily on sales to EMC and IBM. Therefore, the loss of either EMC or IBM as a
customer, or a significant reduction in sales to either EMC or IBM in any fiscal
period, could significantly reduce our revenue.

A large percentage of our quarterly sales occur at the end of the quarter,
contributing to possible quarterly fluctuations in revenue that could adversely
affect our operating results.

     Our quarterly results have historically reflected an uneven pattern in
which a disproportionate percentage of a quarter's total sales occurs in the
last month, weeks or even days of each quarter. This pattern makes the
prediction of revenue, earnings and working capital for each financial period
especially difficult and increases the risk of unanticipated variations from
budgeted quarterly results and financial condition. Additional factors that
affect us and could cause our revenue and operating results to vary in future
periods include:

     o the size, timing, terms and fluctuations of customer orders, particularly
       large orders from our significant original equipment manufacturer or
       reseller customers;

     o our ability to attain and maintain market acceptance of our products;

     o seasonal fluctuations in customer buying patterns;

     o the timing of the introduction or enhancement of products by us, our
       significant original equipment manufacturer or reseller customers or our
       competitors;

     o our ability to obtain sufficient supplies of single- or limited-source
       components of our products; and

     o increased operating expenses, particularly in connection with our
       strategies to increase brand awareness or to invest in accelerated
       research and development.

     Our uneven sales pattern makes it difficult for our management to predict
near-term demand and adjust manufacturing capacity accordingly. If orders for
our products vary substantially from the predicted demand, our ability to
assemble, test and ship orders received in the last weeks and days of each
quarter may be limited, which could seriously harm quarterly revenue or
earnings. Moreover, an unexpected decline in revenue without a corresponding and
timely reduction in expenses could intensify the impact of these factors on our
business, financial condition and results of operations.

We currently have limited product offerings and must successfully introduce new
and enhanced products that respond to rapid technological changes and evolving
industry standards.

     During the quarter ended March 31, 2001, we derived approximately 90% of
our product revenue from sales of our Director-class products. We expect that
revenue from our Director class switching products will continue to account for
a substantial portion of our revenue for the foreseeable future. Therefore,
continued market acceptance of this product and its successor products is
critical to our future success. Factors such as performance, market positioning,
the availability and price of competing products, the introduction of new
technologies and the success of our original equipment manufacturer, reseller
and systems integrator customers will affect the market acceptance of our
products.

     In addition, our future success depends upon our ability to address the
changing needs of customers and to transition to new technologies and industry
standards. The introduction of competing products embodying new technologies or
the emergence of new industry standards could render our products
non-competitive, obsolete or unmarketable and seriously harm our market share,
revenue and gross margin. Risks inherent in this transition include the
inability to expand production capacity to meet demand for new products, the
impact of customer



                                       10
<PAGE>   15


demand for new products or products being replaced, and delays in the initial
shipment of new products. There can be no assurance that we will successfully
manage these transitions.

If we fail to expand our distribution channels and manage our distribution
relationships, our revenue could be significantly reduced.

     Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers, resellers and
systems integrators, as well as on the sales efforts and success of these
customers. We cannot assure you that we will be able to expand our distribution
channels, manage our distribution relationships successfully or that our
customers will market our products effectively. Our failure to expand our
distribution channels or manage successfully our distribution relationships or
the failure of our OEM and reseller customers to sell our products could reduce
our revenue.

We are dependent on a single or limited number of suppliers for certain key
components of our products, and the failure of any of those suppliers to meet
our production needs could seriously harm our ability to manufacture our
products, result in delays in the delivery of our products and harm our revenue.

     We currently purchase several key components from single or limited
sources. We purchase application specific integrated circuits, or ASICs, printed
circuit boards and power supplies from single sources, and gigabit interface
converters and 1x9 transceivers from limited sources. Additional sole- or
limited-sourced components may be incorporated into our products in the future.
Delays in the delivery of components for our products could result in decreased
revenue. We do not have any long-term supply contracts to ensure sources of
supply. In addition, our suppliers may enter into exclusive arrangements with
our competitors, stop selling their products or components to us at commercially
reasonable prices or refuse to sell their products or components to us at any
price, which could harm our operating results. If our suppliers are unable to
provide, or we are unable otherwise to obtain these components for our products
on the schedule and in the quantities we require, we will be unable to
manufacture our products. We have experienced and may continue to experience
production delays and quality control problems with certain of our suppliers,
which, if not effectively managed, could prevent us from satisfying our
production requirements. If we fail to effectively manage our relationships with
these key suppliers, or if our suppliers experience delays, disruptions,
capacity constraints or quality control problems in their manufacturing
operations, our ability to manufacture and ship products to our customers could
be delayed, and our competitive position, reputation, business, financial
condition and results of operations could be seriously harmed.

The loss of our contract manufacturer, or the failure to forecast demand
accurately for our products or to manage our relationship with our contract
manufacturer successfully, would negatively impact our ability to manufacture
and sell our products.

     We rely on third-party manufacturers to manufacture all of our circuit
boards and to perform extensive testing and assembly of our products. We are
transitioning the manufacturing of our mid- and low-end products to the
manufacturer of our director products. We do not have a long-term supply
contract with this manufacturer and, therefore, it is 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 for
circuit boards with our contract manufacturer approximately four to five months
prior to the anticipated delivery date, with order volumes based on forecasts of
demand for our products. If we fail to forecast demand for our products
accurately, we may be unable to obtain adequate manufacturing capacity from our
contract manufacturer to meet our customers' delivery requirements, or we may
accumulate excess inventories. We may be unable to respond adequately to
unexpected increases in customer purchase orders, and therefore be unable to
benefit from this incremental demand. Our contract manufacturer has not provided
assurances to us that adequate capacity will be available to us within the time
required to meet additional demand for our products.

     In addition, we coordinate our efforts with those of our component
suppliers and our contract manufacturer in order to rapidly achieve volume
production. We have experienced and may continue to experience production delays
and quality control problems with certain of our suppliers and with our contract
manufacturer, which, if not effectively managed, could prevent us from
satisfying our production requirements. If we should fail to manage effectively
our relationships with our component suppliers and our contract manufacturer, or
if any of our suppliers or our manufacturer experience delays, disruptions,
capacity constraints or quality control problems in their manufacturing
operations, our ability to ship products to our customers could be delayed, and
our competitive



                                       11
<PAGE>   16


position and reputation could be harmed. Qualifying a new contract manufacturer
and commencing volume production can be expensive and time consuming. If we are
required to change or choose to change contract manufacturers, we may lose
revenue and damage our customer relationships.

If we fail to successfully develop the McDATA brand, our revenue may not grow.

     Our name is not widely recognized as a brand in the marketplace. We have
operated substantially as a separate company from EMC only since October 1997.
EMC, which currently accounts for the majority of our revenue, markets our
products under its own brand name. As a result, we have not fully established
our brand name. We believe that establishing and maintaining the McDATA brand is
a critical component in maintaining and developing strategic original equipment
manufacturer, reseller and systems integrator relationships, and the importance
of brand recognition will increase as the number of vendors of competitive
products increases. Our failure to successfully develop our brand may prevent us
from expanding our business and growing our revenue. Similarly, if we incur
excessive expenses in an attempt to promote and maintain the McDATA brand, our
business, financial condition and results of operations could be seriously
harmed.

The storage area network market in which we compete is still developing, and if
this market does not continue to develop and expand as we anticipate, our
business will suffer.

     The market for storage area networks, or SANs, and related products has
only recently begun to develop and continues to evolve. Because this market is
relatively new, it is difficult to predict its potential size or future growth
rate. Our Director-class products, from which we derived approximately 90%, 92%
and 73% of our total product revenues in the quarter ended March 31, 2001, and
the years ended December 31, 2000 and 1999, respectively, is used extensively in
SANs. Accordingly, continued widespread adoption of SANs as an integral part of
data-intensive enterprise computing environments is critical to our future
success. 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. Our success in generating net revenue in this
developing market will depend on, among other things, our ability to:

     o educate our potential original equipment manufacturer, reseller and
       systems integrator customers and end users about the benefits of SANs and
       the use of our products in the SAN environment; and

     o predict, develop and base our products on standards that ultimately
       become industry standards.

The sales cycle for our products is long, and we may incur substantial
non-recoverable expenses and devote significant resources to sales that do not
occur when anticipated or at all.

     Our original equipment manufacturer, reseller and systems integrator
customers typically conduct significant evaluation, testing, implementation and
acceptance procedures before they begin to market and sell new solutions that
include our products. This evaluation process is lengthy and may extend up to
one year or more. This process is complex and may require significant sales,
marketing and management efforts on our part. This process becomes more complex
as we simultaneously qualify our products with multiple customers. As a result,
we may expend significant resources to develop customer relationships before we
recognize revenue, if any, from these relationships.

Undetected software or hardware defects in our products could result in loss of
or delay in market acceptance of our products and could increase our costs or
reduce our revenue.

     Our products may contain undetected software or hardware errors when first
introduced or when new versions are released. Our products are complex, and we
have from time to time detected errors in existing products, and we may from
time to time find errors in our existing, new or enhanced products. In addition,
our products are combined with products from other vendors. As a result, should
problems occur, it might be difficult to identify the source of the problem.
These errors could result in a loss of or delay in market acceptance of our
products and would increase our costs, reduce our revenue and cause significant
customer relations problems.



                                       12
<PAGE>   17


If we lose key personnel or are unable to hire additional qualified personnel,
we may not be successful.

     Our success depends to a significant degree upon the continued
contributions of our key management, technical, sales and marketing, finance and
operations personnel, many of whom would be difficult to replace. In particular,
we believe that our future success is highly dependent on John F. McDonnell, our
President and Chief Executive Officer and the Chairman of our Board of
Directors. In addition, our engineering and product development teams are
critical in developing our products and have developed important relationships
with customers and their technical staffs. The loss of any of these key
personnel could harm our operations and customer relationships. We do not have
key person life insurance on any of our key personnel.

     We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, and finance and operations personnel. As we increase our production
and sales levels, we will need to attract and retain additional qualified and
skilled workers for our operations. In recent years there has been great demand
among companies in the technology industry for these personnel. In particular,
competition for these personnel has become increasingly intense in the greater
Denver, Colorado metropolitan area, where we have our headquarters and certain
of our manufacturing facilities, and the greater Toronto, Canada metropolitan
area, where we have an engineering group. We cannot assure you that we will
continue to be able to attract and retain qualified personnel, or that delays in
hiring required personnel, particularly engineers, will not delay the
development or introduction of products or negatively impact our ability to sell
our products.

If we cannot compete successfully in the future against existing or potential
competitors, our operating results will suffer.

     The market for our Fibre Channel switching products is competitive, and is
likely to become even more so. Our primary competitor in the Fibre Channel
switch market is Brocade Communications Systems, Inc. Other companies are also
providing Fibre Channel switches and other products to the SAN market, including
Qlogic Corporation, Gadzoox Networks, Inc., Vixel Corporation and INRANGE
Technologies Corporation. In the future, we may also compete with networking
companies that may develop SAN products or other companies in related or other
industries for which future direct participation in the market for switching
devices may become strategic.

     EMC has agreed not to develop or manufacture products that compete with our
products for two years beginning in August 2000. Upon the expiration of the
two-year period, we have no agreement that would restrict EMC from competing
with us in the development or manufacture of these products. In addition, EMC
has recently agreed to resell certain products offered by two of our
competitors. Moreover, under a cross license agreement between us and EMC, we
have granted EMC a license under our patents to make, use and sell any products
that EMC was selling or distributing up to August 9, 2000, including products
that compete with ours.

     Continued or increased competition could result in pricing pressures,
reduced sales, reduced margins, reduced profits, reduced market share or the
failure of our products to achieve or maintain market acceptance. Some of our
competitors and potential competitors have longer operating histories, greater
name recognition, access to larger customer bases, more established distribution
channels or substantially greater resources than we have. As a result, they may
be able to respond more quickly than we can to new or changing opportunities,
technologies, standards or customer requirements.

We do not have significant experience in international markets and may have
unexpected costs and difficulties in developing international revenue.

     We intend to expand the marketing and sales of our products
internationally. We have limited experience in marketing, distributing and
supporting our products internationally and may not be able to maintain or
increase international market demand for our products. In addition, our
international operations are generally subject to inherent risks and challenges
that could harm our operating results, including:

     o expenses associated with developing and customizing our products for
       foreign countries;

     o multiple, conflicting and changing governmental laws and regulations;

     o tariffs, quotas and other import restrictions on computer peripheral
       equipment;



                                       13
<PAGE>   18



     o longer sales cycles for our products;

     o reduced or limited protections of intellectual property rights;

     o compliance with international standards that differ from domestic
       standards; and

     o political and economic instability.

     Any negative effects on our international business could harm our business,
operating results and financial condition as a whole. To date, none of our
international revenue or costs have 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 thus less competitive in
foreign markets. A portion of our international revenue may be denominated in
foreign currencies in the future, which will subject us to risks associated with
fluctuations in those foreign currencies.

If we are unable to adequately protect our intellectual property, we may not be
able to compete effectively.

     We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality and/or license agreements with our employees,
consultants and corporate partners. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy or otherwise obtain and use
our products or technology. Monitoring unauthorized use of our products is
difficult and the steps we have taken may not prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.

     We may be a party to intellectual property litigation in the future, either
to protect our intellectual property or as a result of alleged infringements of
others' intellectual property. These claims and any resulting litigation could
subject us to significant liability for damages or could cause our proprietary
rights to be invalidated. Litigation, regardless of the merits of the claim or
outcome, would likely be time consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation could also force us to do one or more of the following:

     o stop using the challenged intellectual property or selling our products
       or services that incorporate it;

     o obtain a license to use the challenged intellectual property or to sell
       products or services that incorporate it, which license may not be
       available on reasonable terms, or at all; and

     o redesign those products or services that are based on or incorporate the
       challenged intellectual property.

     If we are forced to take any of these actions, we may be unable to
manufacture and sell our products, and our revenue would be reduced.

     EMC and IBM entered into a cross-license agreement on March 19, 1999, and
amended that agreement on May 12, 2000, under which each party, on behalf of
itself and its subsidiaries, granted the other a license under patents issued or
issuing on applications entitled to an effective filing date through December
31, 2005. Under the terms of this cross-license agreement, patents held by us
were licensed to IBM and patents held by IBM were sublicensed to us by EMC. Each
party released the other and its subsidiaries from claims of patent infringement
committed prior to the date of the cross-license. Under the terms of that
agreement, effective upon EMC's February 7, 2001 distribution of our shares of
our Class A common stock indirectly held by it to its stockholders, the
sublicense we hold to those IBM patents terminated. We believe that the
termination of the sublicense does not materially affect our business. We are
not aware of any issued or pending IBM patents that are infringed by our
products, but if IBM were to allege any such infringement, we may have
difficulty negotiating a settlement. If we were unable to negotiate a settlement
with IBM, our ability to produce an infringing product could be affected, which
could materially and adversely affect our business.


                                       14
<PAGE>   19


If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.

     Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices
or that employees have misappropriated confidential information or trade
secrets. We may receive claims of this kind or other claims relating to our
employees in the future as we seek to hire qualified personnel. We could incur
substantial costs in defending ourselves or our employees against such claims,
regardless of their merits. In addition, defending ourselves or our employees
from such claims could divert the attention of our management away from our
operations.

Our stock price is volatile.

     Since the initial public offering of our Class B common stock in August
2000 and the distribution of our Class A common stock by EMC in February 2001,
the market price of our stock has been volatile. Because we are a technology
company, the market price of our stock is subject to the same volatility and
fluctuations that have recently characterized the stock prices of other
technology companies. This volatility is often unrelated or disproportionate to
the operating performance of these companies and, as a result, the price of our
stock could fall regardless of our performance.

RISKS RELATED TO OUR RELATIONSHIP WITH EMC

We have entered into agreements with EMC that, due to our prior
parent-subsidiary relationship, may contain terms less beneficial to us than if
they had been negotiated with unaffiliated third parties.

     In October 1997, in connection with the reorganization of our business, we
entered into certain agreements with EMC relating to our business relationship
with EMC after the 1997 reorganization. In addition, we have entered into
agreements with EMC relating to our relationship with EMC after the completion
of our initial public offering in August 2000 and the distribution by EMC of our
Class A common stock in February 2001. We have also entered into an OEM Purchase
and License Agreement with EMC that governs EMC's purchases of McDATA products
and grants EMC rights to use, support and distribute software for use in
connection with these products. The agreement does not provide for the purchase
of a guaranteed minimum amount of product. These agreements were negotiated and
made in the context of our prior parent-subsidiary relationship. As a result,
some of these agreements may have terms and conditions, in the case of the OEM
agreement, including the terms of pricing, that are less beneficial to us than
agreements negotiated with unaffiliated third parties. Sales and services
revenue from EMC represented approximately 68% of our revenue, excluding ESCON
service revenue, for the quarter ended March 31, 2001. In addition, in some
instances, our ability to terminate these agreements is limited, which may
prevent us from being able to negotiate more favorable terms with EMC or from
entering into similar agreements with third parties.

We depend heavily on EMC as our key OEM customer; if our relationship with EMC
adversely changes, our revenue will be significantly reduced.

     For the quarter ended March 31, 2001, our product sales to EMC represented
approximately 68% of our total revenue, excluding ESCON service revenue. In
addition, during the same period, revenue under our service agreement with EMC
Corporation, pursuant to which we manufacture and supply ESCON switching devices
for IBM, represented approximately 4% of our total revenue. EMC has recently
agreed to resell products offered by two of our competitors, and nothing
restricts EMC from expanding those relationships in a manner that could be
adverse to us. If our business relationship with EMC ends or significantly
changes, resulting in reduced sales to EMC, our revenue will be significantly
reduced.

Provisions of our agreements with EMC relating to our relationship with EMC
after the distribution by EMC of our Class A common stock indirectly held by it
to its stockholders may affect the operation of our business, limit our ability
to finance our operations or prevent a change in control of our company.

     Under the terms of the Tax Sharing Agreement between EMC and us, until 27
months after the date of EMC's distribution of our Class A common stock
indirectly held by it to its stockholders, we may not, without the consent of
EMC or the receipt by EMC of a private letter ruling from the Internal Revenue
Service that the tax treatment of the distribution will not be adversely
affected:

     o enter into any transaction that would result in any person acquiring a
       50% or greater interest in us;

     o take or fail to take any other action which would cause the distribution
       to be taxable to EMC stockholders;



                                       15
<PAGE>   20


     o issue stock or other equity interests in us, or redeem or repurchase any
       of our capital stock which would involve the acquisition by one or more
       persons of more than 35% of our stock; or

     o undertake any transaction which would be treated as a liquidation or
       reorganization for tax purposes.

     These restrictions may prevent us from being acquired, either in a
negotiated transaction or otherwise, from using shares of our common stock as
payment in the acquisition by us of other companies or from financing our
operations through sales of securities.

     Under the terms of the Master Confidential Disclosure and License Agreement
between EMC and us, EMC has granted us a license under existing EMC patents. If
we are acquired, our acquirer will retain this license as long as our acquirer
grants to EMC a license under all of the acquirer's patents for all products
licensed under the agreement under the same terms as the license we have granted
to EMC under the agreement. The potential loss of the license from EMC after an
acquisition of us by a third party may make an acquisition of us by a third
party unlikely.

We may be obligated to indemnify EMC if the distribution is not tax free.

     The Tax Sharing Agreement that we have entered into with EMC obligates us
to indemnify EMC from taxes relating to the failure of EMC's distribution to
EMC's stockholders of our Class A common stock (that it indirectly holds) to be
tax free if that failure results from, among other things:

     o any act or omission by us that would cause the distribution to fail to
       qualify as a tax free distribution under the Internal Revenue Code;

     o any act or omission by us that is inconsistent with any representation
       made to the Internal Revenue Service in connection with the request for
       a private letter ruling regarding the tax-free nature of the distribution
       by EMC of our Class A common stock indirectly held by it to its
       stockholders;

     o any acquisition by a third party of our stock or assets; or

     o any issuance by us of stock or any change in ownership of our stock.

     As a result, we may be liable to EMC under the Tax Sharing Agreement upon
the occurrence of events that are beyond our control. If the distribution of our
Class A common stock fails to qualify as a tax-free distribution, EMC would
incur tax liability as if our Class A common stock that was distributed by EMC
had been sold by EMC for its fair market value in a taxable transaction. In the
event that we are required to indemnify EMC because the distribution of our
Class A common stock fails to qualify as a tax-free distribution, our liability
could exceed 35% of the value of the Class A common stock distributed by EMC as
determined on the date of the distribution.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         The Company is exposed to market risk, primarily from changes in
interest rates, foreign currency exchange rates and credit risks.

Interest Rate Risk

     The Company earns interest income on both its cash and cash equivalents and
its investment portfolio. The Company's investment portfolio consists of readily
marketable investment-grade debt securities of various issuers and maturities
ranging from overnight to two years. All investments are denominated in U.S.
dollars and are classified as "available for sale." These instruments are not
leveraged, and are not held for trading purposes. As interest rates change, the
amount of unrealized gain or loss on these securities will change. The
quantitative and qualitative disclosures about market risk are discussed in Item
7-Quantitative and Qualitative Disclosure About Market Risk, contained in the
Company's Form 10-K.



                                       16
<PAGE>   21



Foreign Currency Exchange Risk

     The Company operates sales and support offices in several countries. All of
the Company's sales contracts have been denominated in U.S. dollars, therefore
the Company's transactions in foreign currencies are limited to operating
expense transactions. Due to the limited nature and amount of these
transactions, we do not believe we have had or will have material exposure to
foreign currency exchange risk.

Credit Risk

     Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of temporary cash
investments, investments and trade receivables. The Company places its temporary
cash investments and investment securities in investment grade instruments and
limits the amount of investment with any one financial institution. The Company
evaluates the credit risk associated with each of its customers and has
concluded that it does not have a material exposure to credit risk with its
customers.








                                       17
<PAGE>   22



PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         From time to time, we become involved in various lawsuits and legal
proceedings that arise in the normal course of business. Litigation is subject
to inherent uncertainties and an adverse result in a matter that may arise from
time to time may harm our business, financial condition or results of operation.
In the opinion of management, the ultimate disposition of any of the claims will
not have a material adverse effect on our consolidated results of operations,
financial position or cash flow.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

         None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None

ITEM 5. OTHER INFORMATION



         In Item 2 of our Annual Report on Form 10-K filed with the SEC in March
of 2001, we disclosed that we had entered to a lease and associated agreements
with Deutsche Bank AG, New York Branch ("Deutsche Bank") for the lease of a
167,000 (approx.) square foot multi-story building for our corporate campus. As
construction agent for Deutsche Bank, we entered into a development/design build
contract for the building and site improvements on the land for an amount equal
to $35.5 million. This amount would be paid by Deutsche Bank and reflected in
the lease payments paid by us.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed for the Company through the filing of this Form 10-Q.

(3.1)       Amended and Restated Certificate of Incorporation of the Company

(3.2)       Amended and Restated By-laws of the Company

(4.1)       Form of Company's Class B Common Stock Certificates

(4.1.1)     Form of Company's Class A Common Stock Certificates

(4.2)       Investors' Rights Agreement dated as of October 1, 1997 by and among
            the Company, EMC Corporation, McDATA Holdings Corporation and
            Certain Investors

(4.3)       Amendment No. 1 to the Investors' Rights Agreement dated May 23,
            2000 by and among the Company, McDATA Holdings Corporation and
            certain Investors

(10.1)      Asset Transfer Agreement dated as of October 1, 1997 by and among
            the Company, EMC Corporation, and McDATA Holdings Corporation

(10.2)      Investors' Rights Agreement dated as of October 1, 1997 by and among
            the Company, EMC Corporation, McDATA Holdings Corporation and
            certain Investors (see Exhibit 4.2)

(10.3)      Amendment No. 1 to the Investors' Rights Agreement dated May 23,
            2000 by and among the Company, McDATA Holdings Corporation and
            certain Investors (see Exhibit 4.3)


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<PAGE>   23


(10.3.1)    Termination of Investors' Rights Agreement, dated as of January 24,
            2001, by and among the Company, McDATA Holdings Corporation and
            Certain Investors (Filed in Form 10-K for the fiscal year ended
            2000)

(10.4)      Services Agreement dated as of October 1, 1997 by and among EMC
            Corporation, McDATA Holdings Corporation and the Company

(10.5)      Letter Agreement dated April 19, 1999 by and between the Company and
            McDATA Holdings Corporation

(10.6)      Technology Rights Agreement dated as of October 1, 1997 by and among
            the Company, EMC Corporation and McDATA Holdings Corporation

(10.7)      Amended and Restated Tax Sharing Agreement dated as of May 31, 2000
            by and among EMC Corporation, McDATA Holdings Corporation and the
            Company

(10.8)      Form of Master Transaction Agreement entered into by and among the
            Company and EMC Corporation dated May 31, 2000

(10.9)      Form of Indemnification and Insurance Matters Agreement entered into
            by and among the Company and EMC Corporation dated May 31, 2000

(10.10)     Master Confidential Disclosure and License Agreement dated as of May
            31, 2000 by and among the Company and EMC Corporation

(10.11)+    Reseller Agreement dated as of February 22, 2000 by and between
            International Business Machines Corporation and the Company

(10.12)     Amendment Number One to the Resale Agreement dated June 30, 2000 by
            and between International Business Machines Corporation and the
            Company

(10.13)+    OEM Purchase and License Agreement dated as of May 19, 2000 by and
            between EMC Corporation and the Company

(10.14)+    Development Agreement dated as of May 19, 2000 by and between EMC
            Corporation and the Company

(10.15)+    Manufacturing Agreement dated as of June 17, 1992 by and between SCI
            Systems, Inc. and the Company

(10.16)+    OEM and License Agreement dated as of April 27, 1999 by and between
            Brocade Communication Systems, Inc. and the Company

(10.17)     Lease dated September 12, 1997 by and between the Company and WHLNF
            Real Estate Limited Partnership

(10.18)     Lease dated November 2, 1999 by and between the Company and the
            Mills Family LLC

(10.19)     Lease dated May 28, 1997 by and between the Company and 1211486
            Ontario Limited

(10.19.1)   Lease dated October 6, 2000, by and between the Company and Amber
            Drive I, LLC (Filed in Form 10-Q for the fiscal quarter ended
            September 30, 2000)

(10.19.2)   Lease dated February 9, 2001 by and between the Company and Deutsche
            Bank (Filed in Form 10-K for the fiscal year ended 2000)

(10.19.3)   Participation Agreement dated February 9, 2001 by and between the
            Company and Deutsche Bank (Filed in Form 10-K for the fiscal year
            ended 2000)

(10.20)*    Form of Severance Agreement

(10.21)*    1997 Stock Option Plan

(10.22)*    Form of Stock Option Agreement for 1997 Stock Option Plan

(10.23)*    Description of the Company's Management Bonus Program


( ) Exhibits previously filed in the Company's Registration Statement on Form
S-1, SEC File No. 333-38106, declared effective on August 8, 2000.

+ Portions of these Exhibits have been omitted and filed separately with the
Securities and Exchange Commission pursuant to an order for confidential
treatment.

* Executive compensation plans and arrangements.


(b) Reports on Form 8-K filed during the first quarter of 2001 and through the
filing of this Form 10-Q:



                                       19
<PAGE>   24


1. We filed a Current Report on Form 8-K dated January 12, 2001 to report the
issuance of a press release by EMC Corporation announcing that the Board of
Directors of EMC Corporation approved the declaration by EMC of a dividend of
all of EMC's shares of McDATA Corporation Class A Common Stock.

2. We filed a Current Report on Form 8-K dated January 25, 2001 to report the
issuance of an Information Statement by EMC Corporation in connection with EMC's
planned declaration of a dividend of all of EMC's shares of McDATA Corporation
Class A Common Stock.

3. We filed a Current Report on Form 8-K dated February 1, 2001 to report the
issuance of a press release by EMC Corporation and McDATA Corporation announcing
the establishment of a "when-issued" trading market for McData Class A Common
Stock.

4. We filed a Current Report on Form 8-K dated February 1, 2001 to report the
issuance of a press release announcing that McDATA Corporation and
Hewlett-Packard Company entered into an OEM Purchase Agreement for McDATA's
products.

5. We filed a Current Report on Form 8-K dated February 7, 2001 to report the
issuance of a press release by EMC Corporation and McDATA Corporation announcing
that EMC had distributed as a dividend 81,000,000 shares of McDATA Class A
Common Stock to EMC stockholders of record as of January 24, 2001.





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<PAGE>   25



                                    SIGNATURE

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                           McDATA CORPORATION



                           By: Janet K. Cooper
                               -------------------------------------------------
                           Janet K. Cooper
                           Chief Financial Officer and Senior Vice President of
                           Finance and Administration (Principal Financial and
                           Chief Accounting Officer)


May 8, 2001




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