Use these links to rapidly review the documentMcDATA CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 2002 TABLE OF CONTENTS

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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|ý | Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2002

OR

|o | 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

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

Delaware

84-1421844(State or other jurisdiction of incorporation of organization)

(I.R.S. Employer Identification No.)


380 Interlocken Crescent, 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 ý    No o

At
April 30, 2002, 81,000,000 shares of the registrant's Class A Common Stock were outstanding and 32,340,384 shares of the registrant's Class B Common Stock were
outstanding.

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McDATA CORPORATION    FORM 10-Q  QUARTER ENDED MARCH 31, 2002    TABLE OF CONTENTS



|Item |  |                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------
|     |  | PART 1FINANCIAL INFORMATION                                                                                       
|1.   |  | Financial Statements                                                                                               
|     |  | Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001                                      
|     |  | Consolidated Income Statements
Three Months ended March 31, 2002 (unaudited) and March 31, 2001 (unaudited)       
|     |  | Consolidated Statements of Cash Flows
Three Months ended March 31, 2002 (unaudited) and March 31, 2001 (unaudited)
|     |  | Notes to Consolidated Financial Statements (unaudited)                                                             
|2.   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                              
|3.   |  | Quantitative and Qualitative Disclosures About Market Risks                                                        
|     |  | PART IIOTHER INFORMATION                                                                                          
|1.   |  | Legal Proceedings                                                                                                  
|2.   |  | Changes in Securities and Use of Proceeds                                                                          
|3.   |  | Defaults Upon Senior Securities                                                                                    
|4.   |  | Submission of Matters to A Vote of Security Holders                                                                
|5.   |  | Other Information                                                                                                  
|6.   |  | Exhibits and Reports on Form 8-K                                                                                   

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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:



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.

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PART IFINANCIAL INFORMATION

McDATA CORPORATION        CONSOLIDATED BALANCE SHEETS        (in thousands, except share data)

|                                                                                                                                                                                                 |                                                                                    | March 31,
2002                             |         | December 31,
2001 |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|
|Assets                                                                                                                                                                                           |                                                                                    |                                            |         |                   |        
|Current assets:                                                                                                                                                                                  |                                                                                    |                                            |         |                   |        
|                                                                                                                                                                                                 | Cash and cash equivalents                                                          |                                            | $       | 39,536            |        
|                                                                                                                                                                                                 | Short-term investments                                                             |                                            |         | 171,277           |        
|                                                                                                                                                                                                 | Accounts receivable, net of allowance for bad debts of $854 and $782, respectively |                                            |         | 39,014            |        
|                                                                                                                                                                                                 | Inventories, net                                                                   |                                            |         | 19,702            |        
|                                                                                                                                                                                                 | Deferred tax asset                                                                 |                                            |         | 25,106            |        
|                                                                                                                                                                                                 | Prepaid expenses and other current assets                                          |                                            |         | 14,763            |        
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|Total current assets                                                                                                                                                                             |                                                                                    |                                            | 309,398 |                   |        
|Property and equipment, net                                                                                                                                                                      |                                                                                    |                                            | 84,754  |                   |        
|Long-term investments                                                                                                                                                                            |                                                                                    |                                            | 95,628  |                   |        
|Restricted investments                                                                                                                                                                           |                                                                                    |                                            |        |                   |        
|Other assets, net                                                                                                                                                                                |                                                                                    |                                            | 27,059  |                   |        
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|                                                                                                                                                                                                 |                                                                                    | Total assets                               |         | $                 | 516,839
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|Liabilities and Stockholders' Equity                                                                                                                                                             |                                                                                    |                                            |         |                   |        
|Current liabilities:                                                                                                                                                                             |                                                                                    |                                            |         |                   |        
|                                                                                                                                                                                                 | Accounts payable                                                                   |                                            | $       | 32,096            |        
|                                                                                                                                                                                                 | Accrued liabilities                                                                |                                            |         | 13,330            |        
|                                                                                                                                                                                                 | Deferred revenue                                                                   |                                            |         | 9,780             |        
|                                                                                                                                                                                                 | Obligations under capital leases                                                   |                                            |         | 2,409             |        
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|Total current liabilities                                                                                                                                                                        |                                                                                    |                                            | 57,615  |                   |        
|Obligations under capital leases                                                                                                                                                                 |                                                                                    |                                            | 2,235   |                   |        
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|                                                                                                                                                                                                 |                                                                                    | Total liabilities                          |         |                   | 59,850 
|Commitments and Contingencies(Notes 6)                                                                                                                                                           |                                                                                    |                                            |         |                   |        
|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     |                   |        
|Common stock, Class B, $0.01 par value, 200,000,000 shares authorized, 32,082,459 and 31,562,223 shares issued and outstanding at March 31, 2002 (unaudited) and December 31, 2001, respectively |                                                                                    |                                            | 321     |                   |        
|Additional paid-in-capital                                                                                                                                                                       |                                                                                    |                                            | 470,475 |                   |        
|Deferred compensation                                                                                                                                                                            |                                                                                    |                                            | (12,364 | )                 |        
|Accumulated other comprehensive income                                                                                                                                                           |                                                                                    |                                            | 36      |                   |        
|Retained earnings (accumulated deficit)                                                                                                                                                          |                                                                                    |                                            | (2,289  | )                 |        
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|Total stockholders' equity                                                                                                                                                                       |                                                                                    |                                            | 456,989 |                   |        
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        
|                                                                                                                                                                                                 |                                                                                    | Total liabilities and stockholders' equity |         | $                 | 516,839
|                                                                                                                                                                                                 |                                                                                    |                                            |         |                   |        

The
accompanying notes are an integral part of these consolidated financial statements.

1

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

|                                                                                                                                                  |                    | Three Months Ended March 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ---------------------------- | -------
|
|Revenue                                                                                                                                           |                    | $                            | 64,543 
|Cost of revenue                                                                                                                                   |                    |                              | 50,652 
|                                                                                                                                                  |                    |                              |        
|                                                                                                                                                  | Gross profit       |                              |        
|Operating expenses:                                                                                                                               |                    |                              |        
|Research and development                                                                                                                          |                    |                              | 13,216 
|Selling and marketing                                                                                                                             |                    |                              | 17,993 
|General and administrative                                                                                                                        |                    |                              | 8,008  
|Amortization of deferred compensation (excludes amortization of deferred compensation included in cost of revenue of $172 and $496, respectively) |                    |                              | 2,141  
|                                                                                                                                                  |                    |                              |        
|                                                                                                                                                  | Operating expenses |                              |        
|                                                                                                                                                  |                    |                              |        
|Income (loss) from operations                                                                                                                     |                    |                              | (27,467
|Interest income                                                                                                                                   |                    |                              | 2,078  
|Interest expense                                                                                                                                  |                    |                              | (90    
|                                                                                                                                                  |                    |                              |        
|Income (loss) before income taxes                                                                                                                 |                    |                              | (25,479
|Income tax expense (benefit)                                                                                                                      |                    |                              | (8,408 
|                                                                                                                                                  |                    |                              |        
|Net income (loss)                                                                                                                                 |                    | $                            | (17,071
|                                                                                                                                                  |                    |                              |        
|Basic net income (loss) per share                                                                                                                 |                    | $                            | (0.15  
|                                                                                                                                                  |                    |                              |        
|Shares used in computing basic net income (loss) per share                                                                                        |                    |                              | 112,732
|                                                                                                                                                  |                    |                              |        
|Diluted net income (loss) per share                                                                                                               |                    | $                            | (0.15  
|                                                                                                                                                  |                    |                              |        
|Shares used in computing diluted net income (loss) per share                                                                                      |                    |                              | 112,732
|                                                                                                                                                  |                    |                              |        

The
accompanying notes are an integral part of these consolidated financial statements.

2

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

|                                                                                    |                                                               | Three Months Ended March 31,              |        
|----------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------------------------------- | -------
|
|Cash flows from operating activities:                                               |                                                               |                                           |        
|Net income (loss)                                                                   |                                                               | $                                         | (17,071
|Adjustments to reconcile net income (loss) to cash flows from operating activities; |                                                               |                                           |        
|                                                                                    | Depreciation and amortization                                 |                                           |        
|                                                                                    | Loss from write-off of capitalized collateralized lease costs |                                           |        
|                                                                                    | Loss on retirement of assets                                  |                                           |        
|                                                                                    | Net realized gain on investments                              |                                           |        
|                                                                                    | Inventory and inventory commitment provisions                 |                                           |        
|                                                                                    | Deferred income taxes                                         |                                           |        
|                                                                                    | Non-cash compensation expense                                 |                                           |        
|                                                                                    | Tax benefit from stock options exercised                      |                                           |        
|                                                                                    | Changes in net assets and liabilities:                        |                                           |        
|                                                                                    |                                                               | Accounts receivable                       |        
|                                                                                    |                                                               | Inventories                               |        
|                                                                                    |                                                               | Prepaid expenses and other current assets |        
|                                                                                    |                                                               | Other assets, net                         |        
|                                                                                    |                                                               | Accounts payable                          |        
|                                                                                    |                                                               | Accrued liabilities                       |        
|                                                                                    |                                                               | Deferred revenue                          |        
|                                                                                    |                                                               |                                           |        
|Net cash provided (used) by operating activities                                    |                                                               |                                           | 7,789  
|Cash flows from investing activities:                                               |                                                               |                                           |        
|Purchases of property and equipment                                                 |                                                               |                                           | (7,509 
|Purchases of investments                                                            |                                                               |                                           | (85,896
|Maturities of investments                                                           |                                                               |                                           | 55,353 
|                                                                                    |                                                               |                                           |        
|Net cash used by investing activities                                               |                                                               |                                           | (38,052
|Cash flows from financing activities:                                               |                                                               |                                           |        
|Payment of obligations under capital leases                                         |                                                               |                                           | (727   
|Proceeds from the exercise of stock options                                         |                                                               |                                           | 1,241  
|                                                                                    |                                                               |                                           |        
|Net cash provided by financing activities                                           |                                                               |                                           | 514    
|                                                                                    |                                                               |                                           |        
|Net decrease in cash and cash equivalents                                           |                                                               |                                           | (29,749
|Cash and cash equivalents, beginning of period                                      |                                                               |                                           | 69,285 
|                                                                                    |                                                               |                                           |        
|Cash and cash equivalents, end of period                                            |                                                               | $                                         | 39,536 
|                                                                                    |                                                               |                                           |        
|Supplemental Disclosure of Non-Cash Investing and Financing Activities              |                                                               |                                           |        
|Capital lease obligations incurred                                                  |                                                               | $                                         | 4,156  
|                                                                                    |                                                               |                                           |        
|Equipment traded-in                                                                 |                                                               | $                                         | (2,473 
|                                                                                    |                                                               |                                           |        
|Transfer of inventory to fixed assets                                               |                                                               | $                                         | 1,404  
|                                                                                    |                                                               |                                           |        
|Acquisition of collateralized lease assets                                          |                                                               | $                                         | 36,884 
|                                                                                    |                                                               |                                           |        
|Collateralized lease liability                                                      |                                                               | $                                         | 2,026  
|                                                                                    |                                                               |                                           |        

The
accompanying notes are an integral part of these consolidated financial statements.

3

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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 open storage networking solutions and provides highly available, scalable
and centrally managed storage area networks ("SANs") that address enterprise-wide storage solutions. The Company sells its products, software, services and solutions through original
equipment manufacturers ("OEMs") and resellers, including EMC Corporation ("EMC"), Hewlett-Packard, Co., Compaq Computer Corp., Hitachi Data Systems Corp., and IBM, as well as systems integrators. The
Company also provides services for EMC's proprietary mainframe protocol ("ESCON") switch business.

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.
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, 2001 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, 2001.

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.

Recent Accounting Pronouncements Not Yet Adopted

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The new standard is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.

4

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Note 2Net Income (Loss) per Share

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

Three Months Ended March 31,2002

2001Net income (loss)

$
(17,071
)
$
7,542Weighted average shares of common stock outstanding used in computing basic net income (loss) per share


112,732


110,687Effect of dilutive stock options





6,900Weighted average shares of common stock used in computing diluted net income (loss) per share


112,732


117,587Basic net income (loss) per share

$
(0.15
)
$
0.07Diluted net income (loss) per share

$
(0.15
)
$
0.06Options not included in diluted share base because of the exercise prices


2,302


467Options and restricted stock not included in diluted share base because of the net loss


8,582





Note 3Restricted Investments

On February 9, 2001 (and amended on May 18, 2001, November 9, 2001 and January 24, 2002), the Company entered into a lease for an
approximately 167,000 square foot multi-story office and engineering building to be constructed on a 106 acre parcel of land located in Broomfield, Colorado (see note 6). As part of the lease,
the Company agreed to restrict a portion of its investment securities as collateral for specified obligations under the lease. As of March 31, 2002, the Company had restricted investments
totaling approximately $41 million which were used to offset the obligations incurred as a result of the Company's decision to terminate the lease contract. See Note 6 for more
information regarding the termination of the lease and liquidation of these restricted assets at March 31, 2002.

Note 4Comprehensive Income (Loss)

Comprehensive income (loss) consisted of the following (in thousands):

Three Months Ended March 31,2002

2001Net income (loss)

$
(17,071
)
$
7,542Unrealized gain on investments, net of tax


484


146Comprehensive income (loss)

$
(16,587
)
$
7,688


5

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Note 5Inventories

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

March 31,
2002

December 31,
2001Raw materials

$
20,289

$
27,206Work-in-progress


3,206


1,864Finished goods


12,915


14,740Total inventories at cost


36,410


43,810Less reserves


(16,708
)

(18,965
)Total inventories, net

$
19,702

$
24,845


During
the quarter ended March 31, 2002, the Company recorded inventory-related charges of $14.0 million primarily for the excess 1 gigabit (Gb) components used in the
Company's Director-class products. This resulted primarily from the unanticipated reduction in Director-class product orders late in March 2002.

Note 6Commitments and 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.

Collateralized Lease

On February 9, 2001 (and amended on May 18, 2001, November 9, 2001 and January 24, 2002), the Company entered into an operating lease
and associated agreements with Deutsche Bank AG, New York Branch ("Deutsche Bank") for the lease of an approximately 167,000 square foot multi-story office and engineering building to be constructed
on a 106 acre parcel of land located in Broomfield, Colorado. Construction of the building commenced in the first half of 2001 and is scheduled for completion in mid-2002, at which time
lease payments were scheduled to commence. As part of the transaction, the Company guaranteed a residual value of the facility to Deutsche Bank of approximately 89% during the construction period and
85% thereafter of the $60 million total original cost. The Company agreed to restrict up to $63 million of its investment securities as collateral for specified obligations under the
lease. These restricted investment securities, valued at approximately $41 million at March 31, 2002, 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. As the result of various charges in the third and fourth quarters of 2001 and for the quarter ended March 31, 2002, the fixed charge coverage ratio covenant with Deutsche
Bank was not met. As a result of this default, the Company has elected to terminate the lease under the provisions of the agreement. At March 31, 2002, the Company has reflected this
termination and recorded approximately $37 million in construction costs as property and equipment. Additionally, the $41 million in restricted assets have been applied against the
termination amount that will be used to pay down the balance of the lease obligation and construction costs. A loss of $1.25 million has also been recorded to reflect the write-off
of certain lease costs that can not be capitalized.

6

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Manufacturing and Purchase Commitments

The Company has contracted with SCI Systems, Inc. ("SCI") for the manufacture of printed circuit boards and box build assembly for specific Fibre Channel
directors and switches. The agreement with SCI requires the Company to submit purchasing forecasts, place orders and reschedule orders for products as necessary. At March 31, 2002, SCI had on
hand materials purchased on behalf of McDATA valued at approximately $44 million. In addition, SCI has purchase commitments outstanding related to materials that it had also ordered on McDATA's
behalf. The Company may be liable for materials that SCI purchases 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 by SCI. At March 31, 2002, the Company recorded obligations of approximately $14.8 million primarily related to materials purchased by SCI for certain
end-of-life and obsolete material used to manufacture the Company's 1Gb products. These charges were incurred primarily as a result of the significant shortfall of actual first
quarter 2002 revenue in comparison to forecast and the expected transition to 2Gb technology in the second quarter of 2002, which resulted in excess ordered and on hand material at SCI. Management
does not expect
this commitment to have a continued material adverse effect on the Company's business, results of operations, financial position or cash flows.

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.

Litigation

The Company, two current officers, and a former officer have been named as defendants in purported securities class-action lawsuits filed in the United States
District Court, Southern District of New York. The first of these lawsuits, filed on July 20, 2001, is captioned Gutner v. McDATA Corporation, Credit Suisse First Boston, Merrill Lynch, Pierce
Fenner & Smith Incorporated, Bear, Stearns & Co., Inc., FleetBoston Robertson Stephenset al., No. 01 CIV. 6627. Three other
similar suits have been filed against the Company. The complaints are substantially identical to numerous other complaints filed against other companies that went public over the last
several years. These lawsuits generally allege, among other things, that the registration statements and prospectus filed with the SEC by such companies were materially false and misleading
because they failed to disclose (a) that certain underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters
allocated to those investors material portions of shares in connection with the initial public offerings ("IPOs") and (b) that certain of the underwriters had entered into agreements with
customers whereby the underwriters agreed to allocate IPO shares in exchange for which the customers agreed to purchase additional company shares in the aftermarket at pre-determined
prices. The complaints relating to the Company allege claims against the Company, two of the Company's current officers, a former officer of the Company and Credit Suisse First Boston, the lead
underwriter of the Company's August 9, 2000 initial public offering, under Sections 11 and 15 of the Securities Act of 1933, as amended. The complaints also allege claims solely against
Credit Suisse First Boston and the other underwriter defendants under Section 12(a)(2) of the Securities Act of 1933, as amended, and claims against the individual defendants under
Section 10(b) of the Securities Exchange Act of 1934, as amended. The Company believes that the lawsuits are without legal merit and intends to defend them vigorously.

7

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On
February 14, 2002, the Company filed a patent infringement lawsuit against Brocade Communications Systems, Inc. ("Brocade") in the United States District Court for the
District of Colorado (Case No. 02-K-0303) alleging that Brocade's Frame Filtering feature in their switch products infringed the Company's U.S. Patent
No. 6,233,235 "Method and apparatus for measuring traffic within a switch." On March 5, 2002, the Company filed for a preliminary
injunction against Brocade to immediately stop infringing the patent after they announced another product containing their Frame Filtering feature. A hearing date of mid-July has
been set for the preliminary injunction and the parties are currently in the discovery phase of litigation. On April 8, 2002, Brocade filed an answer to the motion for preliminary injunction
generally alleging that Brocade has not infringed and is not infringing the patent. Brocade alleged various counterclaims in its answer including a claim that the patent is
invalid and unenforceable and that the Company misappropriated trade secret information from them under prior agreements. Management strongly believes that Brocade's counterclaims are factually
incorrect and without any merit. The Company intends to vigorously defend against such counterclaims and to pursue the preliminary injunction and patent infringement lawsuit against Brocade.

Note 7Recently Adopted Accounting Statements

The Company has adopted Statement of Financial Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") for the year ending
December 31, 2002. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. Under SFAS No. 142, goodwill and other
indefinite lived intangible assets are not subject to amortization, but are subject to an impairment test upon adoption and at least annually thereafter. The Company will complete the impairment
analysis for its $11.8 million of goodwill during the second quarter of 2002 and record an impairment adjustment at that time, if necessary. Management does not expect the completion of this
analysis to have a material impact on the Company's financial position, results of operations or cash flows. There were no changes to the carrying amount of goodwill during the period.

At
March 31, 2002, the Company has an intangible asset with a definite life of five years related to acquired developed technology with a gross carrying amount of
$10.5 million and accumulated amortization of $1.1 million. Amortization expense for the period ended March 31, 2002 and 2001 was $525,000 and $0, respectively. Amortization
expense for the 2002 through 2005 fiscal years will be approximately $2.1 million per year. Amortization expense for fiscal year 2006 will be approximately $1.5 million. The Company does
not have any material intangible assets with indefinite lives at March 31, 2002, excluding the $11.8 million of goodwill discussed above.

Note 8Subsequent Events

Effective May 8, 2002, the Company entered into an amendment to the Manufacturing and Purchasing Agreement with SCI. The amendment provides for the
outsourcing of the box-build manufacture of the Company's Director product. As part of the manufacture outsourcing, approximately $1.9 million of inventory on-hand or on
order will be sold to SCI at the Company's standard cost.

On
May 9, 2002, the Company entered into a Termination Agreement with Deutsche Bank to terminate the operating lease and associated agreements related to the McDATA campus
building entered into on February 9, 2001, to pay off all outstanding obligations of the Company under the lease and to purchase the property as discussed in Note 6.

8

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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 13, 2002.

Results of Operations

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

Three Months Ended March 31,2002

2001Revenue

100.0
%
100.0
%Cost of revenue

78.5

54.9Gross profit

21.5

45.1Operating expenses:Research and development

20.5

12.1Selling and marketing

27.9

16.6General and administrative

12.4

5.5Amortization of deferred compensation

3.3

2.1Total operating expenses

64.1

36.3Income (loss) from operations

(42.6
)
8.8Interest income (expense), net

3.1

5.6Income (loss) before income taxes

(39.5
)
14.4Income tax expense (benefit)

(13.0
)
5.3Net income (loss)

(26.5
)%
9.1
%


Three Months ended March 31, 2002 and 2001



Total revenue decreased by approximately 22% to $64.5 million for the quarter ended March 31, 2002 from $83.0 million for the quarter ended
March 31, 2001. The primary drivers of the revenue decline include the recent economic environment and its slow-down effect on IT storage and infrastructure spending, in particular
in the high-end Director market. Highlighting the current slow-down of IT spending, we experienced a late first-quarter order reduction from EMC, which materially reduced
anticipated earnings in the first quarter of 2002. Additionally, our upcoming transition from 1Gb to 2 Gb products and aggressive marketing activities of our competitors, such as the free
placement of products and the increased use of evaluation units, negatively impacted current quarter revenue. The majority of the net decrease in revenues from March 31, 2001 relates to product
revenue, which decreased to $55.0 million for the quarter ended March 31, 2002 from $74.9 million for the quarter ended March 31, 2001. This decrease highlights the impact
of the current economic environment on the high-end Director market. It is in this sector where the transition to 2 Gb transmission speed has created a highly competitive
environment, and it is also where we felt the impact of EMC's late first quarter
order reduction. Software and professional services revenue increased 63% to $5.9 million for the quarter ended March 31, 2002 from $3.7 million for the quarter ended
March 31, 2001. Other revenues for the quarter, including the ESCON service fee, decreased 19% to $3.6 million for the quarter ended March 31, 2002 from $4.5 million for
the quarter ended

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March 31, 2001. We anticipate that service revenue from EMC under the ESCON service agreement will continue to decrease in future years.

For
the quarter ended March 31, 2002 and 2001, approximately 53% and 68% of our revenues respectively, 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.



Gross profit decreased approximately 63% to $13.9 million for the quarter ended March 31, 2002 from $37.5 million for the quarter ended
March 31, 2001. The gross profit percentage decreased to 22% at March 31, 2002 from 45% at March 31, 2001. The decrease in our gross margin percentage in 2002 from 2001 was
primarily the result of increased manufacturing and component costs and inventory related charges. Beginning in the second quarter of 2001, we experienced increased manufacturing and component costs
related to a transition to multiple product lines and quality problems on component parts. We are continuing to use this high cost inventory, which we anticipate to be depleted by the end of the
second quarter of 2002. In addition, during the first quarter ending March 31, 2002, we incurred a $14.0 million inventory-related charge primarily for the excess 1Gb components used in
our Director-class products. This resulted from the unanticipated reduction in Director-class product orders late in March 2002.



Research and Development.Research and development expenses were $13.2 million in the quarter ended March 31,
2002 compared with $10.1 million in the quarter ended March 31, 2001. The $3.1 million or 31% 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 and new products, including our 2Gb products,
and enhancements to our existing products.

Selling and Marketing Expenses.Selling and marketing expenses increased by approximately 30% to $18.0 million for the
first quarter of 2002 from $13.8 million for the first quarter of 2001. This increase was primarily attributable to increased sales force staffing, as the number of our sales force employees
increased to 213 at March 31, 2002 from 153 at March 31, 2001.

General and Administrative Expenses.General and administrative expenses increased by approximately 58% to
$8.0 million for the first quarter of 2002 from $4.5 million for the first quarter of 2001. This increase was due primarily to increased staffing levels, a $1.25 million charge
related to the termination of the collateralized lease and an approximate $0. 5 million loss on the disposal of fixed assets.

Amortization of Deferred Compensation.In prior periods, we recorded deferred compensation in connection with stock option
grants. We are amortizing these amounts on a straight-line basis over the vesting period of the applicable options, resulting in amortization expense of $2.3 million during the
quarter ended March 31, 2002 and $2.2 million during the quarter ended March 31, 2001 (of which approximately $0.2 million and $0.5 million was included in cost of
revenue for the three months ended March 31, 2002 and March 31, 2001, respectively).

Interest Income, net.Interest income consisted primarily of interest earnings on our cash, cash equivalents and various
investment holdings. Net interest income decreased to $2.1 million for the quarter ended March 31, 2002 from $4.8 million for the quarter ended March 31, 2001. The decrease
in net interest income was due primarily to a decrease in our investment balances between the periods and to declining interest rates realized during 2001 and 2002. The average return on investment
during

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the period ended March 31, 2002 was 2.0% versus 5.6% in the period ended March 31, 2001. If interest rates continue to decrease, interest income may decrease in future periods.

Provision for Income Taxes.The effective tax rates for the quarters ended March 31, 2002 and 2001, were 33.0% and
37.0%, respectively. For the first quarter ended March 31, 2002, the effective tax rate and tax benefit resulting from the operating loss decreased primarily due to a lower percentage of our
investments held in tax-exempt instruments. If we continue to liquidate our tax-exempt investments, we may pay more taxes on our investment earnings.

Liquidity and Capital Resources

We generated approximately $7.8 million in net cash from operating activities, primarily from cash inflows including: (a) net income before
non-cash charges for inventory-related charges, a write-off of synthetic lease costs and a loss on the disposal of assets; (b) decreases in accounts receivable; and
(c) increases in accounts payable and deferred revenues. Offsetting these cash inflows were purchases of inventory and increases in current income tax receivables. Net cash used in investing
activities for the
first three months of 2002 was $38.1 million, primarily related to net purchases of investments and purchases of property and equipment. Net cash provided by financing activities for the
first three months of 2002 totaled approximately $500,000, reflecting proceeds from the exercise of employee stock options, partially offset by repayment of capital lease obligations.

At
March 31, 2002, we have deferred tax assets of $25 million, which we believe will, more likely than not, be realizable through future profitable operations. Additional
operating losses may result in a future valuation reserve or write-off of these assets.

Our
principal sources of liquidity at March 31, 2002 consisted of our cash and short-term investment securities on hand, which totaled approximately
$211 million, and our equipment financing arrangements, which totaled approximately $4.6 million. Borrowings under our equipment financing arrangements are secured by the related capital
equipment and are payable through 2006.

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. 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.

Inventories
decreased 21% from December 31, 2001 to March 31, 2002. Inventory turns, excluding the $14 million and $6.3 million inventory-related charge
during the first quarter of 2002 and fourth quarter of 2001, were 7.4 at March 31, 2002 and 8.5 at December 31, 2001. The inventory levels and inventory turns reflect the Company's
reduced revenues in the first quarter of 2002 and the reduction of inventory purchases during the quarter. In addition, we recently announced our plan to implement an "outsourcing focused"
manufacturing model including the transition of our manufacturing operations in 2002 through 2003 to a contract manufacturer. Inventory management remains an area of focus as we balance the need to
maintain strategic inventory levels to ensure competitive lead times versus the risk of inventory obsolescence because of rapidly changing technology and customer requirements. There can be no
assurance that we will not incur additional inventory write-downs in the future or that any such write-downs would not have a material adverse affect on our future operating results.

Commitments

We have contracted with SCI Systems, Inc. ("SCI") for the manufacture of printed circuit boards and box build assembly for specific Fibre Channel directors
and switches. The agreement with SCI

11

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requires us to submit purchasing forecasts, place orders and reschedule orders for products as necessary. At March 31, 2002, SCI had on hand materials purchased on behalf of McDATA valued at
approximately $44 million. In addition, SCI has purchase commitments outstanding related to materials that it had also ordered on our behalf. We may be liable for materials that SCI purchases
on our behalf if our actual requirements do not meet or exceed our forecasts and those materials cannot be redirected to other uses by SCI. At March 31, 2002, we recorded obligations of
approximately $14.8 million primarily related to materials purchased by SCI for certain end-of-life and obsolete material used to manufacture our 1Gb products. These
charges were incurred primarily as a result of the significant shortfall of actual first quarter 2002 revenue in comparison to forecast and the expected transition to 2Gb technology in the second
quarter of 2002, which resulted in excess ordered material at SCI. Management does not expect this commitment to have a continued material adverse effect on our business, results of operations,
financial position or cash flows.

On
February 9, 2001 (and amended on May 18, 2001, November 9, 2001 and January 24, 2002), we entered into an operating lease and associated agreements with
Deutsche Bank AG, New York Branch ("Deutsche Bank") for the lease of an approximately 167,000 square foot multi-story office and engineering building to be constructed on a 106-acre parcel
of land located in Broomfield, Colorado. Construction of the building commenced in the first half of 2001 and is scheduled to be completed in mid-2002, at which time lease payments were
scheduled to commence. As part of the transaction, we guaranteed a residual value of the facility to Deutsche Bank of approximately 89% during the construction period and 85% thereafter of the
$60 million total original cost. We agreed to restrict up to $63 million of our investment securities as collateral for specified obligations under the lease. These restricted investment
securities, valued at $41 million at March 31, 2002, are restricted as to withdrawal and are managed by a third party subject to certain limitations. In addition, the lease agreement
requires that we maintain compliance with certain affirmative and negative covenants, representations and warranties, including certain defined financial covenants. As the result of various charges in
the third and fourth quarters of 2001 and the first quarter of 2002, the fixed charge coverage ratio covenant with Deutsche Bank was not met. As a result of this default, we have elected to terminate
the lease under the provisions of the agreements. At March 31, 2002, we have reflected this default and planned termination and recorded approximately $37 million in construction costs
as property and equipment. Additionally, the $41 million in restricted assets have been applied against our obligation under the termination provisions to pay down the balance of the lease
obligation and construction costs. A loss of $1.25 million has been recorded to reflect the write-off of certain lease costs that can not be capitalized. The operating lease and
associated agreements were terminated on May 9, 2002. Accordingly, the building and land have been transferred to McDATA.

Risk Factors

RISKS
RELATED TO OUR BUSINESS

Recent risks related to the economy and international political instability

The general economic slowdown and increased international political instability, as demonstrated by the September 11, 2001 terrorist attacks, disruption in
air transportation and enhanced security measures as a result of the terrorist attacks, the conflict in Afghanistan and increasing tension in the Middle East, may hinder our ability to do business and
may increase our costs. The general economic slowdown has had an impact on purchasing decisions by customers. Additionally, this increased instability may, for example, negatively impact the
reliability and cost of transportation, negatively impact the desire of our employees and customers to travel, adversely affect our ability to obtain adequate insurance at reasonable rates or require
us to take extra security precautions for our operations. In addition, to the extent that air transportation is delayed or disrupted, the operations of our contract manufacturers and suppliers may be
disrupted, particularly if shipments of components

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and raw materials are delayed. If the economic slowdown or this international political instability continues or increases, our business and results of operations could be harmed.

We have recently experienced increased inventory costs and delays and have incurred inventory-related write-downs.

We completed an operations review during the third quarter of fiscal 2001, including an analysis of inventory transferred from our discontinued suppliers, a
review of obsolescence, end-of-life inventories, on-going inventory commitments and a year-end physical inventory analysis. Based on this review, we
recorded an inventory charge of approximately $14.7 million and $6.3 million in the third and fourth fiscal quarters of 2001, respectively. Additionally, in the fourth fiscal quarter of
2001, we incurred a charge related to obsolescence of certain demonstration and test equipment of approximately $4.1 million. In the first quarter of 2002, we incurred an additional
$14.0 million inventory-related charge related to our 1Gb product inventory. As we and our competitors introduce 2 Gb products, an unexpected drop in demand in 1 Gb products may occur, which
would create excess inventory and further inventory write-downs. There can be no assurance that we will not incur additional inventory write-downs in the future or that any such write-downs would not
have a material adverse affect on our future operating results.

During
2001, we experienced increased manufacturing and component costs related to a transition to multiple product lines and quality problems on component parts. Specifically, we
incurred increased costs and delays related to some mechanical features of our low-end and mid-range switch products. Also, we incurred additional costs related to our
die-cast chassis for these products. We are continuing to use this high cost inventory, which negatively affects our gross margins.

We incurred a substantial loss for the year ended December 31, 2001 and the three months ended March 31, 2002 and may not sustain
profitability in the future.

We incurred a substantial loss for the year ended December 31, 2001 and the three months ended March 31, 2002. Our future operating results
will depend on many factors, including the growth of the Fibre Channel market, market acceptance of new products we introduce, demand for our products, levels of product and price competition and our
reaching and maintaining targeted costs for our products. In addition, we expect to incur continued significant product development, sales and marketing, and general and administrative expenses. We
also anticipate expenses related to the implementation of an "outsourcing focused" manufacturing model during 2002 and 2003. We cannot assure you that we will generate sufficient revenue to achieve or
sustain profitability.

SANavigator Acquisition

In late September 2001, we acquired the assets of SANavigator, which was in the early stages of selling its SAN management software product. Factors that
may affect the success of this acquisition include our ability to quickly ramp sales of SANavigator's software, our ability to retain managerial, technical and sales talent and our ability to
successfully integrate SANavigator's software with our current product mix. We cannot assure you that we will achieve the anticipated benefits of this acquisition. Our failure to do so could
materially and adversely affect our business and operating results.

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 and services to EMC, which is an original equipment manufacturer customer, represented approximately 53% of
our revenue, excluding ESCON service revenue, for the three months ended March 31, 2002. In addition, IBM represented approximately 24% of our total revenue for the same period. We
anticipate that our future operating

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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 anticipated quarterly
results and financial condition. Additional factors that affect us and which could cause our revenue and operating results to vary in future periods include:



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 three months ended March 31, 2002, we derived approximately 72% of our revenue from sales of our Director-class products. We expect that
revenue from our Director-class 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 OEMs, 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 demand for new products
or products being

14

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

We
are currently developing next generation products that contain untested devices and subassemblies. As with any development, there are inherent risks should such devices or
subassemblies require redesign or rework. In particular, in conjunction with our transition of our products from 1 to 2 Gb transmission speed technology and higher port density, we have begun
introducing products with new features and functionality. We face risks relating to this product transition, including risks relating to forecasting of demand for 2 Gb and higher port density products
and related transition issues, as discussed in the previous paragraph, as well as possible product and software defects and a potentially different sales and support environment due to the complexity
of these new systems. If we fail to timely introduce new 2 Gb and higher port density products with enhanced features, or if there is no demand for these products, our business could be seriously
harmed.

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

Our success will depend on our continuing ability to develop and manage relationships with significant OEMs, 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 or 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 and operating results. In particular, we must increase product sales through systems integrator and distributors to obtain higher margins.

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 of components. 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.

15

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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 SCI to manufacture all of our circuit boards and to perform extensive testing and assembly of our products. In December of 2001, we entered into
a new supply contract with SCI, which has a one year term that renews automatically unless cancelled and is cancellable by either party without cause on advance notice. SCI 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 SCI 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 SCI 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. SCI does not guarantee that adequate capacity will be available to us within the time required
to meet additional demand for our products. As discussed earlier, we are in the process of implementing an "outsourcing-focused" manufacturing model. In May 2002, we outsourced to SCI the
integration of our Directors into cabinets.

In
addition, we coordinate our efforts with those of our component suppliers and SCI 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 SCI, 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 or SCI, 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 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 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 72% of our total revenues in the three months ended March 31, 2002, are 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,

16

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like SANs. Our success in generating net revenue in this developing market will depend on, among other things, our ability to:



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 OEMs, 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.

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 our senior executive team, half of which were hired in late 2000 and
2001. 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 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 remains intense in the San Jose, California metropolitan area, where we have
a software 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.

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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 then existing 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. Notably, Brocade Communications Systems, Inc. recently introduced a 2 Gb transmission speed 16-port switch to the market
place and is expected to introduce a 2 Gb transmission speed 120-port switch in the near future. We do not expect to introduce our 2 Gb transmission speed directors and switches until the
second quarter of 2002. As a result, they may be able to obtain further market share.

Failure to manage expansion effectively could seriously harm our business, financial condition and prospects.

Our ability to successfully implement our business plan, develop and offer products, and manage expansion in a rapidly evolving market requires a comprehensive
and effective planning and management process. We continue to increase the scope of our operations domestically and internationally, and have increased headcount substantially. In addition, we plan to
continue to hire employees in the foreseeable future. Our growth in business, headcount, and relationships with customers and other third parties has placed, and will continue to place, a significant
strain on management systems and resources. Our failure to continue to improve upon our operational, managerial, and financial controls, reporting systems, and procedures, and/or our failure to
continue to expand, train, and manage our work force worldwide, could seriously harm our business and financial results.

We may engage in future acquisitions that dilute our stockholders and cause us to use cash, incur debt or assume contingent liabilities.

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



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These
purchases also involve numerous risks, including:



We
may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future.

Our products must comply with evolving industry standards and government regulations.

Industry standards for SAN products are continuing to emerge, evolve, and achieve acceptance. To remain competitive, we must continue to introduce new products
and product enhancements that meet these industry standards. All components of the SAN must utilize the same standards in order to operate together. Our products comprise only a part of the entire SAN
and we depend on the companies that provide other components of the SAN, many of whom are significantly larger than us, to support the industry standards as they evolve. The failure of these providers
to support these industry standards could adversely affect the market acceptance of our products.

In
addition, in the United States, our products comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories.
Internationally, products that we develop will be required to comply with standards established by authorities in various countries. Failure to comply with existing or evolving industry standards or
to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business.

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

We have expanded and intend to continue 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:



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

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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, and those we may take in the future, 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. Please see "Item 3, Legal Proceedings" in
this Form 10-Q for a recent patent infringement lawsuit we are pursuing.

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, if successful, 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:



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.

In
March 1999, we, as an EMC subsidiary, granted IBM a license to all of our patents under a cross license agreement between IBM and EMC. Under the terms of that agreement,
effective upon EMC's February 7, 2001 distribution of our Class A common stock indirectly held by it to its stockholders, the sublicense we previously held 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.

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.

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Provisions in our charter documents, our rights agreement and Delaware law could prevent or delay a change in control of McDATA and may reduce the
market price of our common stock.

Provisions of our certificate of incorporation, by-laws and rights agreement may discourage, delay or prevent a merger, acquisition or other business
combination that a stockholder may consider favorable. These provisions include:



We
are incorporated in Delaware and certain provisions of Delaware law may also discourage, delay, or prevent someone from acquiring or merging with us, which may cause the market price
of our common stock to decline.

Risks Relating to the Securities Markets

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 common stock has been volatile. Because we are a technology company, the market price of our stock is usually 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.

Defending Lawsuits

Several securities class action lawsuits have been filed against us. For more information about this litigation, please see "Part II, Item
1Legal Proceedings" in this Form 10-Q.

We
may become subject to additional class action litigation following a period of volatility in the market price of our common stock. Securities class action litigation could result in
substantial costs and divert the attention of management and our resources and seriously harm our business, financial condition and results of operation.

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

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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 our 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 53% of our revenue, excluding ESCON service revenue, for the three months ended March 31, 2002. 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 three months ended March 31, 2002, our revenues from EMC represented approximately 53% of our total revenue, excluding ESCON service
revenue. In addition, during the same period, revenue under our service agreement with EMC, pursuant to which we manufacture and supply ESCON switching devices for IBM, represented approximately 2% 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 to EMC's
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 February 2001 distribution by EMC of our Class A
common stock to EMC's 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;



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 then 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

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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 for taxes relating to the failure of EMC's distribution to EMC's
stockholders of our Class A common stock that it indirectly held to be tax free if that failure results from, among other things:



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

We are exposed to market risk, primarily from changes in interest rates, foreign currency exchange rates and credit risks.

Interest Rate Risk

We earn interest income on both our cash and cash equivalents and our investment portfolio. Our 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 realized and 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 our Form 10-K.

Foreign Currency Exchange Risk

We operate sales and support offices in several countries. All of our sales contracts have been denominated in U.S. dollars, therefore our 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 us to concentrations of credit risk, consist principally of temporary cash investments, investments and trade
receivables. We place our temporary cash investments and investment securities in investment grade instruments and limit the amount of investment with any one financial institution. We evaluate the
credit risk associated with each of our
customers but generally do not require collateral. We depend on two customers for most of our total revenue who comprise a significant portion of our trade receivables and, therefore, expose us to a
concentration of credit risk.

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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.

Class Action Laddering Lawsuits

The Company, two current officers and a former officer have been named as defendants in purported securities class-action lawsuits filed in the United States
District Court, Southern District of New York. The first of these lawsuits, filed on July 20, 2001, is captioned Gutner v. McDATA Corporation, Credit Suisse First Boston, Merrill Lynch, Pierce
Fenner & Smith Incorporated, Bear, Stearns & Co., Inc., FleetBoston Robertson Stephenset al., No. 01 CIV. 6627. Three other
similar suits have been filed against the Company. The complaints are substantially identical to numerous other complaints filed against other companies that went public over the last
several years. These lawsuits generally allege, among other things, that the registration statements and prospectus filed with the SEC by such companies were materially false and misleading
because they failed to disclose (a) that certain underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters
allocated to those investors material portions of shares in connection with the initial public offerings ("IPOs") and (b) that certain of the underwriters had entered into agreements with
customers whereby the underwriters agreed to allocate IPO shares in exchange for which the customers agreed to purchase additional company shares in the aftermarket at pre-determined
prices. The complaints relating to the Company allege claims against the Company, two of the Company's officers, a former officer of the Company, and Credit Suisse First Boston, the lead underwriter
of the Company's August 9, 2000 initial public offering, under Sections 11 and 15 of the Securities Act of 1933, as amended. The complaints also allege claims solely against Credit
Suisse First Boston and the other underwriter defendants under Section 12(a)(2) of the Securities Act of 1933, as amended, and claims against the individual defendants under
Section 10(b) of the Securities Exchange
Act of 1934, as amended. We believe that the lawsuits are without legal merit and we intend to defend them vigorously.

Patent Infringement Lawsuit

On February 14, 2002, we filed a patent infringement lawsuit against Brocade Communications Systems, Inc. ("Brocade") in the United States District
Court for the District of Colorado (Case No. 02-K-0303) alleging that Brocade's Frame Filtering feature in their switch products infringed our U.S. Patent
No. 6,233,235 "Method and apparatus for measuring traffic within a switch." On March 5, 2002, we filed for a preliminary injunction
against Brocade to immediately stop infringing our patent after they announced another product containing their Frame Filtering feature. A hearing date of mid-July has been set for
the preliminary injunction and the parties are currently in the discovery phase of litigation. On April 8, 2002, Brocade filed an answer to our motion for preliminary injunction generally
alleging that Brocade has not infringed and is not infringing our patent. Brocade alleged various counterclaims in its answer including a claim that our patent is invalid and unenforceable and that we
misappropriated trade secret information from them under prior agreements. We strongly believe that Brocade's counterclaims are factually incorrect and without any merit. We intend to vigorously
defend against such counterclaims and to pursue the preliminary injunction and patent infringement lawsuit against them.

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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

None

ITEM 6. Exhibits and Reports on Form 8-K

|(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                                                        
|(4.4)    |  | Rights Agreement dated as of May 18, 2001, by and between the Company and the Bank of New York, as rights agent (Filed in Form 8-K dated May 21, 2001).                                                  
|(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                                                     
|(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                                                        
|(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                                                                        
|         |  |                                                                                                                                                                                                          

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|(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                                                                          
|(10.13.1)+ |  | Amendment to OEM Purchase and License Agreement dated as of June 21, 2001, 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                                                                                  
|(10.15.1)+ |  | Manufacturing and Purchasing Agreement dated as of December 14, 2001 by and between SCI Systems, Inc. and the Company (Filed on Form 8-K dated February 25, 2002)                   
|(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)                                     
|(10.19.4)  |  | Second Amendment to Participation Agreement dated November 9, 2001 by and between the Company and Deutsche Bank (Filed in Form 10-Q for the fiscal quarter ended September 30, 2001)
|(10.19.5)  |  | Third Amendment to Participation Agreement dated January 24, 2002 by and between the Company and Deutsche Bank (Filed on Form 8-K dated February 25, 2002)                          
|(10.20)*   |  | Form of Severance Agreement                                                                                                                                                         
|           |  |                                                                                                                                                                                     

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|(10.21)*   |  | 1997 Stock Option Plan                                                                                                                
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|(10.21.1)* |  | 2001 McDATA Equity Incentive Plan (Filed in Form 10-Q for the fiscal quarter ended September 30, 2001)                                
|(10.22)*   |  | Form of Stock Option Agreement for 1997 Stock Option Plan                                                                             
|(10.23)*   |  | Description of the Company's Management Bonus Program                                                                                 
|(10.24)    |  | Asset Purchase Agreement dated August 3, 2001 by and among the Company, SANavigator, Inc., Western Digital Corporation and Connex Inc.

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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:               

May 14,
2002

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