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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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|                                                  |  |                                                                                         
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                        |  |                                                                                         
|[X]                                               |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|                                                  |  |                                                                                         
|For the quarterly period ended September 30, 2002
|                                                  |  |                                                                                         
|OR                                               
|                                                  |  |                                                                                         
|[   ]                                             |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from  to

Commission File Number 000-31257

McDATA CORPORATION

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 84-1421844                          
|(State or other jurisdiction of
incorporation or 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 [X]      No [   ]

At October 28, 2002, 81,000,000 shares of the registrants Class A Common Stock
were outstanding and 32,728,774 shares of the registrants Class B Common Stock
were outstanding.



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TABLE OF CONTENTS



|                                                                                              |                                            |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|                                                                                              | CONSOLIDATED BALANCE SHEETS               
|                                                                                              | CONSOLIDATED INCOME STATEMENTS            
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|ITEM 3. Quantitative and Qualitative Disclosures about Market Risks                          
|ITEM 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                                                                  
|ITEM 1. Legal Proceedings                                                                    
|ITEM 2. Changes in Securities and Use of Proceeds                                            
|ITEM 3. Defaults Upon Senior Securities                                                      
|ITEM 4. Submission of Matters to A Vote of Security Holders                                  
|ITEM 5. Other Information                                                                    
|ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                                                                    
|CERTIFICATIONS                                                                               
|CERTIFICATIONS                                                                               



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McDATA CORPORATION

FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

|     |  |                                                             |                                                        |                                                                |    |    |   |      |  | 
|---- |  | ----------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------------- | -- | -- | - | ---- |  | 
|Item |  |                                                             |                                                        |                                                                |    |    |   | Page
|     |  |                                                             |                                                        |                                                                |    |    |   |     
|     |  | PART 1 -- FINANCIAL INFORMATION                             |                                                        |                                                                |    |   
|1    |  | Financial Statements                                        |                                                        |                                                                |    |   
|     |  |                                                             | Consolidated Balance Sheets --                         |                                                                |    |    |  
|     |  |                                                             |                                                        | September 30, 2002 (unaudited) and December 31, 2001           |    |    | 1 |     
|     |  |                                                             | Consolidated Income Statements --                      |                                                                |    |    |  
|     |  |                                                             |                                                        | Three and Nine months ended September 30, 2002 (unaudited) and |    |    |   |     
|     |  |                                                             |                                                        | September 30, 2001 (unaudited)                                 |    |    | 2 |     
|     |  |                                                             | Consolidated Statements of Cash Flows --               |                                                                |    |    |  
|     |  |                                                             |                                                        | Nine months ended September 30, 2002 (unaudited) and           |    |    |   |     
|     |  |                                                             |                                                        | September 30, 2001 (unaudited)                                 |    |    | 3 |     
|     |  |                                                             | Notes to Consolidated Financial Statements (unaudited) |                                                                |    | 4  |  
|2    |  | Management's Discussion and Analysis of Financial Condition |                                                        |                                                                |    |   
|     |  |                                                             | and Results of Operations                              |                                                                |    | 10 |  
|3    |  | Quantitative and Qualitative Disclosures About Market Risks |                                                        |                                                                | 25 |   
|4    |  | Controls and Procedures                                     |                                                        |                                                                | 26 |   
|     |  | PART II -- OTHER INFORMATION                                |                                                        |                                                                |    |   
|1    |  | Legal Proceedings                                           |                                                        |                                                                | 26 |   
|2    |  | Changes in Securities and Use of Proceeds                   |                                                        |                                                                | 27 |   
|3    |  | Defaults Upon Senior Securities                             |                                                        |                                                                | 27 |   
|4    |  | Submission of Matters to A Vote of Security Holders         |                                                        |                                                                | 27 |   
|5    |  | Other Information                                           |                                                        |                                                                | 28 |   
|6    |  | Exhibits and Reports on Form 8-K                            |                                                        |                                                                | 28 |   





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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:



| |  | changes in our relationship with EMC Corporation, or EMC, and International Business Machines Corporation, or IBM, and the
level of their orders;                                                                                 
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | our ability to successfully ramp sales of SANavigator software;                                                                                                                                                                   
| 
| |  | the impact of the continued general economic slowdown on purchasing decisions by customers and capital spending;                                                                                                                  
| 
| |  | our ability to complete the manufacturing review plan and the successful implementation of an outsourcing-focused
manufacturing model;                                                                                          
| 
| |  | additional manufacturing and component costs and production delays that we may continue to experience as we continue the
transition to new products and multiple product lines;                                                   
| 
| |  | a loss of any of our key customers (and our OEMs key customers), distributors, resellers or our manufacturers;                                                                                                                   
| 
| |  | our ability to expand our product offerings and any transition to new products (including even higher port density products
and multi-protocol products);                                                                         
| 
| |  | the impact and uncertainty of typically having most of our sales volume occur in the last month, and a significant amount
in the last two weeks and even days, of each fiscal quarter;                                            
| 
| |  | any change in business conditions, our sales strategy or product development plans;                                                                                                                                               
| 
| |  | competition in the storage area network (SAN) and director, software and switch markets (including competitive pricing
pressures by current competitors and possible new entrants from the IP and multi-protocol switch industry);
| 
| |  | continued market acceptance of our products, name recognition of our products and changes in customer buying patterns;                                                                                                            
| 
| |  | delays and changes in the development of new products and new technology and component quality and availability;                                                                                                                  
| 
| |  | any industry or technology changes that cause obsolescence of our products or components of those products; and                                                                                                                   
| 
| |  | one-time events and other important risks and factors disclosed previously and from time to time in our filings with the
U.S. Securities and Exchange Commission, including the risk factors discussed in this Quarterly Report.  

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)

|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------ | ------------ | ------- | ------------- | ------- | ------------ | ------- | ------- | ------- | 
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         | September 30, |         | December 31,
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         | 2002          |         | 2001        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         | (unaudited)   |         |              |         |        
|Assets                                                                                                                                                                                               |                                           |                                                                                      |                                            |              |         |               |         |             
|Current assets:                                                                                                                                                                                      |                                           |                                                                                      |                                            |              |         |               |         |             
|                                                                                                                                                                                                     |                                           | Cash and cash equivalents                                                            |                                            | $            | 69,259  |               |         | $            | 69,285  |        
|                                                                                                                                                                                                     |                                           | Short-term investments                                                               |                                            |              | 147,576 |               |         |              | 146,867 |        
|                                                                                                                                                                                                     |                                           | Accounts receivable, net of allowance for bad debts of $1,282
and $782, respectively |                                            |              | 45,852  |               |         |              | 43,805  |        
|                                                                                                                                                                                                     |                                           | Inventories, net                                                                     |                                            |              | 11,223  |               |         |              | 24,845  |        
|                                                                                                                                                                                                     | Deferred tax assets                       |                                                                                      |                                            | 28,144       |         |               |         | 21,953       |        
|                                                                                                                                                                                                     | Prepaid expenses and other current assets |                                                                                      |                                            | 5,940        |         |               |         | 9,795        |        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|Total current assets                                                                                                                                                                                 |                                           |                                                                                      | 307,994                                    |              |         |               | 316,550 |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |             
|Property and equipment, net                                                                                                                                                                          |                                           |                                                                                      | 102,845                                    |              |         |               | 40,838  |             
|Long-term investments                                                                                                                                                                                |                                           |                                                                                      | 78,543                                     |              |         |               | 94,849  |             
|Restricted investments                                                                                                                                                                               |                                           |                                                                                      |                                           |              |         |               | 36,199  |             
|Other assets, net                                                                                                                                                                                    |                                           |                                                                                      | 39,275                                     |              |         |               | 25,517  |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            | Total assets |         | $             | 528,657 |              |         | $       | 513,953 | 
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |             
|Liabilities and Stockholders Equity                                                                                                                                                                 |                                           |                                                                                      |                                            |              |         |               |         |             
|Current liabilities:                                                                                                                                                                                 |                                           |                                                                                      |                                            |              |         |               |         |             
|                                                                                                                                                                                                     | Accounts payable                          |                                                                                      | $                                          | 16,745       |         |               | $       | 11,544       |        
|                                                                                                                                                                                                     | Accrued liabilities                       |                                                                                      |                                            | 30,813       |         |               |         | 22,441       |        
|                                                                                                                                                                                                     | Deferred revenue                          |                                                                                      |                                            | 15,078       |         |               |         | 7,454        |        
|                                                                                                                                                                                                     | Obligations under capital leases          |                                                                                      |                                            | 1,865        |         |               |         | 1,934        |        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|Total current liabilities                                                                                                                                                                            |                                           |                                                                                      | 64,501                                     |              |         |               | 43,373  |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |             
|Obligations under capital leases                                                                                                                                                                     |                                           |                                                                                      | 1,865                                      |              |         |               | 789     |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|                                                                                                                                                                                                     | Total liabilities                         |                                                                                      |                                            | 66,366       |         |               |         | 44,162       |        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |             
|Commitments and Contingencies (Note 9)                                                                                                                                                               |                                           |                                                                                      |                                            |              |         |               |         |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |             
|Stockholders Equity:                                                                                                                                                                                |                                           |                                                                                      |                                            |              |         |               |         |             
|Preferred stock, $0.01 par value, 25,000,000 shares authorized, no
shares issued or outstanding                                                                                                      |                                           |                                                                                      |                                           |              |         |               |        |             
|Common stock, Class A, $0.01 par value, 250,000,000 shares
authorized, 81,000,000 shares issued and outstanding                                                                                      |                                           |                                                                                      | 810                                        |              |         |               | 810     |             
|Common stock, Class B, $0.01 par value, 200,000,000 shares
authorized, 32,673,863 and 31,562,223 shares issued and
outstanding at September 30, 2002 (unaudited) and December 31,
2001, respectively |                                           |                                                                                      | 327                                        |              |         |               | 316     |             
|Additional paid-in-capital                                                                                                                                                                           |                                           |                                                                                      | 473,545                                    |              |         |               | 468,133 |             
|Deferred compensation                                                                                                                                                                                |                                           |                                                                                      | (9,248                                     | )            |         |               | (14,770 | )           
|Accumulated other comprehensive income                                                                                                                                                               |                                           |                                                                                      | 661                                        |              |         |               | 520     |             
|Retained earnings (accumulated deficit)                                                                                                                                                              |                                           |                                                                                      | (3,804                                     | )            |         |               | 14,782  |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|Total stockholders equity                                                                                                                                                                           |                                           |                                                                                      | 462,291                                    |              |         |               | 469,791 |             
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        
|                                                                                                                                                                                                     |                                           |                                                                                      | Total liabilities and stockholders equity |              | $       | 528,657       |         |              | $       | 513,953 |        
|                                                                                                                                                                                                     |                                           |                                                                                      |                                            |              |         |               |         |              |         |        

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

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McDATA CORPORATION

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

|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | - | ------- | ------ | ------------------ | - | ----------------- | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- |  |  | 
|                                                                                                                                                                |                    |   |         |        | Three Months Ended |   | Nine months Ended
|                                                                                                                                                                |                    |   |         |        | September 30,      |   | September 30,    
|                                                                                                                                                                |                    |   |         |        |                    |   |                  
|                                                                                                                                                                |                    |   |         |        | 2002               |   | 2001              |        | 2002 |   | 2001   
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |        
|Revenue                                                                                                                                                         |                    | $ | 80,941  |        |                    | $ | 86,600            |        |      | $ | 222,738 |         |  | $ | 250,924 |        
|Cost of revenue                                                                                                                                                 |                    |   | 38,361  |        |                    |   | 63,787            |        |      |   | 131,176 |         |  |   | 156,552 |        
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|                                                                                                                                                                | Gross profit       |   |         | 42,580 |                    |   |                   | 22,813 |      |   |         | 91,562  |  |   |         | 94,372  | 
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |        
|Operating expenses:                                                                                                                                             |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |        
|Research and development                                                                                                                                        |                    |   | 15,631  |        |                    |   | 13,411            |        |      |   | 43,475  |         |  |   | 34,863  |        
|Selling and marketing                                                                                                                                           |                    |   | 17,798  |        |                    |   | 18,554            |        |      |   | 54,466  |         |  |   | 47,871  |        
|General and administrative                                                                                                                                      |                    |   | 6,960   |        |                    |   | 4,683             |        |      |   | 22,260  |         |  |   | 13,149  |        
|Acquired in-process research & development and other
acquisition-related costs                                                                                  |                    |   |        |        |                    |   | 9,291             |        |      |   |        |         |  |   | 9,291   |        
|Amortization of deferred compensation (excludes
amortization of deferred compensation included in cost of
revenue of $137, $274, $455 and $1,266, respectively) |                    |   | 2,217   |        |                    |   | 1,729             |        |      |   | 6,501   |         |  |   | 5,111   |        
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|                                                                                                                                                                | Operating expenses |   |         | 42,606 |                    |   |                   | 47,668 |      |   |         | 126,702 |  |   |         | 110,285 | 
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|Loss from operations                                                                                                                                            |                    |   | (26     | )      |                    |   | (24,855           | )      |      |   | (35,140 | )       |  |   | (15,913 | )      
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |        
|Interest and other income                                                                                                                                       |                    |   | 1,851   |        |                    |   | 3,394             |        |      |   | 5,859   |         |  |   | 11,954  |        
|Interest expense                                                                                                                                                |                    |   | (89     | )      |                    |   | (98               | )      |      |   | (220    | )       |  |   | (278    | )      
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|Income (loss) before income taxes                                                                                                                               |                    |   | 1,736   |        |                    |   | (21,559           | )      |      |   | (29,501 | )       |  |   | (4,237  | )      
|Income tax benefit                                                                                                                                              |                    |   | (607    | )      |                    |   | (7,977            | )      |      |   | (10,915 | )       |  |   | (1,568  | )      
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|Net income (loss)                                                                                                                                               |                    | $ | 2,343   |        |                    | $ | (13,582           | )      |      | $ | (18,586 | )       |  | $ | (2,669  | )      
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |        
|Basic net income (loss) per share                                                                                                                               |                    | $ | 0.02    |        |                    | $ | (0.12             | )      |      | $ | (0.16   | )       |  | $ | (0.02   | )      
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|Shares used in computing basic net income (loss) per share                                                                                                      |                    |   | 113,280 |        |                    |   | 111,658           |        |      |   | 113,026 |         |  |   | 111,226 |        
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |        
|Diluted net income (loss) per share                                                                                                                             |                    | $ | 0.02    |        |                    | $ | (0.12             | )      |      | $ | (0.16   | )       |  | $ | (0.02   | )      
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 
|Shares used in computing diluted net income (loss) per share                                                                                                    |                    |   | 116,295 |        |                    |   | 111,658           |        |      |   | 113,026 |         |  |   | 111,226 |        
|                                                                                                                                                                |                    |   |         |        |                    |   |                   |        |      |   |         |         |  |   |         |         |  |  | 

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

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McDATA CORPORATION

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

|                                                                           |                                                   |                                           |          |                                 |        |      |          |        |         |  
|-------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | -------- | ------------------------------- | ------ | ---- | -------- | ------ | ------- | -
|                                                                           |                                                   |                                           |          | Nine months Ended September 30,
|                                                                           |                                                   |                                           |          |                                
|                                                                           |                                                   |                                           |          | 2002                            |        | 2001
|                                                                           |                                                   |                                           |          |                                 |        |     
|Cash flows from operating activities:                                      |                                                   |                                           |          |                                 |        |      |          |       
|Net loss                                                                   |                                                   | $                                         | (18,586  | )                               |        | $    | (2,669   | )     
|Adjustments to reconcile net loss to cash flows from operating activities: |                                                   |                                           |          |                                 |        |      |          |       
|                                                                           | Depreciation and amortization                     |                                           |          | 17,828                          |        |      |          | 11,978 |        
|                                                                           | Loss from write-off of collateralized lease costs |                                           |          | 1,256                           |        |      |          |       |        
|                                                                           | (Gain)loss on trade-in of fixed assets            |                                           |          | 599                             |        |      |          | (340   | )      
|                                                                           | Net realized loss on investments                  |                                           |          | 720                             |        |      |          |       |        
|                                                                           | Inventory and inventory commitment provisions     |                                           |          | 14,722                          |        |      |          | 12,732 |        
|                                                                           | Acquired in-process research and development      |                                           |          |                                |        |      |          | 7,200  |        
|                                                                           | Deferred income taxes                             |                                           |          | (15,129                         | )      |      |          | (9,921 | )      
|                                                                           | Non-cash compensation expense                     |                                           |          | 6,956                           |        |      |          | 6,377  |        
|                                                                           | Tax benefit from stock options exercised          |                                           |          | 2,116                           |        |      |          | 3,884  |        
|                                                                           | Changes in net assets and liabilities:            |                                           |          |                                 |        |      |          |        |        
|                                                                           |                                                   | Accounts receivable                       |          |                                 | (2,047 | )    |          |        | (373    | )
|                                                                           |                                                   | Inventories                               |          |                                 | 1,092  |      |          |        | (29,895 | )
|                                                                           |                                                   | Prepaid expenses and other current assets |          |                                 | 3,855  |      |          |        | (2,674  | )
|                                                                           |                                                   | Other assets, net                         |          |                                 | (7,567 | )    |          |        | (771    | )
|                                                                           |                                                   | Accounts payable                          |          |                                 | 5,201  |      |          |        | (5,337  | )
|                                                                           |                                                   | Accrued liabilities                       |          |                                 | 975    |      |          |        | 2,890   |  
|                                                                           |                                                   | Accrued income taxes                      |          |                                 |       |      |          |        | (8,340  | )
|                                                                           |                                                   | Deferred revenue                          |          |                                 | 7,624  |      |          |        | 993     |  
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Net cash provided (used) by operating activities                           |                                                   |                                           | 19,615   |                                 |        |      | (14,266  | )     
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Cash flows from investing activities:                                      |                                                   |                                           |          |                                 |        |      |          |       
|Purchases of property and equipment                                        |                                                   |                                           | (68,640  | )                               |        |      | (16,393  | )     
|Acquisitions                                                               |                                                   |                                           |         |                                 |        |      | (29,750  | )     
|Payment of collateralized lease costs                                      |                                                   |                                           | (1,256   | )                               |        |      |         |       
|Purchases of investments                                                   |                                                   |                                           | (389,422 | )                               |        |      | (516,394 | )     
|Maturities of investments                                                  |                                                   |                                           | 439,927  |                                 |        |      | 472,803  |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Net cash used by investing activities                                      |                                                   |                                           | (19,391  | )                               |        |      | (89,734  | )     
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Cash flows from financing activities:                                      |                                                   |                                           |          |                                 |        |      |          |       
|Payment of obligations under capital leases                                |                                                   |                                           | (2,126   | )                               |        |      | (2,366   | )     
|Proceeds from the exercise of stock options                                |                                                   |                                           | 1,876    |                                 |        |      | 3,658    |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Net cash provided (used) by financing activities                           |                                                   |                                           | (250     | )                               |        |      | 1,292    |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Net decrease in cash and cash equivalents                                  |                                                   |                                           | (26      | )                               |        |      | (102,708 | )     
|Cash and cash equivalents, beginning of period                             |                                                   |                                           | 69,285   |                                 |        |      | 174,630  |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Cash and cash equivalents, end of period                                   |                                                   | $                                         | 69,259   |                                 |        | $    | 71,922   |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Supplemental Disclosure of Non-Cash Investing and Financing Activities:    |                                                   |                                           |          |                                 |        |      |          |       
|Capital lease obligations incurred                                         |                                                   | $                                         | 4,634    |                                 |        | $    | 1,413    |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Fixed assets exchanged for capital leases                                  |                                                   | $                                         | (1,501   | )                               |        |      |         |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Acquisition of equipment with payables                                     |                                                   |                                           |         |                                 |        | $    | 2,100    |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       
|Transfer of inventory to fixed assets                                      |                                                   | $                                         | 5,205    |                                 |        | $    | 3,676    |       
|                                                                           |                                                   |                                           |          |                                 |        |      |          |       

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

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1  Background and Basis of Presentation

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.

Certain amounts in the Consolidated Balance Sheet as of December 31, 2001
have been reclassified in order to conform to the current presentation.

Note 2  Accounting Changes

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 completed its evaluation of the carrying value of its
goodwill in the second quarter. The results of this evaluation indicated that
there was no impairment of goodwill upon adoption of SFAS 142.

Net income and earnings per share for the three and nine months ended
September 30, 2001 adjusted to exclude amortization of goodwill (net of taxes)
would not have been materially different than reported. There were no changes
to or acquisitions of goodwill during the three and nine months ended September
30, 2002. As of September 30, 2002, goodwill totaled $11.8 million.

All of the Companys identifiable acquired intangible assets are subject
to amortization. There were no material acquisitions of intangible assets
during the three or nine months ended September 30, 2002. At September 30,
2002, the Company has an identifiable 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 $2.1 million.
Amortization expense for the nine months ended September 30, 2002 and 2001 was
$1.6 million and $0, respectively. Amortization expense for the net carrying
amount of intangible assets at September 30, 2002 is estimated to be $0.5
million for the remainder of fiscal 2002, $2.1 million per year through 2006,
and $1.5 million for fiscal year 2006.

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 3  Recent Accounting Pronouncements

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 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.

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146). This statement addresses the accounting for costs associated with
an exit activity or with a disposal of long-lived assets. SFAS No. 146 is
effective for the Companys financial statements for the year ending December
31, 2002. The adoption of this statement is not currently anticipated to have a
material impact on the Companys financial position or results of operations.

Note 4  Net Income (Loss) per Share

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

|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                        |  | Three Months Ended |         | Nine months Ended
|                                                                                                        |  | September 30,      |         | September 30,    
|                                                                                                        |  |                    |         |                  
|                                                                                                        |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                                                                                                        |  |                    |         |                   |  |      |         |     
|Net income (loss)                                                                                       |  | $                  | 2,343   |                   |  | $    | (13,582 | )    |  | $ | (18,586 | ) |  | $ | (2,669  | )
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Weighted average shares of common stock outstanding used
in computing basic net income (loss) per share |  |                    | 113,280 |                   |  |      | 111,658 |      |  |   | 113,026 |   |  |   | 111,226 |  
|Effect of dilutive stock options                                                                        |  |                    | 3,015   |                   |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Weighted average shares of common stock used in
computing diluted net income (loss) per share           |  |                    | 116,295 |                   |  |      | 111,658 |      |  |   | 113,026 |   |  |   | 111,226 |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Basic net income (loss) per share                                                                       |  | $                  | 0.02    |                   |  | $    | (0.12   | )    |  | $ | (0.16   | ) |  | $ | (0.02   | )
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Diluted net income (loss) per share                                                                     |  | $                  | 0.02    |                   |  | $    | (0.12   | )    |  | $ | (0.16   | ) |  | $ | (0.02   | )
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Options not included in diluted share base because of the
exercise prices                               |  |                    | 6,107   |                   |  |      | 1,912   |      |  |   | 3,837   |   |  |   | 1,272   |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Options and restricted stock not included in diluted
share base because of the net loss                 |  |                    |        |                   |  |      | 8,674   |      |  |   | 7,538   |   |  |   | 9,314   |  
|                                                                                                        |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  

Note 5  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 9). As part of the lease, the Company agreed to restrict a portion of
its investment securities as collateral for specified obligations under the
lease.

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 5  Restricted Investments (continued)

During the quarter ended June 30, 2002, the Company completed its
termination of the lease agreement initiated in the first quarter of 2002.
Restricted investments of $41 million were used to pay down the outstanding
obligation and to acquire the property and equipment related to the new office
and engineering building. See Note 9 for more information regarding the
termination of the lease and liquidation of these restricted assets at June 30,
2002.

Note 6  Comprehensive Income (Loss)

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

|                                           |  |                    |       |                   |  |      |         |      |  |   |         |   |  |   |        |  
|------------------------------------------ |  | ------------------ | ----- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                           |  | Three Months Ended |       | Nine months Ended
|                                           |  | September 30,      |       | September 30,    
|                                           |  |                    |       |                  
|                                           |  | 2002               |       | 2001              |  | 2002 |         | 2001
|                                           |  |                    |       |                   |  |      |         |     
|Net income (loss)                          |  | $                  | 2,343 |                   |  | $    | (13,582 | )    |  | $ | (18,586 | ) |  | $ | (2,669 | )
|Unrealized gain on investments, net of tax |  |                    | 81    |                   |  |      | 365     |      |  |   | 141     |   |  |   | 661    |  
|                                           |  |                    |       |                   |  |      |         |      |  |   |         |   |  |   |        |  
|Comprehensive income (loss)                |  | $                  | 2,424 |                   |  | $    | (13,217 | )    |  | $ | (18,445 | ) |  | $ | (2,008 | )
|                                           |  |                    |       |                   |  |      |         |      |  |   |         |   |  |   |        |  

Note 7  Inventories

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

|                 |                           |   |               |        |              |   |         |        | 
|---------------- | ------------------------- | - | ------------- | ------ | ------------ | - | ------- | ------ | 
|                 |                           |   | September 30, |        | December 31,
|                 |                           |   | 2002          |        | 2001        
|                 |                           |   |               |        |             
|Raw materials    |                           | $ | 12,887        |        |              | $ | 27,206  |       
|Work-in-progress |                           |   | 2,369         |        |              |   | 1,864   |       
|Finished goods   |                           |   | 7,910         |        |              |   | 14,740  |       
|                 |                           |   |               |        |              |   |         |       
|                 | Total inventories at cost |   |               | 23,166 |              |   |         | 43,810 | 
|Less reserves    |                           |   | (11,943       | )      |              |   | (18,965 | )     
|                 |                           |   |               |        |              |   |         |       
|                 | Total inventories, net    |   | $             | 11,223 |              |   | $       | 24,845 | 
|                 |                           |   |               |        |              |   |         |       

During the quarter ended March 31, 2002, the Company recorded
inventory-related charges of $14.0 million, primarily for excess 1 gigabit (Gb)
components used in the Companys Director-class products. The excess inventory
resulted primarily from the unanticipated reduction in 1 Gb Director-class
product orders late in March 2002 and the Companys introduction of 2 Gb
products during the second quarter of 2002. During the quarters ended
September 30, 2002 and June 30, 2002, $2.5 million and $1.1 million,
respectively, of reserves were reversed as the Company experienced
higher-than-expected sales of discontinued 1 Gb products and, therefore,
realized 100% margins for these product sales.

During the quarter ended September 30, 2001, the Company recorded a $14.7
million inventory-related charge based upon the completion of a review of
operations including an analysis of inventory transferred from discontinued
suppliers, a review of obsolescence, end-of-life inventories, on-going
inventory commitments and the completion of a physical inventory.

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 8  Stock Plans

Effective August 1, 2002, the Companys Board of Directors and Company
shareholders approved a non-compensatory Employee Stock Purchase Plan (the
ESPP). Under the plan, shares of the Companys Class B common stock may be
purchased at generally six-month intervals at 85% of the lower of the fair
market value on the first or the last day of each six-month period. Employees
may purchase shares having a value not exceeding 10% of their gross
compensation during an offering period. At September 30, 2002, 1.2 million
shares were reserved for future issuance.

On August 1, 2002, the Company adopted an Executive Performance Incentive
Bonus Plan (EPIB Plan). This plan uses cash bonuses and Class B restricted
common stock to reward executive participants for the collective achievement of
strategic corporate financial goals. 157,500 shares of restricted Class B
common stock have been granted to certain executive participants as of
September 30, 2002. These shares are subject to a four-year cliff-vesting
period. Upon the successful achievement of quarterly financial goals, certain
of these restricted stock awards are subject to accelerated vesting over
eighteen months. For the quarter ended September 30, 2002, the established
third quarter targets were not met and no bonuses or vesting acceleration was
recorded. Deferred compensation of $1.7 million and related amortization of
$71,000 was recorded at September 30, 2002.

Note 9  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 was completed in July 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. During the first
quarter of 2002, the Company elected to terminate the lease under the
provisions of the agreements. On May 9, 2002, the Company entered into a
Termination Agreement with Deutsche Bank and recorded approximately $39 million
in construction costs as property and equipment. Additionally, $41 million in
restricted assets were used to pay down the balance of the lease obligation and
construction costs. A loss of $1.25 million was recorded during the first
quarter of 2002 to reflect the write-off of certain lease costs that could not
be capitalized. As of September 30, 2002, construction of the new building was
substantially complete and occupation of the building by our engineering
departments began in July 2002.

Manufacturing and Purchase Commitments

The Company has contracted with Sanmina SCI Systems, Inc. (SSCI) and
Solectron Corporation (Solectron) (collectively, Contract Manufacturers)
for the manufacture of printed circuit boards and box build assembly and
configuration for specific Fibre Channel directors and switches. The agreements
require the Company to submit purchasing forecasts and place orders sixty
calendar days in advance of delivery. At September 30, 2002, the Companys
commitment with the Contract Manufacturers for purchases over the next sixty
days totaled $32.0 million. The Contract Manufacturers had on hand materials
purchased on behalf of McDATA valued at approximately $45.0 million. Finally,
the Contract Manufacturers have outstanding purchase commitments related to
materials that it had also ordered on McDATAs behalf.

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 9  Commitments and Contingencies (continued)

The Company may be liable for materials that the Contract Manufacturers
purchase 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.
At September 30, 2002, the Company had recorded obligations of approximately
$10.0 million primarily related to materials purchased by SSCI for certain
end-of-life and obsolete material used to manufacture the Companys 1 Gb
products. Management does not expect the remaining commitments under this
agreement to have a 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 Stephens et al., No. 01 CIV.
6627. Three other similar suits have been filed against the Company. The
complaints are substantially identical to over 300 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. We believe that the lawsuits
are without legal merit and intend to defend them vigorously.

In September 2002, plaintiffs counsel in the above-mentioned lawsuits
offered to individual defendants of many of the public companies being sued the
opportunity to enter into a Reservation of Rights and Tolling Agreement that
would dismiss without prejudice and without costs all claims against such
persons if the company itself had entity coverage insurance. Nothing in the
agreement constitutes or should be construed as an admission by either party
and both parties reserve their rights. This agreement was signed by Mr. John
F. McDonnell, the Companys Chairman, Mrs. Dee J. Perry, the Companys former
chief financial officer, and Mr. Thomas O. McGimpsey, the Companys Vice
President and General Counsel. It is expected that plaintiffs executive
committee will sign soon and will dismiss the claims against such individuals,
without prejudice to their right to reassert those claims and subject to the
agreed tolling of the statute of limitations. This will not affect the claims
against the Company or the underwriters.

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##### Table of Contents



McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 9  Commitments and Contingencies (continued)

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 our 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.

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 and that a 1999 OEM agreement contained a covenant not to sue.
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. The hearing for the preliminary
injunction occurred during the week of July 15, 2002, however, the court has
not yet rendered a decision.

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##### Table of Contents






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|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 |      | Nine months Ended
|                                  |                                                                                |                          |       | September 30,      |      | September 30,    
|                                  |                                                                                |                          |       |                    |      |                  
|                                  |                                                                                |                          |       | 2002               |      | 2001              |       | 2002 |      | 2001
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |     
|Revenue                           |                                                                                |                          | 100.0 | %                  |      |                   | 100.0 | %    |      | $    | 100.0 | %    |      |  | 100.0 | %   
|Cost of revenue                   |                                                                                |                          | 47.4  |                    |      |                   | 73.7  |      |      |      | 58.9  |      |      |  | 62.4  |     
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|Gross profit                      |                                                                                |                          | 52.6  |                    |      |                   | 26.3  |      |      |      | 41.1  |      |      |  | 37.6  |     
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|Operating expenses:               |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                  | Research and development                                                       |                          |       | 19.3               |      |                   |       | 15.5 |      |      |       | 19.5 |      |  |       | 13.9 |     
|                                  | Selling and marketing                                                          |                          |       | 22.0               |      |                   |       | 21.4 |      |      |       | 24.5 |      |  |       | 19.1 |     
|                                  | General and administrative                                                     |                          |       | 8.6                |      |                   |       | 5.4  |      |      |       | 10.0 |      |  |       | 5.2  |     
|                                  | Acquired in-process research !
development and other
acquisition-related costs |                          |       |                   |      |                   |       | 10.7 |      |      |       |     |      |  |       | 3.7  |     
|                                  | Amortization of deferred compensation                                          |                          |       | 2.7                |      |                   |       | 2.0  |      |      |       | 2.9  |      |  |       | 2.0  |     
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|                                  |                                                                                | Total operating expenses |       |                    | 52.6 |                   |       |      | 55.0 |      |       |      | 56.9 |  |       |      | 43.9 | 
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|Income (loss) from operations     |                                                                                |                          |      |                    |      |                   | (28.7 | )    |      |      | (15.8 | )    |      |  | (6.3  | )   
|Interest income, net              |                                                                                |                          | 2.2   |                    |      |                   | 3.8   |      |      |      | 2.5   |      |      |  | 4.6   |     
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|Income (loss) before income taxes |                                                                                |                          | 2.2   |                    |      |                   | (24.9 | )    |      |      | (13.3 | )    |      |  | (1.7  | )   
|Income tax benefit                |                                                                                |                          | (0.7  | )                  |      |                   | (9.2  | )    |      |      | (4.9  | )    |      |  | (0.6  | )   
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     
|Net income (loss)                 |                                                                                |                          | 2.9   | %                  |      |                   | (15.7 | )%   |      |      | (8.4  | )%   |      |  | (1.1  | )%  
|                                  |                                                                                |                          |       |                    |      |                   |       |      |      |      |       |      |      |  |       |     

Three Months ended September 30, 2002 and 2001

Revenue

Total revenue decreased by approximately 7% to $80.9 million for the
quarter ended September 30, 2002 from $86.6 million for the quarter ended
September 30, 2001. The primary driver of the revenue decline was the net
decline in product revenue, which decreased by approximately 9% to $69.9
million for the quarter ended September 30, 2002 from $76.0 million for the
quarter ended September 30, 2001. The decline in product sales primarily
reflected reduced host bus adapter (HBA) sales of approximately $5.4 million,
resulting from our sale of this product line in the second quarter of 2002 to
an independent data storage hardware reseller. The recent economic environment,
however, and its slow-down effect on IT storage and infrastructure spending,
also resulted in smaller than expected growth or declines in our other product
sales. Software and professional services revenue increased by approximately
30% to $8.0 million for the quarter ended September 30, 2002 from $6.1 million
for the quarter ended September 30, 2001. Our software products include
SANavigator software acquired through a business acquisition in September 2001.
Software revenue grew strongly in the third quarter from sales of our
SANavigator software. Other revenues for the quarter, including the ESCON
service fee, decreased by approximately 32% to $3.1 million for the quarter
ended September 30, 2002 from $4.5 million for the quarter ended September 30,
2001. We anticipate that service revenue from EMC under the ESCON service
agreement will continue to decrease in future years as end users migrate from
ESCON to FICON.

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For the quarter ended September 30, 2002 and 2001, approximately 56% and
68% of our revenues respectively, came from sales to EMC, excluding ESCON
service revenues. Additionally, approximately 20% and 14% of our revenues for
the quarters ended September 30, 2002 and 2001, respectively came from sales to
IBM. Although we anticipate the percentage of EMC-related revenue to decrease
as we increase our revenue from other sources, we expect a majority of our
revenues in the foreseeable future to continue to be derived from EMC and IBM.

Gross Profit

Gross profit increased by approximately 87% to $42.6 million for the
quarter ended September 30, 2002 from $22.8 million for the quarter ended
September 30, 2001. The gross profit percentage increased to approximately
52.6% at September 30, 2002 from 26.3% at September 30, 2001. In the prior
years quarter, we recorded a $14.7 million inventory-related charge for
end-of-life inventories and the completion of a physical inventory. In the
current quarter, the gross margin percentage reflected the reversal of
approximately $2.5 million of previous inventory reserves and inventory-related
obligations as sales of discontinued 1 Gb products were higher than we had
previously estimated resulting in 100% margins for these product sales.
Additionally, approximately $0.8 million of benefit was recorded upon the
completion of a reconciliation of vendor invoices performed during the quarter.
Excluding these items, our gross margin percentages would have been
approximately 49% and 43% for the quarters ended September 30, 2002 and 2001,
respectively. The increase in the adjusted gross margin percentage in 2002 from
2001 was the result of significant cost increases experienced in the third
quarter of 2001, including increased costs of expediting delivery of new
product components and higher than expected costs related to our former
die-cast chassis supplier. This high cost inventory, which was purchased
during the last half of 2001, was fully depleted by the end of the quarter
ended June 30, 2002. Additionally, in the third quarter of 2002, we benefited
from product and channel mixes that favored higher margin products such as our
2Gb and software products. Improved gross margins in the third quarter of 2002
were also driven by reduced spending for manufacturing as a result of our
continued move toward our outsourced-focused manufacturing model.

Operating Expenses

Research and Development. Research and development expenses were
approximately $15.6 million in the quarter ended September 30, 2002 compared
with $13.4 million in the quarter ended September 30, 2001. The approximate
$2.2 million or 17% net increase in expenses was primarily attributable to
increased staffing levels, and to expenditures for design consulting services,
system integration lab (SIL) testing and other materials and services related
to the testing of new technology and new products. Offsetting these expenses,
were approximately $2.2 million of capitalized software development costs in
the third quarter of 2002. Capitalizable software development costs were
immaterial for the third quarter of 2001. These capitalized software costs are
amortized over the estimated useful life of the underlying products as costs of
revenue. Capitalized software development costs have increased with the
acquisition of the SANavigator software business and the development of our new
director and switch products.

Selling and Marketing Expenses. Selling and marketing expenses decreased
by approximately 4% to $17.8 million for the third quarter of 2002 from $18.6
million for the third quarter of 2001. This decrease was attributable to
decreases in our 2002 advertising and marketing expenses from 2001. As the
result of our 2000 IPO and spin-off from EMC, which occurred in February 2001,
we incurred significant advertising and marketing-related expenses in the third
quarter of 2001 related to the planned ramp-up of our direct assist sales
organization and brand marketing in support of new products and channel
expansion. Offsetting these decreases were increased personnel costs for our
increased sales force staffing, as the number of our sales force employees
increased to 215 at September 30, 2002 from 196 at September 30, 2001.

General and Administrative Expenses. General and administrative expenses
increased by approximately 49% to $7.0 million for the third quarter of 2002
from $4.7 million for the third quarter of 2001. This increase was due
primarily to increases in staffing levels as well as significantly increased
legal fees due to the patent infringement lawsuit discussed under Part II, Item
1. Legal Proceedings.

Acquired In-Process Research and Development and Other Acquisition-related
Costs. In connection with our acquisition of SANavigator, Inc. (SANavigator)
in September 2001, we incurred non-recurring acquisition costs and
integration-related charges. Additionally, a portion of the SANavigator
purchase price was allocated to in-process research and development (IPR&D).
This IPR&D was expensed at the time of purchase because

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technological feasibility had not been established and no future
alternative use existed. The IPR&D charge totaled $7.2 million for the three
months ended September 30, 2001. The other acquisition-related charges recorded
during the three months ended September 30, 2001, related primarily to one-time
consideration paid for the completion of ongoing employment arrangements with
SANavigator employees. There have been no acquisitions of IPR&D during the
three months ended September 30, 2002.

Amortization of Deferred Compensation. We have recorded deferred
compensation in connection with certain Class B stock options issued prior to
our IPO and restricted Class B stock grants. We are amortizing these amounts
on a straight-line basis over the vesting period of the applicable grants,
resulting in amortization expense of $2.3 million during the quarter ended
September 30, 2002 and $2.0 million during the quarter ended September 30, 2001
(of which approximately $0.1 million and $0.3 million was included in cost of
revenue for the three months ended September 30, 2002 and September 30, 2001,
respectively).

Interest and Other Income, net. Interest and other income consisted
primarily of interest earnings on our cash, cash equivalents and various
investment holdings. Interest and other income decreased by approximately 45%
to $1.9 million for the quarter ended September 30, 2002 from $3.3 million for
the quarter ended September 30, 2001. The decrease in 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 the period ended September 30, 2002 was 2.5% versus 4.5% in
the period ended September 30, 2001. If interest rates or overall investment
balances continue to decrease, interest income may decrease in future periods.

Provision for Income Taxes.In the third quarter ended September 30, 2002,
we identified and recorded a $1.2 million tax benefit generated from our 2001
Research and Development Tax Credit. Excluding this income tax benefit, the
effective tax rate was 33% and 37% for the quarters ended September, 30, 2002
and 2001, respectively. The effective tax rate 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.

Nine months ended September 30, 2002 and 2001

Revenue

Total revenue decreased by approximately 11% to $222.7 million for the
nine months ended September 30, 2002 from $250.9 million for the nine months
ended September 30, 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.
Additionally, the transition from 1 Gb 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 first quarter
revenue. In the second quarter of 2002, however, we successfully launched our
2 Gb products and experienced higher than expected demand, particularly in our
director product space. This successful product launch was confirmed in the
third quarter as revenues from our director products surpassed revenue levels
experienced in the third quarter of 2001. Finally, the sale of our HBA product
line in the second quarter of 2002 reduced our revenue related to other
products by approximately $10.0 million. These primary drivers are reflected
in the net decrease in product revenue, which decreased by approximately 14% to
$192 million for the nine months ended September 30, 2002 from $223.3 million
for the nine months ended September 30, 2001. Software and professional
services revenue increased by approximately 40% to $20.4 million for the nine
months ended September 30, 2002 from $14.6 million for the nine months ended
September 30, 2001. We continue to experience revenue growth from the sale of
all our software products, in particular our SANavigator product that was
acquired as part of a business acquisition completed in late September 2001.
Other revenues for the nine month period, including the ESCON service fee,
decreased by approximately 22% to $10.2 million for the nine months ended
September 30, 2002 from $13.0 million for the nine months ended September 30,
2001. We anticipate that service revenue from EMC under the ESCON service
agreement will continue to decrease in future years.

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Gross Profit

Gross profit decreased approximately 3% to $91.6 million for the nine
months ended September 30, 2002 from $94.4 million for the nine months ended
September 30, 2001. The gross profit percentage increased to 41% at September
30, 2002 from 38% at September 30, 2001. In the prior year, we recorded a
$14.7 million inventory-related charge for end-of-life inventories and the
completion of a physical inventory. In the current year, we have recorded net
inventory-related charges of $10.4 million for the anticipated reduction of 1
Gb products resulting from the introduction of our 2 Gb products in June 2002.
Additionally, approximately $0.8 million of benefit was recorded upon the
completion of a reconciliation of vendor invoices performed during the third
quarter. Excluding these items, our gross margin percentages would have been
45% and 44% for the nine months ended September 30, 2002 and 2001,
respectively. The slight increase in the adjusted gross margin percentage in
2002 from 2001 was the result of significant cost increases experienced in the
last half of 2001, including increased costs of expediting delivery of new
product components and higher than expected costs related to our former
die-cast chassis supplier. As anticipated, this high cost inventory, which was
purchased during the last half of 2001, was fully depleted by the end of the
quarter ended June 30, 2002. The sale of this higher-cost inventory in 2002 and
2001 mitigated the benefits from second and third-quarter product and channel
mixes that favored higher margin products such as our 2Gb and software
products. Improved gross margins in the nine months ended September 30, 2002
were also driven by reduced spending for manufacturing as a result of our
continued move toward our outsourced-focused manufacturing model.

Operating Expenses

Research and Development. Research and development expenses were $43.5
million in the nine months ended September 30, 2002 compared with $34.9 million
in the nine months ended September 30, 2001. The approximate $8.6 million or
25% increase in expenses was primarily attributable to increased staffing
levels, and to expenditures for design consulting services, SIL testing and
other materials and services related to the design and development of new
technology and new products. Offsetting these expenses, were approximately $6.8
million of capitalized software development costs during the nine months ended
September 30, 2002. Capitalizable software development costs were immaterial
for the nine months ended September 30, 2001. These capitalized software costs
are amortized over the estimated useful life of the underlying products as
costs of revenue. Capitalized software development costs have increased with
the acquisition of the SANavigator software business and the development of our
new director and switch products.

Selling and Marketing Expenses. Selling and marketing expenses increased
by approximately 14% to $54.5 million for the first nine months of 2002 from
$47.9 million for the first nine months of 2001. This net increase was
primarily attributable to our increased sales force staffing, as the number of
our sales force employees increased to 215 at September 30, 2002 from 196 at
September 30, 2001. Offsetting these personnel related cost increases were
decreases in our advertising and marketing expenses. For the nine months ended
September 30, 2001, we incurred significant advertising and marketing-related
expenses as the result of our 2000 IPO and spin-off from EMC, which occurred in
February 2001. These activities included our brand-recognition efforts,
roll-out of our direct assist sales organization and brand marketing in support
of new products and channel expansion.

General and Administrative Expenses. General and administrative expenses
increased by approximately 69% to $22.3 million for the first nine months of
2002 from $13.1 million for the first nine months of 2001. This increase was
due primarily to increased staffing levels, higher facilities costs, a $1.25
million charge related to the termination of the collateralized lease, and
increased legal fees due to the patent infringement lawsuit.

Acquired In-Process Research and Development and Other Acquisition-related
Costs. In connection with our acquisition of SANavigator in September 2001, we
incurred non-recurring acquisition costs and integration-related charges.
Additionally, a portion of the SANavigator purchase price was allocated to
in-process research and development (IPR&D). This IPR&D was expensed at the
time of purchase because technological feasibility had not been established and
no future alternative use existed. The IPR&D charge totaled $7.2 million for
the nine months ended September 30, 2001. There were no corresponding charges
for the nine months ended September 30, 2002. The other acquisition-related
charges recorded during the nine months ended September 30, 2001, related
primarily to one-time consideration paid for the completion of ongoing
employment arrangements with SANavigator employees. There have been no
acquisitions of IPR&D during the nine months ended September 30, 2002.

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Amortization of Deferred Compensation. We have recorded deferred
compensation in connection with certain Class B stock options granted prior to
our IPO and restricted Class B stock grants. We are amortizing these amounts
on a straight-line basis over the vesting period of the applicable grants,
resulting in amortization expense of $7.0 million during the nine months ended
September 30, 2002 and $6.4 million during the nine months ended September 30,
2001 (of which approximately $0.5 million and $1.3 million was included in cost
of revenue for the nine months ended September 30, 2002 and 2001,
respectively).

Interest and Other Income, net. Interest and other income consisted
primarily of interest earnings on our cash, cash equivalents and various
investment holdings. Interest and other income decreased by approximately 51%
to $5.9 million for the nine months ended September 30, 2002 from $12.0 million
for the nine months ended September 30, 2001. The decrease in 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 the nine months ended September 30, 2002 was 2.8%
versus 5.3% in the period ended September 30, 2001. If interest rates or
overall investment balances continue to decrease, interest income may decrease
in future periods.

Provision for Income Taxes.The effective tax rate for the nine months
ended September 30, 2002 and 2001 was 37.0%.

Liquidity and Capital Resources

For the nine months ended September 30, 2002, we generated approximately
$19.6 million in net cash from operating activities, primarily from cash
inflows including, net income before non-cash charges and increases in accounts
payable, accrued liabilities and deferred revenue and decreases in inventory
balances and other current assets. Offsetting these cash inflows were
increases in accounts receivable and other assets including the capitalization
of software development. Net cash used in investing activities for the nine
months ended September 30, 2002 was $19.4 million, primarily related to
purchases of property and equipment, including the approximate $55.5 million of
assets recorded for the new multi-story office and engineering building
acquired with the termination of the collateralized operating lease discussed
below. These purchases were partially offset by net maturities of investments,
including the disposition of our restricted assets held as collateral under the
collateralized operating lease. Net cash used by financing activities for the
nine months ended September 30, 2002 totaled approximately $250,000, reflecting
repayment of capital lease obligations offset by proceeds received from the
exercise of stock options.

At September 30, 2002, we have short- and long-term deferred tax assets
of $39 million which we believe, after considering relevant positive and
negative evidence, will, more likely than not, be realized through future
profitable operations. However, it is possible that if additional operating
losses are incurred, we may need to provide a valuation allowance on our
deferred tax assets. To the extent we establish a valuation allowance, we must
include an expense within the tax provision in the income statements which
could materially impact our financial position and results of operations.

Our principal sources of liquidity at September 30, 2002 consisted of our
cash and short-term investment securities on hand, which totaled approximately
$217 million, long-term investment securities of $78.5 million, and our
equipment financing arrangements, which totaled approximately $3.7 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 55% from December 31, 2001 to September 30, 2002.
Annualized inventory turns during the first nine months of 2002 and 2001 were
15.6 and 8.4, respectively. The inventory levels and inventory turns reflect
inventory write-offs incurred in the first quarter of 2002 coupled with our
efforts to better manage our inventory levels in the current economic
environment. In addition, we have begun our plan to implement an outsourcing
focused manufacturing model including the transition of existing manufacturing
operations in 2002 through 2003. Inventory management remains an area of focus
as we balance the need to

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maintain strategic inventory levels to ensure competitive lead times
versus the risk of inventory obsolescence because of rapidly changing
technology and customer requirements. However, 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 SSCI and Solectron for the manufacture of printed
circuit boards and box build assembly and configuration for specific Fibre
Channel directors and switches. The agreements require us to submit purchasing
forecasts and place orders sixty calendar days in advance of delivery. At
September 30, 2002, our commitment with the Contract Manufacturers for
purchases over the next sixty days totaled $32.0 million. Additionally, the
Contract Manufacturers had on hand materials purchased on our behalf valued at
approximately $45.0 million. Finally, the Contract Manufacturers have
outstanding purchase commitments related to materials that it had also ordered
on our behalf. We may be liable for materials that the Contract Manufacturers
purchase on McDATAs behalf if our actual requirements do not meet or exceed
our forecasts and those materials cannot be redirected to other uses. At
September 30, 2002, we had recorded obligations of approximately $10.0 million
primarily related to materials purchased by SSCI for certain end-of-life and
obsolete material used to manufacture our 1 Gb products. Management does not
expect the remaining commitments under this agreement 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 completed
in July 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. During the first quarter of 2002, we elected to terminate the lease
under the provisions of the agreements. On May 9, 2002, we entered into a
Termination Agreement with Deutsche Bank and recorded approximately $37 million
in construction costs as property and equipment. Additionally, $41 million in
restricted assets were used to pay down the balance of the lease obligation and
construction costs. A loss of $1.25 million was recorded during the first
quarter of 2002 to reflect the write-off of certain lease costs that could not
be capitalized. As of June 30, 2002, construction of the new building was
substantially complete and occupation of the building by our engineering
departments began in July 2002.

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 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.

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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-related 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. For the nine months ended September 30, 2002, we
incurred an additional net $10.4 million inventory-related charge related to
our 1 Gb product inventory. 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. During the second quarter ended June 30, 2002, we completed the use
of this high cost inventory, which negatively affected our gross margins.

We incurred a substantial loss for the year ended December 31, 2001 and for the
nine months ended September 30, 2002 and may not sustain profitability in the
future.

We incurred a substantial loss for the year ended December 31, 2001 and
for the nine months ended September 30, 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
provide assurance that we will generate sufficient revenue to achieve or
sustain profitability.

SANavigator Acquisition

In late September 2001, we acquired the assets of SANavigator, Inc., 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
ramp sales of SANavigators software, our ability to retain managerial,
technical and sales talent, our ability to successfully integrate SANavigators
software with our current product mix and our ability to expand our current
direct distribution model to software resellers and original equipment
manufacturers. 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 a significant portion of our total revenue. Sales
and services to EMC, which is an original equipment manufacturer customer,
represented approximately 56% and 53% of our revenue, excluding ESCON service
revenue, for the three and nine months ended September 30, 2002, respectively.
In addition, IBM represented approximately 20% and 24% of our total revenue for
the same periods. We anticipate that our future operating results will
continue to depend heavily on sales to EMC and IBM. Therefore, the loss of
either EMC or IBM as a customer, or a significant reduction in sales to either
EMC or IBM in any fiscal period, could significantly reduce our revenue.

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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:



| |  |  | the size, timing, terms and fluctuations of customer orders,
particularly large orders from our significant OEM (e.g. EMC) or
reseller customers (e.g. IBM);                                         
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to attain and maintain market acceptance of our products;                                                                                                                                
|
| |  |  | seasonal fluctuations in customer buying patterns;                                                                                                                                                   
|
| |  |  | the timing of the introduction or enhancement of products by us,
our significant OEM or reseller customers or our competitors (e.g.,
transition to 2 Gb transmission speeds and higher port density);
|
| |  |  | our ability to obtain sufficient supplies of single- or
limited-source components of our products; and                                                                                               
|
| |  |  | increased operating expenses, particularly in connection with our
strategies to increase brand awareness or to invest in research and
development.                                                   

Our uneven sales pattern makes it difficult for our management to predict
near-term demand and adjust manufacturing capacity accordingly. If orders for
our products vary substantially from the predicted demand, our ability to
assemble, test and ship orders received in the last weeks and days of each
quarter may be limited, which could seriously harm quarterly revenue or
earnings. We are also highly dependent on our ERP and operating software
systems to receive and process orders for the shipment of our products at the
end of the quarter 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 and nine months ended September 30, 2002, respectively,
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 these products
and their 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 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

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systems. Finally, if we fail to timely introduce new products that are
multi-protocol products to compete against new entrants in the SAN market, or
if there is no demand for these or our current 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 provide
assurance 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.

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 optic 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.

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

We rely on our Contract Manufacturers to manufacture substantially 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
SSCI, which has a one year term that renews automatically unless cancelled and
is cancellable by either party without cause on advance notice. Recently, we
have contracted with Solectron Corporation to be our contract manufacturer for
our Spherion 4500 24-port switch product. Our Contract Manufacturers are not
obligated to supply products to us for any specific period, or in any specific
quantity, except as may be provided in a particular purchase order. We
generally place forecasts for circuit boards with our Contract Manufacturers
approximately four to five months prior to the anticipated delivery date, with
order volumes based on forecasts of demand for our products. We generally
place purchase orders sixty calendar days in advance of delivery. If we fail
to forecast demand for our products accurately, we may be unable to obtain
adequate manufacturing capacity from SSCI 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. SSCI 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 SSCI the integration of our Directors
into cabinets.

In addition, we coordinate our efforts with those of our component
suppliers and Contract Manufacturers in order to rapidly achieve volume
production. We have experienced and may continue to experience production

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delays and quality control problems with certain of our suppliers and with
our Contract Manufacturers, 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 Contract
Manufacturers, or if any of our suppliers or our manufacturers 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 as a separate company from EMC only since February 2001. EMC, which
currently accounts for a significant portion 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 and nine months ended September 30, 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, like SANs. Our success in
generating net revenue in this developing market will depend on, among other
things, our ability to:



| |  |  | educate potential OEMs, reseller and systems integrator customers
and end users about the benefits of SANs and the use of our products in
the SAN environment; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | predict, develop and base our products on standards that ultimately
become industry standards.                                                                    

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

Our 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

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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 and 5 of
which have resigned in 2002. 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. We
cannot assure you that we will continue to be able to attract and retain
qualified personnel, or that delays in hiring required personnel, particularly
engineers, will not delay the development or introduction of products or
negatively impact our ability to sell our products.

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

The market for our Fibre Channel switching products is competitive, and is
likely to become even more so. Our primary competitor in the Fibre Channel
switch market is Brocade Communications Systems, Inc. Other companies are also
providing Fibre Channel switches and other products to the SAN market,
including Qlogic Corporation, Gadzoox Networks, Inc., Vixel Corporation and
INRANGE Technologies Corporation. In the future, we may also compete with
networking companies that may develop SAN products or other companies in
related or other industries for which future direct participation in the market
for switching devices may become strategic. In August 2002, Cisco Systems
announced that they would be entering the storage switch market with the
introduction of their family of switches and directors.

EMC has agreed not to develop or manufacture products that compete with
our then existing products for two years beginning in August 2000. As of
August 2002, 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.

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. 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. As we grow, our
failure to maintain and 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.

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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:



| |  |  | issue stock that would dilute our current stockholders percentage ownership;
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | use cash, which may result in a reduction of our liquidity;                  
|
| |  |  | incur debt; or                                                               
|
| |  |  | assume liabilities.                                                          

These purchases also involve numerous risks, including:



| |  |  | problems combining the purchased operations, technologies, personnel or products;          
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | unanticipated costs;                                                                       
|
| |  |  | diversion of managements attention from our core business;                                
|
| |  |  | adverse effects on existing business relationships with suppliers and customers;           
|
| |  |  | risks associated with entering markets in which we have no or limited prior experience; and
|
| |  |  | potential loss of key employees of acquired organizations.                                 

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.

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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:



| |  |  | expenses associated with developing and customizing our products for foreign countries;
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | multiple, conflicting and changing governmental laws and regulations;                  
|
| |  |  | tariffs, quotas and other import restrictions on computer peripheral equipment;        
|
| |  |  | longer sales cycles for our products;                                                  
|
| |  |  | reduced or limited protections of intellectual property rights;                        
|
| |  |  | compliance with international standards that differ from domestic standards; and       
|
| |  |  | political and economic instability.                                                    

Any negative effects on our international business could harm our
business, operating results and financial condition as a whole. To date,
substantially none of our international revenue or costs have been denominated
in foreign currencies. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products more expensive
and thus less competitive in foreign markets. A portion of our international
revenue may be denominated in foreign currencies in the future, which will
subject us to risks associated with fluctuations in those foreign currencies.

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

We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality and/or license agreements with our
employees, consultants and corporate partners. Despite our efforts to protect
our proprietary rights, unauthorized parties may copy or otherwise obtain and
use our products or technology. Monitoring unauthorized use of our products is
difficult and the steps we have taken, 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 Part II  Item 1. 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:



| |  |  | stop using the challenged intellectual property or selling our
products or services that incorporate it;                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | obtain a license to use the challenged intellectual property or to
sell products or services that incorporate it, which license may not be
available on reasonable terms, or at all; and
|
| |  |  | redesign those products or services that are based on or
incorporate the challenged intellectual property.                                                                              

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

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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.

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:



| |  |  | authorizing the issuance of preferred stock without stockholder approval;                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | providing for a classified board of directors with staggered three year terms;                                                                                                               
|
| |  |  | limiting the persons who may call special meetings of stockholders;                                                                                                                          
|
| |  |  | requiring super-majority voting for stockholder action by written consent;                                                                                                                   
|
| |  |  | establishing advance notice requirements for nominations for
election to the board of directors and for proposing other matters that
can be acted on by stockholders at stockholder meetings;
|
| |  |  | prohibiting cumulative voting for the election of directors;                                                                                                                                 
|
| |  |  | requiring super-majority voting to effect certain amendments to our
certificate of incorporation and by-laws; and                                                                            
|
| |  |  | requiring parties to request board approval prior to acquiring 15%
or more of the voting power of the common stock to avoid economic and
voting dilution of their stock holdings.            

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 Deferred Tax Assets.

At September 30, 2002, we have deferred tax assets of $39 million, which
we believe, after considering relevant positive and negative evidence, will,
more likely than not, be realized through future profitable operations.
However, it is possible that if additional operating losses are incurred, we
may need to provide a valuation allowance on our deferred tax assets. To the
extent we establish a valuation allowance, we must include an expense within
the tax provision in the income statements which could materially impact our
financial position and results of operations.

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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 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 56% of our
revenue, excluding ESCON service revenue, for the three months ended September
30, 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 September 30, 2002, our revenues from EMC
represented approximately 56% 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 1% of our total revenue. In 2001,
EMC 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.

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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;



| |  |  | enter into any transaction that would result in any person
acquiring a 50% or greater interest in us;                                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | take or fail to take any other action which would cause the
distribution to be taxable to EMC stockholders;                                                                               
|
| |  |  | issue stock or other equity interests in us, or redeem or
repurchase any of our capital stock which would involve the acquisition
by one or more persons of more than 35% of our stock; or
|
| |  |  | undertake any transaction which would be treated as a liquidation
or reorganization for tax purposes.                                                                                     

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

Under the terms of the Master Confidential Disclosure and License
Agreement between EMC and us, EMC has granted us a license under 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 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:



| |  |  | any act or omission by us that would cause the distribution to fail
to qualify as a tax-free distribution under the Internal Revenue Code;                                                                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | any act or omission by us that is inconsistent with any
representation made to the Internal Revenue Service in connection with
the request for a private letter ruling regarding the tax-free nature
of the distribution by EMC of our Class A common stock indirectly held
by it to its stockholders;
|
| |  |  | any acquisition by a third party of our stock or assets; or                                                                                                                                                                                                                                           
|
| |  |  | any issuance by us of stock or any change in ownership of our stock.                                                                                                                                                                                                                                  

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




|        |  |                                                            
|------- |  | -----------------------------------------------------------
|ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risks

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

Interest Rate Risk

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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 three 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. Substantially
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 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.




|        |  |                        
|------- |  | -----------------------
|ITEM 4. |  | Controls and Procedures

Our chief executive officer and chief financial officer have reviewed and
evaluated the Companys disclosure controls and procedures within 90 days of
the filing date of this Quarterly Report. Based on such review and evaluation,
the officers believe that the disclosure controls and procedures are designed
effectively to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time period specified in the SECs rules and forms and that the information
required to be discussed by the Company in the reports that it files and
submits under the Securities Exchange Act of 1934, as amended, is documented
and communicated to the Companys management, including the officers, as
appropriate to allow timely decisions regarding required disclosure. In
addition, the officers believe that there have been no significant changes in
the Companys internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.




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 Stephens et al., No. 01 CIV.
6627. Three other similar suits have been filed against the Company. The

26



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complaints are substantially identical to over 300 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. We believe that the lawsuits
are without legal merit and intend to defend them vigorously.

In September 2002, plaintiffs counsel in the above-mentioned lawsuits
offered to individual defendants of many of the public companies being sued the
opportunity to enter into a Reservation of Rights and Tolling Agreement that
would dismiss without prejudice and without costs all claims against such
persons if the company itself had entity coverage insurance. Nothing in the
agreement constitutes or should be construed as an admission by either party
and both parties reserve their rights. This agreement was signed by Mr. John
F. McDonnell, the Companys Chairman, Mrs. Dee J. Perry, the Companys former
chief financial officer, and Mr. Thomas O. McGimpsey, the Companys Vice
President and General Counsel. It is expected that plaintiffs executive
committee will sign soon and will dismiss the claims against such individuals,
without prejudice to their right to reassert those claims and subject to the
agreed tolling of the statute of limitations. This will not affect the claims
against the Company or the underwriters.

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 the patent after they announced another product
containing their Frame Filtering feature.

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 and that a 1999 OEM agreement contained a covenant not to sue. 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 Brocade. The hearing for the preliminary injunction occurred during
the week of July 15, 2002, however, the court has not yet rendered a decision.




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

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ITEM 5. Other Information

Giving the increasing difficulty in recruiting and retaining directors to
sit on the boards of public companies and the recent negative changes in the
general availability of D&O insurance, the Board revisited its October 2001
decision granting indemnification agreements to certain officers and directors
(originally disclosed on Page 49 of the Companys Form 10-K for fiscal year
2001), and expanded the list of recipients to include all current and future
directors. The indemnification agreements will be part of the standard
director recruiting package and will provide specific contractual assurances
that the indemnification protection promised by the Companys by-laws will be
available to all directors.




ITEM 6. Exhibits and Reports on Form 8-K

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

|           |  |                                                                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.1)      |  | Amended and Restated Certificate of Incorporation of the Company                                                                                                                                         
|(3.2)      |  | Amended and Restated By-laws of the Company                                                                                                                                                              
|(4.1)      |  | Form of Companys Class B Common Stock Certificates                                                                                                                                                      
|(4.1.1)    |  | Form of Companys Class A Common Stock Certificates                                                                                                                                                      
|(4.2)      |  | Investors Rights Agreement dated as of October 1, 1997 by and among the Company, EMC
Corporation, McDATA Holdings Corporation and Certain Investors                                                     
|(4.3)      |  | Amendment No. 1 to the Investors Rights Agreement dated May 23, 2000 by and among the
Company, McDATA Holdings Corporation and certain Investors                                                        
|(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                                                                        
|(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 September 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                                                                                

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|           |  |                                                                                                                                                                                     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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                                                                                                                                                         
|(10.21)*   |  | 1997 Stock Option Plan (This Plan was amended and restated in the 2001 McDATA Equity
Incentive plan                                                                                 
|(10.21.1)* |  | 2001 McDATA Equity Incentive Plan (Filed in Form 10-Q for the fiscal quarter ended
September 30, 2001)                                                                              
|(10.21.2)* |  | Employee Stock Purchase Plan (Filed in the Schedule 14A Proxy Statement filed June 10, 2002)                                                                                        
|(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.                                              



---

|( ) |  | Exhibits previously filed in the Companys Registration Statement on Form
S-1, SEC File No. 333-38106, declared effective on August 8, 2000 or filed in
the Companys periodic filings as specifically noted.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|+   |  | Portions of these Exhibits have been omitted and filed separately with the
Securities and Exchange Commission pursuant to an order for confidential
treatment.                                               
|   
|*   |  | Executive compensation plans and arrangements.                                                                                                                                                               

(b)  Reports on Form 8-K filed during the third quarter of 2002 and through
the filing of this Form 10-Q:



| | (1) |  | We filed a Current Report on Form 8-K dated July 19, 2002 to report
that John McDonnell and his wife, Patrick McDonnell had entered into
Rule 10b5-1 Stock Selling Plans with Charles Schwab & Co., Inc. to each
sell a total of 230,000 shares of McDATA Class B common stock through
January 2003. These sales are subject to a $10 limit price. Mr. and
Mrs. McDonnell also intend to gift 10,000 shares of Class B common
stock each per month to the McDonnell Family Foundation.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | We filed a Current Report on Form 8-K dated August 14, 2002 to file
the certifications required under Section 906 of the Sarbanes-Oxley Act
of 2002.                                                                                                                                                                                                                                                                                                                                  
|
| | (3) |  | We filed a Current Report on Form 8-K dated October 21, 2002 to
report the resignation of James E. Kuenzel as Vice President of
Engineering.                                                                                                                                                                                                                                                                                                                                          

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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:                |  | /s/ Ernest J. SampiasErnest J. Sampias
Chief Financial Officer and Senior Vice President of
Finance and Administration

October 31, 2002

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CERTIFICATIONS

I, John A. Kelley, Jr., certify that:

1.     I have reviewed this quarterly report on Form 10-Q of McDATA Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: October 31, 2002

| |                                           
| | ------------------------------------------
| | /s/ John A. Kelley, Jr.John A. Kelley, Jr.
|
| | President and Chief Executive Officer     

31



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CERTIFICATIONS

I, Ernest J. Sampias, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of McDATA Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: October 31, 2002

| |                                                  
| | -------------------------------------------------
| | /s/ Ernest J. SampiasErnest J. Sampias           
|
| | Chief Financial Officer and Senior Vice President

32