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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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| |                                                                                          | 
| | ---------------------------------------------------------------------------------------- | 
| | (Mark One)                                                                               | 
| | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  | 
| |                                                                                          | 
| | For the quarterly period ended June 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
(State or other jurisdiction of
incorporation of organization) |  | 84-1421844
(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     No

At July 31, 2002, 81,000,000 shares of the registrants Class A Common Stock
were outstanding and 32,407,980 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                          
|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                                                     
|EX-10.21.2 Employee Stock Purchase Plan



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McDATA CORPORATION

FORM 10-Q
QUARTER ENDED JUNE 30, 2002

TABLE OF CONTENTS

|                               |    |  |  |                                                                                       |                                                                                                                     |  |    |   | 
|------------------------------ | -- |  |  | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- |  | -- | - | 
|Item                           |    |  |  |                                                                                       | Page                                                                                                               
|                               |    |  |  |                                                                                       |                                                                                                                    
|PART 1  FINANCIAL INFORMATION
|                               | 1. |  |  | Financial Statements                                                                  |                                                                                                                     |  |    |  
|                               |    |  |  |                                                                                       | Consolidated Balance Sheets 
June 30, 2002 (unaudited) and December 31, 2001                                       |  |    | 1 | 
|                               |    |  |  |                                                                                       | Consolidated Income Statements 
Three and Six Months ended June 30, 2002 (unaudited) and
June 30, 2001 (unaudited) |  |    | 2 | 
|                               |    |  |  |                                                                                       | Consolidated Statements of Cash Flows 
Six Months ended June 30, 2002 (unaudited) and
June 30, 2001 (unaudited)    |  |    | 3 | 
|                               |    |  |  |                                                                                       | Notes to Consolidated Financial Statements (unaudited)                                                              |  |    | 4 | 
|                               | 2. |  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                     |  | 8  |  
|                               | 3. |  |  | Quantitative and Qualitative Disclosures About Market Risks                           |                                                                                                                     |  | 22 |  
|PART II  OTHER INFORMATION   
|                               | 1. |  |  | Legal Proceedings                                                                     |                                                                                                                     |  | 23 |  
|                               | 2. |  |  | Changes in Securities and Use of Proceeds                                             |                                                                                                                     |  | 24 |  
|                               | 3. |  |  | Defaults Upon Senior Securities                                                       |                                                                                                                     |  | 24 |  
|                               | 4. |  |  | Submission of Matters to A Vote of Security Holders                                   |                                                                                                                     |  | 24 |  
|                               | 5. |  |  | Other Information                                                                     |                                                                                                                     |  | 24 |  
|                               | 6. |  |  | Exhibits and Reports on Form 8-K                                                      |                                                                                                                     |  | 24 |  





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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 a 2 gigabit product line and
higher port density 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 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);    
| 
| |  | our ability to attract and retain highly skilled individuals;                                                                                                                                                                   
| 
| |  | 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)

|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |         | 
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ----------- | ------- | ------------ | ------- | ------- | ------- | 
|                                                                                                |                                                                                                                                      |                                            |         | June 30,    |         | December 31,
|                                                                                                |                                                                                                                                      |                                            |         | 2002        |         | 2001        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |             
|                                                                                                |                                                                                                                                      |                                            |         | (unaudited) |         |              |         |        
|Assets                                                                                          |                                                                                                                                      |                                            |         |             |         |              |         |        
|Current assets:                                                                                 |                                                                                                                                      |                                            |         |             |         |              |         |        
|                                                                                                | Cash and cash equivalents                                                                                                            |                                            | $       | 51,325      |         |              | $       | 69,285  |        
|                                                                                                | Short-term investments                                                                                                               |                                            |         | 126,602     |         |              |         | 146,867 |        
|                                                                                                | Accounts receivable, net of allowance for bad debts of $1,228
and $782, respectively                                                 |                                            |         | 46,974      |         |              |         | 43,805  |        
|                                                                                                | Inventories, net                                                                                                                     |                                            |         | 17,735      |         |              |         | 24,845  |        
|                                                                                                | Deferred tax asset                                                                                                                   |                                            |         | 27,855      |         |              |         | 21,953  |        
|                                                                                                | Prepaid expenses and other current assets                                                                                            |                                            |         | 9,991       |         |              |         | 9,795   |        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|Total current assets                                                                            |                                                                                                                                      |                                            | 280,482 |             |         |              | 316,550 |        
|Property and equipment, net                                                                     |                                                                                                                                      |                                            | 94,517  |             |         |              | 40,838  |        
|Long-term investments                                                                           |                                                                                                                                      |                                            | 112,213 |             |         |              | 94,849  |        
|Restricted investments                                                                          |                                                                                                                                      |                                            |        |             |         |              | 36,199  |        
|Other assets, net                                                                               |                                                                                                                                      |                                            | 31,914  |             |         |              | 25,517  |        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|                                                                                                |                                                                                                                                      | Total assets                               |         | $           | 519,126 |              |         | $       | 513,953 | 
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|Liabilities and Stockholders Equity                                                            |                                                                                                                                      |                                            |         |             |         |              |         |        
|Current liabilities:                                                                            |                                                                                                                                      |                                            |         |             |         |              |         |        
|                                                                                                | Accounts payable                                                                                                                     |                                            | $       | 14,636      |         |              | $       | 11,544  |        
|                                                                                                | Accrued liabilities                                                                                                                  |                                            |         | 31,004      |         |              |         | 22,441  |        
|                                                                                                | Deferred revenue                                                                                                                     |                                            |         | 12,790      |         |              |         | 7,454   |        
|                                                                                                | Obligations under capital leases                                                                                                     |                                            |         | 2,116       |         |              |         | 1,934   |        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|Total current liabilities                                                                       |                                                                                                                                      |                                            | 60,546  |             |         |              | 43,373  |        
|Obligations under capital leases                                                                |                                                                                                                                      |                                            | 2,269   |             |         |              | 789     |        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|                                                                                                | Total liabilities                                                                                                                    |                                            |         | 62,815      |         |              |         | 44,162  |        
|Commitments and Contingencies (Note 8)                                                          |                                                                                                                                      |                                            |         |             |         |              |         |        
|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, 32,298,369 and 31,562,223 shares issued and
outstanding at June 30, 2002 (unaudited) and December 31, 2001,
respectively |                                            |         | 323         |         |              |         | 316     |        
|Additional paid-in-capital                                                                      |                                                                                                                                      |                                            | 470,719 |             |         |              | 468,133 |        
|Deferred compensation                                                                           |                                                                                                                                      |                                            | (9,974  | )           |         |              | (14,770 | )      
|Accumulated other comprehensive income                                                          |                                                                                                                                      |                                            | 580     |             |         |              | 520     |        
|Retained earnings (accumulated deficit)                                                         |                                                                                                                                      |                                            | (6,147  | )           |         |              | 14,782  |        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|Total stockholders equity                                                                      |                                                                                                                                      |                                            | 456,311 |             |         |              | 469,791 |        
|                                                                                                |                                                                                                                                      |                                            |         |             |         |              |         |         |        
|                                                                                                |                                                                                                                                      | Total liabilities and stockholders equity |         | $           | 519,126 |              |         | $       | 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 June 30, |        | Six Months Ended June 30,
|                                                                                                                                                              |                    |   |                             |        |                          
|                                                                                                                                                              |                    |   | 2002                        |        | 2001                      |   | 2002    |        | 2001
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |     
|Revenue                                                                                                                                                       |                    | $ | 77,254                      |        |                           | $ | 81,289  |        |      | $ | 141,797 |        |  | $ | 164,324 |       
|Cost of revenue                                                                                                                                               |                    |   | 42,163                      |        |                           |   | 47,194  |        |      |   | 92,815  |        |  |   | 92,765  |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|                                                                                                                                                              | Gross profit       |   |                             | 35,091 |                           |   |         | 34,095 |      |   |         | 48,982 |  |   |         | 71,559 | 
|Operating expenses:                                                                                                                                           |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Research and development                                                                                                                                      |                    |   | 14,628                      |        |                           |   | 11,359  |        |      |   | 27,844  |        |  |   | 21,452  |       
|Selling and marketing                                                                                                                                         |                    |   | 18,676                      |        |                           |   | 15,499  |        |      |   | 36,669  |        |  |   | 29,317  |       
|General and administrative                                                                                                                                    |                    |   | 7,291                       |        |                           |   | 3,923   |        |      |   | 15,299  |        |  |   | 8,466   |       
|Amortization of deferred compensation (excludes
amortization of deferred compensation included in cost of
revenue of $146, $496, $318 and $992, respectively) |                    |   | 2,143                       |        |                           |   | 1,659   |        |      |   | 4,284   |        |  |   | 3,382   |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|                                                                                                                                                              | Operating expenses |   |                             | 42,738 |                           |   |         | 32,440 |      |   |         | 84,096 |  |   |         | 62,617 | 
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Income (loss) from operations                                                                                                                                 |                    |   | (7,647                      | )      |                           |   | 1,655   |        |      |   | (35,114 | )      |  |   | 8,942   |       
|Interest and other income                                                                                                                                     |                    |   | 1,930                       |        |                           |   | 3,779   |        |      |   | 4,008   |        |  |   | 8,560   |       
|Interest expense                                                                                                                                              |                    |   | (41                         | )      |                           |   | (83     | )      |      |   | (131    | )      |  |   | (180    | )     
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Income (loss) before income taxes                                                                                                                             |                    |   | (5,758                      | )      |                           |   | 5,351   |        |      |   | (31,237 | )      |  |   | 17,322  |       
|Income tax expense (benefit)                                                                                                                                  |                    |   | (1,900                      | )      |                           |   | 1,980   |        |      |   | (10,308 | )      |  |   | 6,409   |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Net income (loss)                                                                                                                                             |                    | $ | (3,858                      | )      |                           | $ | 3,371   |        |      | $ | (20,929 | )      |  | $ | 10,913  |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Basic net income (loss) per share                                                                                                                             |                    | $ | (0.03                       | )      |                           | $ | 0.03    |        |      | $ | (0.19   | )      |  | $ | 0.10    |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Shares used in computing basic net income (loss) per share                                                                                                    |                    |   | 113,069                     |        |                           |   | 111,331 |        |      |   | 112,900 |        |  |   | 111,009 |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Diluted net income (loss) per share                                                                                                                           |                    | $ | (0.03                       | )      |                           | $ | 0.03    |        |      | $ | (0.19   | )      |  | $ | 0.09    |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       
|Shares used in computing diluted net income (loss) per share                                                                                                  |                    |   | 113,069                     |        |                           |   | 117,198 |        |      |   | 112,900 |        |  |   | 117,392 |       
|                                                                                                                                                              |                    |   |                             |        |                           |   |         |        |      |   |         |        |  |   |         |       

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)

|                                                                                    |                                                   |                                           |          |                           |        |      |          |        |         |  
|----------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | -------- | ------------------------- | ------ | ---- | -------- | ------ | ------- | -
|                                                                                    |                                                   |                                           |          | Six Months Ended June 30,
|                                                                                    |                                                   |                                           |          |                          
|                                                                                    |                                                   |                                           |          | 2002                      |        | 2001
|                                                                                    |                                                   |                                           |          |                           |        |     
|Cash flows from operating activities:                                               |                                                   |                                           |          |                           |        |      |          |       
|Net income (loss)                                                                   |                                                   | $                                         | (20,929  | )                         |        | $    | 10,913   |       
|Adjustments to reconcile net income (loss) to cash
flows from operating activities: |                                                   |                                           |          |                           |        |      |          |       
|                                                                                    | Depreciation and amortization                     |                                           |          | 11,019                    |        |      |          | 7,582  |        
|                                                                                    | Loss from write-off of collateralized lease costs |                                           |          | 1,256                     |        |      |          |       |        
|                                                                                    | Loss on trade-in of fixed assets                  |                                           |          | 474                       |        |      |          |       |        
|                                                                                    | Net realized loss on investments                  |                                           |          | 721                       |        |      |          |       |        
|                                                                                    | Inventory and inventory commitment provisions     |                                           |          | 15,462                    |        |      |          | 1,436  |        
|                                                                                    | Deferred income taxes                             |                                           |          | (5,967                    | )      |      |          | (3,038 | )      
|                                                                                    | Non-cash compensation expense                     |                                           |          | 4,602                     |        |      |          | 4,374  |        
|                                                                                    | Tax benefit from stock options exercised          |                                           |          | 1,256                     |        |      |          | 3,410  |        
|                                                                                    | Changes in net assets and liabilities:            |                                           |          |                           |        |      |          |        |        
|                                                                                    |                                                   | Accounts receivable                       |          |                           | (3,169 | )    |          |        | (16,584 | )
|                                                                                    |                                                   | Inventories                               |          |                           | (1,790 | )    |          |        | (26,572 | )
|                                                                                    |                                                   | Prepaid expenses and other current assets |          |                           | (196   | )    |          |        | (1,568  | )
|                                                                                    |                                                   | Other assets, net                         |          |                           | (7,926 | )    |          |        | (169    | )
|                                                                                    |                                                   | Accounts payable                          |          |                           | 3,092  |      |          |        | (2,829  | )
|                                                                                    |                                                   | Accrued liabilities                       |          |                           | (1,559 | )    |          |        | (600    | )
|                                                                                    |                                                   | Deferred revenue                          |          |                           | 5,336  |      |          |        | 1,875   |  
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Net cash provided (used) by operating activities                                    |                                                   |                                           | 1,682    |                           |        |      | (21,770  | )     
|Cash flows from investing activities:                                               |                                                   |                                           |          |                           |        |      |          |       
|Purchases of property and equipment                                                 |                                                   |                                           | (56,671  | )                         |        |      | (12,705  | )     
|Payment of collateralized lease costs                                               |                                                   |                                           | (1,256   | )                         |        |      |         |       
|Purchases of investments                                                            |                                                   |                                           | (271,073 | )                         |        |      | (324,394 | )     
|Maturities of investments                                                           |                                                   |                                           | 308,961  |                           |        |      | 283,608  |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Net cash used by investing activities                                               |                                                   |                                           | (20,039  | )                         |        |      | (53,491  | )     
|Cash flows from financing activities:                                               |                                                   |                                           |          |                           |        |      |          |       
|Payment of obligations under capital leases                                         |                                                   |                                           | (1,136   | )                         |        |      | (1,511   | )     
|Proceeds from the exercise of stock options                                         |                                                   |                                           | 1,533    |                           |        |      | 3,071    |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Net cash provided by financing activities                                           |                                                   |                                           | 397      |                           |        |      | 1,560    |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Net decrease in cash and cash equivalents                                           |                                                   |                                           | (17,960  | )                         |        |      | (73,701  | )     
|Cash and cash equivalents, beginning of period                                      |                                                   |                                           | 69,285   |                           |        |      | 174,630  |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Cash and cash equivalents, end of period                                            |                                                   |                                           | 51,325   |                           |        | $    | 100,929  |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Supplemental Disclosure of Non-Cash Investing and
Financing Activities              |                                                   |                                           |          |                           |        |      |          |       
|Capital lease obligations incurred                                                  |                                                   | $                                         | 4,299    |                           |        | $    | 1,399    |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Fixed assets exchanged for capital leases                                           |                                                   | $                                         | (1,501   | )                         |        |      |         |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       
|Transfer of inventory to fixed assets                                               |                                                   | $                                         | 3,794    |                           |        | $    | 2,588    |       
|                                                                                    |                                                   |                                           |          |                           |        |      |          |       

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 six months ended June
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 six months ended June 30, 2002.
As of June 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 six months ended June 30, 2002. At June 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 $1.6 million. Amortization expense for
the six months ended June 30, 2002 and 2001 was $1.1 million and $0,
respectively. Amortization expense for the net carrying amount of intangible
assets at June 30, 2002 is estimated to be $1.0 million for the remainder of
fiscal 2002, $2.1 million per year through 2006, and $1.5 million for fiscal
year 2006.

Note 3  Recent Accounting Pronouncements

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

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 4  Net Income (Loss) per Share

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

|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | 
|                                                                                                        |  | Three Months Ended |         | Six Months Ended
|                                                                                                        |  | June 30,           |         | June 30,        
|                                                                                                        |  |                    |         |                 
|                                                                                                        |  | 2002               |         | 2001             |  | 2002 |         | 2001
|                                                                                                        |  |                    |         |                  |  |      |         |     
|Net income (loss)                                                                                       |  | $                  | (3,858  | )                |  | $    | 3,371   |      |  | $ | (20,929 | ) |  | $ | 10,913  | 
|Weighted average shares of common stock outstanding used
in computing basic net income (loss) per share |  |                    | 113,069 |                  |  |      | 111,331 |      |  |   | 112,900 |   |  |   | 111,009 | 
|Effect of dilutive stock options                                                                        |  |                    |        |                  |  |      | 5,867   |      |  |   |        |   |  |   | 6,383   | 
|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Weighted average shares of common stock used in
computing diluted net income (loss) per share           |  |                    | 113,069 |                  |  |      | 117,198 |      |  |   | 112,900 |   |  |   | 117,392 | 
|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Basic net income (loss) per share                                                                       |  | $                  | (0.03   | )                |  | $    | 0.03    |      |  | $ | (0.19   | ) |  | $ | 0.10    | 
|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Diluted net income (loss) per share                                                                     |  | $                  | (0.03   | )                |  | $    | 0.03    |      |  | $ | (0.19   | ) |  | $ | 0.09    | 
|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Options not included in diluted share base because of the
exercise prices                               |  |                    | 5,761   |                  |  |      | 578     |      |  |   | 3,226   |   |  |   | 572     | 
|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 
|Options and restricted stock not included in diluted
share base because of the net loss                 |  |                    | 5,363   |                  |  |      |        |      |  |   | 7,898   |   |  |   |        | 
|                                                                                                        |  |                    |         |                  |  |      |         |      |  |   |         |   |  |   |         | 

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 8). As part of the lease, the Company agreed to restrict a portion of
its investment securities as collateral for specified obligations under the
lease. 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 8 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 |        | Six Months Ended
|                                           |  | June 30,           |        | June 30,        
|                                           |  |                    |        |                 
|                                           |  | 2002               |        | 2001             |  | 2002 |       | 2001
|                                           |  |                    |        |                  |  |      |       |     
|Net income (loss)                          |  | $                  | (3,858 | )                |  | $    | 3,371 |      |  | $ | (20,929 | ) |  | $ | 10,913 | 
|Unrealized gain on investments, net of tax |  |                    | 544    |                  |  |      | 150   |      |  |   | 60      |   |  |   | 296    | 
|                                           |  |                    |        |                  |  |      |       |      |  |   |         |   |  |   |        | 
|Comprehensive income (loss)                |  | $                  | (3,314 | )                |  | $    | 3,521 |      |  | $ | (20,869 | ) |  | $ | 11,209 | 
|                                           |  |                    |        |                  |  |      |       |      |  |   |         |   |  |   |        | 

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 7  Inventories

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

|                 |                           |   |          |        |              |   |         |        | 
|---------------- | ------------------------- | - | -------- | ------ | ------------ | - | ------- | ------ | 
|                 |                           |   | June 30, |        | December 31,
|                 |                           |   | 2002     |        | 2001        
|                 |                           |   |          |        |             
|Raw materials    |                           | $ | 23,395   |        |              | $ | 27,206  |       
|Work-in-progress |                           |   | 1,855    |        |              |   | 1,864   |       
|Finished goods   |                           |   | 7,225    |        |              |   | 14,740  |       
|                 |                           |   |          |        |              |   |         |       
|                 | Total inventories at cost |   |          | 32,475 |              |   |         | 43,810 | 
|Less reserves    |                           |   | (14,740  | )      |              |   | (18,965 | )     
|                 |                           |   |          |        |              |   |         |       
|                 | Total inventories, net    |   | $        | 17,735 |              |   | $       | 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. During the quarter ended June 30, 2002,
$1.1 million 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.

Note 8  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 scheduled for completion in mid-2002, at which time lease
payments were scheduled to commence. As part of the transaction, the Company
guaranteed a residual value of the facility to Deutsche Bank of approximately
89% during the construction period and 85% thereafter of the $60 million total
original cost. The Company agreed to restrict up to $63 million of its
investment securities as collateral for specified obligations under the lease.
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 June 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 SCI Systems, Inc. (SCI) for the
manufacture of printed circuit boards and box build assembly for specific Fibre
Channel directors and switches. The agreement with SCI requires the Company to
submit purchasing forecasts, place orders and reschedule orders for products as
necessary. At June 30, 2002, SCI had on hand materials purchased on behalf of
McDATA valued at approximately $45.5 million. In addition, SCI has purchase
commitments outstanding related to materials that it had also ordered on
McDATAs behalf. The Company
may be liable for materials that SCI purchases on McDATAs behalf if the
Companys actual requirements do not meet or exceed its forecasts and those
materials cannot be redirected to other uses by SCI. At June 30, 2002, the
Company had recorded obligations of approximately $13.6 million primarily
related to materials purchased by SCI for certain end-of-life and obsolete
material used to manufacture the Companys 1 Gb products. These charges

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McDATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 8  Commitments and Contingencies (continued)

were incurred primarily as a result of the significant shortfall of actual
first quarter 2002 revenue in comparison to forecast and the expected
transition to 2 Gb technology in the second quarter of 2002, which resulted in
excess ordered and on hand material at SCI. Management does not expect the
remaining commitments under this agreement to have a continued material adverse
effect on the Companys business, results of operations, financial position or
cash flows.

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

Litigation

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

On February 14, 2002, the Company filed a patent infringement lawsuit against
Brocade Communications Systems, Inc. (Brocade) in the United States District
Court for the District of Colorado (Case No. 02-K-0303) alleging that Brocades
Frame Filtering feature in their switch products infringed the Companys U.S.
Patent No. 6,233,235 Method and apparatus for measuring traffic within a
switch. On March 5, 2002, the Company filed for a preliminary injunction
against Brocade to immediately stop infringing the patent after they announced
another product containing their Frame Filtering feature. 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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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   |      | Six Months    
|                                  |                                       |                          |       | Ended June 30, |      | Ended June 30,
|                                  |                                       |                          |       |                |      |               
|                                  |                                       |                          |       | 2002           |      | 2001           |       | 2002 |      | 2001
|                                  |                                       |                          |       |                |      |                |       |      |      |     
|Revenue                           |                                       |                          | 100.0 | %              |      |                | 100.0 | %    |      |      | 100.0 | %    |      |  | 100.0 | %   
|Cost of revenue                   |                                       |                          | 54.6  |                |      |                | 58.1  |      |      |      | 65.5  |      |      |  | 56.5  |     
|                                  |                                       |                          |       |                |      |                |       |      |      |      |       |      |      |  |       |     
|Gross profit                      |                                       |                          | 45.4  |                |      |                | 41.9  |      |      |      | 34.5  |      |      |  | 43.5  |     
|Operating expenses:               |                                       |                          |       |                |      |                |       |      |      |      |       |      |      |  |       |     
|                                  | Research and development              |                          |       | 18.9           |      |                |       | 14.0 |      |      |       | 19.6 |      |  |       | 13.1 |     
|                                  | Selling and marketing                 |                          |       | 24.2           |      |                |       | 19.1 |      |      |       | 25.9 |      |  |       | 17.8 |     
|                                  | General and administrative            |                          |       | 9.4            |      |                |       | 4.8  |      |      |       | 10.8 |      |  |       | 5.1  |     
|                                  | Amortization of deferred compensation |                          |       | 2.8            |      |                |       | 2.0  |      |      |       | 3.0  |      |  |       | 2.1  |     
|                                  |                                       |                          |       |                |      |                |       |      |      |      |       |      |      |  |       |     
|                                  |                                       | Total operating expenses |       |                | 55.3 |                |       |      | 39.9 |      |       |      | 59.3 |  |       |      | 38.1 | 
|Income (loss) from operations     |                                       |                          | (9.9  | )              |      |                | 2.0   |      |      |      | (24.8 | )    |      |  | 5.4   |     
|Interest income (expense), net    |                                       |                          | 2.4   |                |      |                | 4.5   |      |      |      | 2.7   |      |      |  | 5.1   |     
|                                  |                                       |                          |       |                |      |                |       |      |      |      |       |      |      |  |       |     
|Income (loss) before income taxes |                                       |                          | (7.5  | )              |      |                | 6.5   |      |      |      | (22.1 | )    |      |  | 10.5  |     
|Income tax expense (benefit)      |                                       |                          | 2.5   |                |      |                | 2.4   |      |      |      | 7.3   |      |      |  | 3.9   |     
|                                  |                                       |                          |       |                |      |                |       |      |      |      |       |      |      |  |       |     
|Net income (loss)                 |                                       |                          | (5.0  | )%             |      |                | 4.1   | %    |      |      | (14.8 | )%   |      |  | 6.6   | %   
|                                  |                                       |                          |       |                |      |                |       |      |      |      |       |      |      |  |       |     

Three Months ended June 30, 2002 and 2001

Revenues

Total revenue decreased by approximately 5% to $77.3 million for the
quarter ended June 30, 2002 from $81.3 million for the quarter ended June 30,
2001. The primary driver of the revenue decline was the net decline in product
revenue, which decreased to $67.2 million for the quarter ended June 30, 2002
from $72.4 million for the quarter ended June 30, 2001. The decline in product
sales reflected reduced host bus adapter (HBA) sales resulting from our sale of
this product line in the second quarter of 2002 to an independent data storage
hardware reseller. In the second quarter of 2002, we successfully launched our
2 Gb products and experienced higher than expected demand for these new
products. The recent economic environment, however, and its slow-down effect on
IT storage and infrastructure spending, resulted in smaller than expected
growth in our other product sales. Software and professional services revenue
increased 35% to $6.5 million for the quarter ended June 30, 2002 from $4.8
million for the quarter ended June 30, 2001. Other revenues for the quarter,
including the ESCON service fee, decreased 15% to $3.5 million for the quarter
ended June 30, 2002 from $4.1 million for the quarter ended June 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 June 30, 2002 and 2001, approximately 50% and 68% of
our revenues respectively, came from sales to EMC, excluding ESCON service
revenues. Additionally, approximately 29% and 16% of our revenues for the
quarters ended June 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 be derived from EMC and IBM.

Gross Profit

Gross profit increased approximately 3% to $35.1 million for the quarter
ended June 30, 2002 from $34.1 million for the quarter ended June 30, 2001.
The gross profit percentage increased to 45.4% at June 30, 2002 from 41.9% at
June 30, 2001. The increase in our gross margin percentage in 2002 from 2001
was primarily the result of significant cost increases experienced in the
second quarter of 2001, including the introduction and initial production of
our new products, increased costs of expediting delivery of components and
higher than expected costs related to our former die-cast chassis supplier. As
anticipated, this high cost inventory, which was purchased during 2001, was
fully depleted by the end of the quarter ended June 30, 2002. Additionally,
during the three months ended June 30, 2002, approximately $1.1 million of
previous inventory reserves and inventory-related obligations were reversed as
sales of discontinued 1 Gb products were higher than we had previously
estimated resulting in 100% margins for these product sales.

Operating Expenses

Research and Development. Research and development expenses were $14.6
million in the quarter ended June 30, 2002 compared with $11.4 million in the
quarter ended June 30, 2001. The $3.2 million or 29% increase in expenses was
primarily attributable to increased staffing levels, and to expenditures for
prototype materials, design consulting services, system integration
lab (SIL) testing and
other materials and services related to the testing of new technology and new
products, including our 2 Gb products, and enhancements to our existing
products. We capitalized approximately $2.6 million of eligible software
development costs in the second quarter of 2002. There were no such costs
capitalized during the second quarter of 2001.

Selling and Marketing Expenses. Selling and marketing expenses increased
by approximately 21% to $18.7 million for the second quarter of 2002 from $15.5
million for the second quarter of 2001. This increase was attributable to
increased sales force staffing, as the number of our sales force employees
increased to 223 at June 30, 2002 from 183 at June 30, 2001, as well as
increased spending for our 2Gb product marketing launch in May 2002.

General and Administrative Expenses. General and administrative expenses
increased by approximately 86% to $7.3 million for the second quarter of 2002
from $3.9 million for the second quarter of 2001. This increase was due
primarily to increased staffing levels as well as some increased legal fees due
to the patent infringement lawsuit.

Amortization of Deferred Compensation. In prior periods, we recorded
deferred compensation in connection with certain stock option and restricted
stock grants. We are amortizing these amounts on a straight-line basis over
the vesting period of the applicable options, resulting in amortization expense
of $2.3 million during the quarter ended June 30, 2002 and $2.2 million during
the quarter ended June 30, 2001 (of which approximately $0.2 million and $0.5
million was included in cost of revenue for the three months ended June 30,
2002 and June 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 income decreased to $1.7 million for the quarter
ended June 30, 2002 from $3.5 million for the quarter ended June 30, 2001. The
decrease in net interest income was due primarily to a decrease in our
investment balances between the periods and to declining interest rates
realized during 2001 and 2002. The average return on investment during the
period ended June 30, 2002 was 2.1% versus 3.9% in the period ended June 30,
2001. If interest rates or overall investment balances continue to decrease,
interest income may decrease in future periods. Other income included
approximately $270,000 of income related to the sale of our HBA business to a
data storage hardware reseller during the quarter.

Provision for Income Taxes.The effective tax rates for the quarters
ended June 30, 2002 and 2001, were 33.0% and 37.0%, respectively. For the
second quarter ended June 30, 2002, the effective tax rate and tax benefit
resulting from the operating loss decreased primarily due to a lower percentage
of our investments held in tax-exempt

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instruments. If we continue to liquidate
our tax-exempt investments, we may pay more taxes on our investment earnings.

Six Months ended June 30, 2002 and 2001

Revenues

Total revenue decreased by approximately 14% to $141.8 million for the six
months ended June 30, 2002 from $164.3 million for the six months ended June
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, we successfully launched our 2 Gb products and experienced
higher than expected demand. We are encouraged by the IT infrastructure
spending levels we experienced in the second quarter of 2002, as well as the
early indications for the remainder of the 2002 fiscal year. Finally, the sale
of our HBA product line in the second quarter of 2002 significantly reduced our
revenue related to these products. These primary drivers are reflected in the
net decrease in product revenue, which decreased to $122 million for the six
months ended June 30, 2002 from $147 million for the six months ended June 30,
2001. Software and professional services revenue increased 46% to $12.4 million
for the six months ended June 30, 2002 from $8.5 million for the six months
ended June 30, 2001. Other revenues for the six month period, including the
ESCON service fee, decreased 16% to $7.1 million for the six months ended June
30, 2002 from $8.5 million for the six months ended June 30, 2001. We
anticipate that service revenue from EMC under the ESCON service agreement will
continue to decrease in future years.

Gross Profit

Gross profit decreased approximately 32% to $49.0 million for the six
months ended June 30, 2002 from $71.6 million for the six months ended June 30,
2001. The gross profit percentage decreased to 35% at June 30, 2002 from 44%
at June 30, 2001. The decrease in our gross margin percentage in 2002 from
2001 was primarily the result of increased manufacturing and component costs
experienced primarily in the last half of 2001 through June 30, 2002. These
costs related to the introduction and initial production of our new products,
increased costs of expediting delivery of components and higher than expected
costs related to our former die-cast chassis supplier. As of June 30, 2002,
this high cost inventory was fully depleted. In addition, the gross margin
decline reflects a $14.0 million inventory-related charge in the quarter ended
March 31, 2002. We incurred this charge as the result of an unanticipated
reduction in Director-class product orders late in March 2002 related to our 1
Gb Director. During the second quarter ended June 30, 2002, we introduced our
2 Gb products and we do not anticipate further 1 Gb inventory-related charges.
Offsetting these decreases, approximately $1.1 million of previous inventory
reserves and inventory-related obligations were reversed during the three
months ended June 30, 2002, as sales of discontinued 1 Gb products were higher
than we had previously estimated resulting in 100% margins for these product
sales.

Operating Expenses

Research and Development. Research and development expenses were $27.8
million in the six months ended June 30, 2002 compared with $21.5 million in
the six months ended June 30, 2001. The $6.3 million or 30% increase in
expenses was primarily attributable to increased staffing levels, and to
expenditures for prototype materials, design consulting services, SIL testing and other materials and services related to the design and
development of new technology and new products, including our 2 Gb products,
and enhancements to our existing products. We capitalized approximately $4.6
million of eligible software development costs during the six months ended June
30, 2002. There were no such costs capitalized during the six months ended
June 30, 2001.

Selling and Marketing Expenses. Selling and marketing expenses increased
by approximately 25% to $36.7 million for the first six months of 2002 from
$29.3 million for the first six months of 2001. This increase was primarily
attributable to increased sales force staffing, as the number of our sales
force employees increased to 223 at June 30, 2002 from 183 at June 30, 2001, as
well as increased spending for our 2Gb/s marketing launch in May 2002.

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General and Administrative Expenses. General and administrative expenses
increased by approximately 81% to $15.3 million for the first six months of
2002 from $8.5 million for the first six months of 2001. This increase was due
primarily to increased staffing levels, a $1.25 million charge related to the
termination of the collateralized lease, and increased legal fees due to the
patent infringement lawsuit.

Amortization of Deferred Compensation. In prior periods, we recorded
deferred compensation in connection with certain stock option and restricted
stock grants. We are amortizing these amounts on a straight-line basis over
the vesting period of the applicable options, resulting in amortization expense
of $4.6 million during the six months ended June 30, 2002 and $4.4 million
during the six months ended June 30, 2001 (of which approximately $0.3 million
and $1.0 million was included in cost of revenue for the six months ended June
30, 2002 and June 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 income decreased to $3.8 million for the six
months ended June 30, 2002 from $8.6 million for the six months ended June 30,
2001. The decrease in net interest income was due primarily to a decrease in
our investment balances between the periods and to declining interest rates
realized during 2001 and 2002. The average return on investment during the six
months ended June 30, 2002 was 2.2% versus 4.5% in the period ended June 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 rates for the six months
ended June 30, 2002 and 2001, were 33.0% and 37.0%, respectively. For the
first six months ended June 30, 2002, the effective tax rate and tax benefit
resulting from the operating loss decreased primarily due to a lower percentage
of our investments held in tax-exempt instruments. If we continue to liquidate
our tax-exempt investments, we may pay more taxes on our investment earnings.

Liquidity and Capital Resources

For the six months ended June 30, 2002, we generated approximately $1.7
million in net cash from operating activities, primarily from cash inflows
including, net income before non-cash charges and increases in accounts
payable and deferred revenues. Offsetting these cash inflows were increases in
accounts receivable, purchases of inventory, other assets including the
capitalization of software development and decreases in accrued liabilities.
Net cash used in investing activities for the six months ended June 30, 2002
was $20.0 million, primarily related to purchases of property and equipment,
including the approximate $45 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 sales and maturities of investments, including the
disposition of our restricted assets held as collateral under the
collateralized operating lease. Net cash provided by financing activities for
the six months ended June 30, 2002 totaled approximately $400,000, reflecting
proceeds from the exercise of employee stock options, partially offset by
repayment of capital lease obligations.

At June 30, 2002, we have deferred tax assets of $33 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 June 30, 2002 consisted of our cash
and short-term investment securities on hand, which totaled approximately $178
million, long-term investment securities of $112.2 million, and our equipment
financing arrangements, which totaled approximately $4.4 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

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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 29% from December 31, 2001 to June 30, 2002.
Inventory turns, excluding the net inventory-related charges during the first
six months of 2002 were 9.0 at June 30, 2002 compared to a 4.1 inventory turn
for the six months ended June 30, 2001. The inventory levels and inventory
turns reflect our efforts to better manage our inventory levels in the current
economic environment. In addition, we have announced our plan to implement an
outsourcing focused manufacturing model including the transition of our
manufacturing operations in 2002 through 2003 to a contract manufacturer.
Inventory management remains an area of focus as we balance the need to
maintain strategic inventory levels to ensure competitive lead times versus the
risk of inventory obsolescence because of rapidly changing technology and
customer requirements. There can be no assurance that we will not incur
additional inventory write-downs in the future or that any such write-downs
would not have a material adverse affect on our future operating results.

Commitments

We have contracted with SCI Systems, Inc. (SCI) for the manufacture of
printed circuit boards and box build assembly for specific Fibre Channel
directors and switches. The agreement with SCI requires us to submit purchasing
forecasts, place orders and reschedule orders for products as necessary. At
June 30, 2002, SCI had on hand materials purchased on behalf of McDATA valued
at approximately $45.5 million. In addition, SCI has purchase commitments
outstanding related to materials that it had also ordered on our behalf. We may
be liable for materials that SCI purchases on our behalf if our actual
requirements do not meet or exceed our forecasts and those materials cannot be
redirected to other uses by SCI. At June 30, 2002, we had recorded obligations
of approximately $13.6 million primarily related to materials purchased by SCI
for certain end-of-life and obsolete material used to manufacture our 1 Gb
products. These charges were incurred primarily as a result of the significant
shortfall of actual first quarter 2002 revenue in comparison to forecast and
the expected transition to 2 Gb technology in the second quarter of 2002, which
resulted in excess ordered material at SCI. Management does not expect this
commitment to have a continued material adverse effect on our business, results
of operations, financial position, or cash flows.

On February 9, 2001 (and amended on May 18, 2001, November 9, 2001 and
January 24, 2002), we entered into an operating lease and associated agreements
with Deutsche Bank AG, New York Branch (Deutsche Bank) for the lease of an
approximately 167,000 square foot multi-story office and engineering building
to be constructed on a 106 acre parcel of land located in Broomfield, Colorado.
Construction of the building commenced in the first half of 2001 and was
scheduled for completion in mid-2002, at which time lease payments were
scheduled to commence. As part of the transaction, we guaranteed a residual
value of the facility to Deutsche Bank of approximately 89% during the
construction period and 85% thereafter of the $60 million total original cost.
We agreed to restrict up to $63 million of its 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

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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.

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. In the first quarter of 2002, we incurred an
additional $14.0 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 the
three and six months ended June 30, 2002 and may not sustain profitability in
the future.

We incurred a substantial loss for the year ended December 31, 2001 and
the three and six months ended June 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
assure you that we will generate sufficient revenue to achieve or sustain
profitability.

SANavigator Acquisition

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

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

We depend on EMC for a significant portion of our total revenue. Sales
and services to EMC, which is an original equipment manufacturer customer,
represented approximately 50% and 51% of our revenue, excluding ESCON service
revenue, for the three and six months ended June 30, 2002, respectively. In
addition, IBM represented approximately 29% and 27% 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. 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 six months ended June 30, 2002, respectively, we
derived approximately 71% of our revenue from sales of our Director-class
products. We expect that revenue from our Director-class products will
continue to account for a substantial portion of our revenue for the
foreseeable future. Therefore, continued market acceptance of this product and
its successor products is critical to our future success. Factors such as
performance, market positioning, the availability and price of competing
products, the introduction of new technologies and the success of our OEMs,
reseller and systems integrator customers will affect the market acceptance of
our products.

In addition, our future success depends upon our ability to address the
changing needs of customers and to transition to new technologies and industry
standards. The introduction of competing products embodying new technologies
or the emergence of new industry standards could render our products
non-competitive, obsolete or unmarketable and seriously harm our market share,
revenue and gross margin. Risks inherent in this transition include the
inability to expand production capacity to meet demand for new products, the
impact of customer demand for new products or products being replaced, and
delays in the initial shipment of new products. There can be no assurance that
we will successfully manage these transitions.

We are currently developing next generation products that contain untested
devices and subassemblies. As with any development, there are inherent risks
should such devices or subassemblies require redesign or rework. In
particular, in conjunction with our transition of our products from 1 to 2 Gb
transmission speed technology and higher port density, we have begun
introducing products with new features and functionality. We face risks
relating to this product transition, including risks relating to forecasting of
demand for 2 Gb and higher port density products and related transition issues,
as discussed in the previous paragraph, as well as possible product and
software defects and a potentially different sales and support environment due
to the complexity of these new systems. If we fail to

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timely introduce new 2
Gb and higher port density products with enhanced features, or if there is no
demand for these products, our business could be seriously harmed.

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

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

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

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

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

We rely on SCI to
manufacture 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 SCI, which has a one year term that
renews automatically unless cancelled and is cancellable by either party
without cause on advance notice. SCI is not obligated to supply products to us
for any specific period, or in any specific quantity, except as may be provided
in a particular purchase order. We generally place orders for circuit boards
with SCI approximately four to five months prior to the anticipated delivery
date, with order volumes based on forecasts of demand for our products. If we
fail to forecast demand for our products accurately, we may be unable to obtain
adequate manufacturing capacity from SCI to meet our customers delivery
requirements, or we may accumulate excess inventories. We may be unable to
respond adequately to unexpected increases in customer purchase orders, and
therefore be unable to benefit from this incremental demand. SCI does not
guarantee that adequate capacity will be available to us within the time
required to meet additional demand for our products. As discussed
earlier, we are in the process of implementing an outsourcing-focused
manufacturing model. In May 2002, we outsourced to SCI the integration of our
Directors into cabinets.

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

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or quality control
problems in their manufacturing operations, our ability to ship products to our
customers could be delayed, and our competitive position and reputation could
be harmed. Qualifying a new contract manufacturer and commencing volume
production can be expensive and time consuming. If we are required to change
or choose to change contract manufacturers, we may lose revenue and damage our
customer relationships.

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

Our name is not widely recognized as a brand in the marketplace. We have
operated substantially as a separate company from EMC only since October 1997.
EMC, which currently accounts for 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 71% of our total
revenues in the three and six months ended June 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
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.

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Our success depends to a significant degree upon the continued
contributions of our key management, technical, sales and marketing, finance
and operations personnel, many of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on our
senior executive team, half of which were hired in late 2000 and 2001. In
addition, our engineering and product development teams are critical in
developing our products and have developed important relationships with
customers and their technical staffs. The loss of any of these key personnel
could harm our operations and customer relationships. We do not have key
person life insurance on any of our key personnel.

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

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

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

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

Continued or increased competition could result in pricing pressures,
reduced sales, reduced margins, reduced profits, reduced market share or the
failure of our products to achieve or maintain market acceptance. Some of our
competitors and potential competitors have longer operating histories, greater
name recognition, access to larger customer bases, more established
distribution channels or substantially greater resources than we have.
Notably, Brocade Communications Systems, Inc. recently introduced a 2 Gb
transmission speed 16-port and 120-port switch to the market place.

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

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

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

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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.

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;
| | - |  | ---------------------------------------------------------------------------------------

18



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| |  |  | 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, 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.

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.

19



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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 June 30, 2002, we have deferred tax assets of $33 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.

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

20



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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 50% of our
revenue, excluding ESCON service revenue, for the three months ended June 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 June 30, 2002, our revenues from EMC
represented approximately 50% of our total revenue, excluding ESCON service
revenue. In addition, during the same period, revenue under our service
agreement with EMC, pursuant to which we manufacture and supply ESCON switching
devices for IBM, represented approximately 2% of our total revenue. EMC has
recently agreed to resell products offered by two of our competitors, and
nothing restricts EMC from expanding those relationships in a manner that could
be adverse to us.

If our business relationship with EMC ends or significantly changes,
resulting in reduced sales to EMC, our revenue will be significantly reduced.

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

Under the terms of the Tax Sharing Agreement between EMC and us, until 27
months after the February 2001 distribution by EMC of our Class A common stock
to EMCs stockholders, we may not, without the consent of EMC or the receipt by
EMC of a private letter ruling from the Internal Revenue Service that the tax
treatment of the distribution will not be adversely affected;



| |  |  | 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;

21



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| |  |  | 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

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.

22



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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 or will have material exposure to foreign currency
exchange risk.

Credit Risk

Financial instruments, which potentially subject us to concentrations of
credit risk, consist principally of temporary cash investments, investments and
trade receivables. We place our temporary cash investments and investment
securities in investment grade instruments and limit the amount of investment
with any one financial institution. We evaluate the credit risk associated with
each of our customers but generally do not require collateral. We depend on
two customers for most of our total revenue who comprise a significant portion
of our trade receivables and, therefore, expose us to a concentration of credit
risk.




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
complaints are substantially identical to numerous other complaints filed
against other companies that went public over the last several years. These
lawsuits generally allege, among other things, that the registration statements
and prospectus filed with the SEC by such companies were materially false and
misleading because they failed to disclose (a) that certain underwriters had
solicited and received excessive and undisclosed commissions from certain
investors in exchange for which the underwriters allocated to those investors
material portions of shares in connection with the initial public offerings
(IPOs) and (b) that certain of the underwriters had entered into agreements
with customers whereby the
underwriters agreed to allocate IPO shares in exchange for which the
customers agreed to purchase additional company shares in the aftermarket at
pre-determined prices. The complaints relating to the Company allege claims
against the Company, two of the Companys current officers, a former officer of
the Company and Credit Suisse First Boston, the lead underwriter of the
Companys August 9, 2000 initial public offering, under Sections 11 and 15 of
the Securities Act of 1933, as amended. The complaints also allege claims
solely against Credit Suisse First Boston and the other underwriter defendants
under Section 12(a)(2) of the Securities Act of 1933, as amended, and claims
against the individual defendants under Section 10(b) of the Securities
Exchange Act of 1934, as amended. We believe that the lawsuits are without
legal merit and intend to defend them vigorously.

Patent Infringement Lawsuit

On February 14, 2002, we filed a patent infringement lawsuit against
Brocade Communications Systems, Inc. (Brocade) in the United States District
Court for the District of Colorado (Case No. 02-K-0303) alleging that Brocades
Frame Filtering feature in their switch products infringed our U.S. Patent No.
6,233,235 Method and apparatus for measuring traffic within a switch. On
March 5, 2002, we filed for a preliminary injunction against Brocade to
immediately stop infringing the patent after they announced another product
containing their Frame Filtering feature.

23



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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

The annual meeting of the Companys stockholders was held on August 1,
2002. At that meeting, three proposals were submitted to a vote of the
Companys stockholders. Proposal 1 was a proposal to elect two directors, D.
Van Skilling and Thomas M. Uhlman, to serve until the 2005 Annual Meeting of
Stockholders. Proposal 2 was a proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the Companys independent public accountants for
the fiscal year ending December 31, 2002. Proposal 3 was a proposal to approve
an Employee Stock Purchase Plan. For further information regarding the annual
meeting, please see the Companys Proxy Statement on Schedule 14A filed on June
10, 2002.

|                                                                    |  |                 |            |          |  |          |           |  |  |  |         | 
|------------------------------------------------------------------- |  | --------------- | ---------- | -------- |  | -------- | --------- |  |  |  | ------- | 
|                                                                    |  | Number of Votes
|                                                                    |  |                
|                                                                    |  |                 |            | Abstain/
|Proposal                                                            |  | For             |            | Against  |  | Withhold
|                                                                    |  |                 |            |          |  |         
|Proposal 1 - Election of director: D. Van Skilling                  |  |                 | 73,807,050 |          |  |          |          |  |  |  | 623,915 | 
|Proposal 1 - Election of director: Thomas M. Uhlman                 |  |                 | 74,126,430 |          |  |          |          |  |  |  | 304,536 | 
|Proposal 2 - Ratification of PricewaterhouseCoopers
LLP appointment |  |                 | 72,802,985 |          |  |          | 1,554,338 |  |  |  | 73,644  | 
|Proposal 3 - Approval of Employee Stock Purchase Plan               |  |                 | 73,429,529 |          |  |          | 853,705   |  |  |  | 147,731 | 

Consequently, all proposals were passed by stockholders.




ITEM 5. Other Information

None




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   

24



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|           |  |                                                                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 June 30, 2000 by and between
International Business Machines Corporation and the Company                                                              
|           |  |                                                                                                                                                                                                          
|(10.13)+   |  | OEM Purchase and License Agreement dated as of May 19, 2000 by and between EMC
Corporation and the Company                                                                                               
|           |  |                                                                                                                                                                                                          
|(10.13.1)+ |  | Amendment to OEM Purchase and License Agreement dated as of June 21, 2001, by
and between EMC Corporation and the Company                                                                                
|           |  |                                                                                                                                                                                                          
|(10.14)+   |  | Development Agreement dated as of May 19, 2000 by and between EMC Corporation
and the Company                                                                                                            
|           |  |                                                                                                                                                                                                          
|(10.15)+   |  | Manufacturing Agreement dated as of June 17, 1992 by and between SCI Systems,
Inc. and the Company                                                                                                       
|           |  |                                                                                                                                                                                                          
|(10.15.1)+ |  | Manufacturing and Purchasing Agreement dated as of December 14, 2001 by and
between SCI Systems, Inc. and the Company (Filed on Form 8-K dated February 25,
2002)                                        
|           |  |                                                                                                                                                                                                          
|(10.16)+   |  | OEM and License Agreement dated as of April 27, 1999 by and between Brocade
Communication Systems, Inc. and the Company                                                                                  
|           |  |                                                                                                                                                                                                          
|(10.17)    |  | Lease dated September 12, 1997 by and between the Company and WHLNF Real Estate
Limited Partnership                                                                                                      
|           |  |                                                                                                                                                                                                          
|(10.18)    |  | Lease dated November 2, 1999 by and between the Company and the Mills Family LLC                                                                                                                         
|           |  |                                                                                                                                                                                                          
|(10.19)    |  | Lease dated May 28, 1997 by and between the Company and 1211486 Ontario Limited                                                                                                                          
|           |  |                                                                                                                                                                                                          
|(10.19.1)  |  | Lease dated October 6, 2000, by and between the Company and Amber Drive I, LLC
(Filed in Form 10-Q for the fiscal quarter ended September 30, 2000)                                                      
|           |  |                                                                                                                                                                                                          
|(10.19.2)  |  | Lease dated February 9, 2001 by and between the Company and Deutsche Bank
(Filed in Form 10-K for the fiscal year ended 2000)                                                                            
|           |  |                                                                                                                                                                                                          
|(10.19.3)  |  | Participation Agreement dated February 9, 2001 by and between the Company and
Deutsche Bank (Filed in Form 10-K for the fiscal year ended 2000)                                                          
|           |  |                                                                                                                                                                                                          
|(10.19.4)  |  | Second Amendment to Participation Agreement dated November 9, 2001 by and
between the Company and Deutsche Bank (Filed in Form 10-Q for the fiscal
quarter ended September 30, 2001)                     
|           |  |                                                                                                                                                                                                          
|(10.19.5)  |  | Third Amendment to Participation Agreement dated January 24, 2002 by and
between the Company and Deutsche Bank (Filed on Form 8-K dated February 25,
2002)                                               
|           |  |                                                                                                                                                                                                          
|(10.20)*   |  | Form of Severance Agreement                                                                                                                                                                              

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|           |  |                                                                                                                                       
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|(10.21)*   |  | 1997 Stock Option Plan                                                                                                                
|           |  |                                                                                                                                       
|(10.21.1)* |  | 2001 McDATA Equity Incentive Plan (Filed in Form 10-Q for the fiscal quarter
ended September 30, 2001)                                
|           |  |                                                                                                                                       
|10.21.2*   |  | Employee Stock Purchase Plan                                                                                                          
|           |  |                                                                                                                                       
|(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 second quarter of 2002 and through
the filing of this Form 10-Q:
|--- |  | -----------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) We filed a Current Report on Form 8-K dated May 13, 2002 to report that
John A. Kelley, Jr., McDATAs president and COO, entered into a Rule 10b5-1
Stock Purchase Plan with Deutsche Bank Alex Brown to purchase a total of
$100,000 of McDATA Class B Common Stock.                                                                                                                                                                                                                  
|
| | (2) We filed a Current Report on Form 8-K dated June 11, 2002 to report the
election of John A. Kelley, Jr. as President and Chief Executive Officer
with John McDonnell remaining as Chairman of the Board of Directors
effective as of August 1, 2002.                                                                                                                                                                                                                                   
|
| | (3) We filed a Current Report on Form 8-K dated July 19, 2002 to report
that John McDonnell and his wife, Patricia 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.

26



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##### Table of Contents



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. Sampias                                                                        
|                |  |                                                                                                  
|August 14, 2002 |  | Ernest J. Sampias
Chief Financial Officer and Senior Vice President of
Finance and Administration

27



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##### Table of Contents



INDEX TO EXHIBITS

|           |  |                                                                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 June 30, 2000 by and between
International Business Machines Corporation and the Company                                                              
|           |  |                                                                                                                                                                                                          
|(10.13)+   |  | OEM Purchase and License Agreement dated as of May 19, 2000 by and between EMC
Corporation and the Company                                                                                               
|           |  |                                                                                                                                                                                                          
|(10.13.1)+ |  | Amendment to OEM Purchase and License Agreement dated as of June 21, 2001, by
and between EMC Corporation and the Company                                                                                
|           |  |                                                                                                                                                                                                          
|(10.14)+   |  | Development Agreement dated as of May 19, 2000 by and between EMC Corporation
and the Company                                                                                                            



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##### Table of Contents



|           |  |                                                                                                                                                                                     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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                                                                                                                                                              
|           |  |                                                                                                                                                                                     
|(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                                                                                                                                                        
|           |  |                                                                                                                                                                                     
|(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.