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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2001

OR

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

For the transition period from  to

Commission File Number 000-31257

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

Delaware

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

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


380 Interlocken Crescent, Broomfield, Colorado 80021(Address of principal executive offices)(zip code)

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

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

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

At
November 1, 2001, 81,000,000 shares of the registrant's Class A Common Stock were outstanding and 31,400,530 shares of the registrant's Class B Common Stock
were outstanding.

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McDATA CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001

TABLE OF CONTENTS



|Item                         |  |                                                                                                                             
|---------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|PART IFINANCIAL INFORMATION
|1.                           |  | Financial Statements                                                                                                        
|                             |  | Consolidated Balance SheetsSeptember 30, 2001 (unaudited) and December 31, 2000                                            
|                             |  | Consolidated Income StatementsThree and Nine Months ended September 30, 2001 (unaudited) and September 30, 2000 (unaudited)
|                             |  | Consolidated Statements of Cash FlowsNine Months ended September 30, 2001 (unaudited) and September 30, 2000 (unaudited)   
|                             |  | Notes to Consolidated Financial Statements (unaudited)                                                                      
|2.                           |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                       
|3.                           |  | Quantitative and Qualitative Disclosures About Market Risks                                                                 
|PART IIOTHER INFORMATION   
|1.                           |  | Legal Proceedings                                                                                                           
|2.                           |  | Changes in Securities and Use of Proceeds                                                                                   
|3.                           |  | Defaults Upon Senior Securities                                                                                             
|4.                           |  | Submission of Matters to a Vote of Security Holders                                                                         
|5.                           |  | Other Information                                                                                                           
|6.                           |  | Exhibits and Reports on Form 8-K                                                                                            



Special Note Regarding Forward-Looking Statements

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



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





PART IFINANCIAL INFORMATION

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

|                                                                                                                                                                                                     |                                           | September 30,
2001                         |         | December 31,
2000 |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|
|Assets                                                                                                                                                                                               |                                           |                                            |         |                   |        
|Current assets:                                                                                                                                                                                      |                                           |                                            |         |                   |        
|                                                                                                                                                                                                     | Cash and cash equivalents                 |                                            | $       | 71,922            |        
|                                                                                                                                                                                                     | Short-term investments                    |                                            |         | 147,124           |        
|                                                                                                                                                                                                     | Accounts receivable, net                  |                                            |         | 59,170            |        
|                                                                                                                                                                                                     | Inventories, net                          |                                            |         | 36,592            |        
|                                                                                                                                                                                                     | Deferred tax asset                        |                                            |         | 18,766            |        
|                                                                                                                                                                                                     | Prepaid expenses and other current assets |                                            |         | 6,216             |        
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|Total current assets                                                                                                                                                                                 |                                           |                                            | 339,790 |                   |        
|Property and equipment, net                                                                                                                                                                          |                                           |                                            | 40,471  |                   |        
|Long-term investments                                                                                                                                                                                |                                           |                                            | 80,955  |                   |        
|Restricted investments                                                                                                                                                                               |                                           |                                            | 29,788  |                   |        
|Other assets, net                                                                                                                                                                                    |                                           |                                            | 23,726  |                   |        
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|                                                                                                                                                                                                     |                                           | Total assets                               |         | $                 | 514,730
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|Liabilities and Stockholders' Equity                                                                                                                                                                 |                                           |                                            |         |                   |        
|Current liabilities:                                                                                                                                                                                 |                                           |                                            |         |                   |        
|                                                                                                                                                                                                     | Accounts payable                          |                                            | $       | 21,210            |        
|                                                                                                                                                                                                     | Accrued liabilities                       |                                            |         | 14,145            |        
|                                                                                                                                                                                                     | Deferred revenue                          |                                            |         | 8,771             |        
|                                                                                                                                                                                                     | Income taxes payable                      |                                            |         | 1,763             |        
|                                                                                                                                                                                                     | Obligations under capital leases          |                                            |         | 2,069             |        
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|Total current liabilities                                                                                                                                                                            |                                           |                                            | 47,958  |                   |        
|Obligations under capital leases                                                                                                                                                                     |                                           |                                            | 1,048   |                   |        
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|                                                                                                                                                                                                     |                                           | Total liabilities                          |         |                   | 49,006 
|Commitments and Contingencies (Notes 8, 9 and 10)                                                                                                                                                    |                                           |                                            |         |                   |        
|Stockholders' Equity:                                                                                                                                                                                |                                           |                                            |         |                   |        
|Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued or outstanding                                                                                                      |                                           |                                            |        |                   |        
|Common stock, Class A, $0.01 par value, 250,000,000 shares authorized, 81,000,000 shares issued and outstanding                                                                                      |                                           |                                            | 810     |                   |        
|Common stock, Class B, $0.01 par value, 200,000,000 shares authorized, 31,016,460 and 28,907,689 shares issued and outstanding at September 30, 2001 (unaudited) and December 31, 2000, respectively |                                           |                                            | 310     |                   |        
|Additional paid-in-capital                                                                                                                                                                           |                                           |                                            | 460,422 |                   |        
|Deferred compensation                                                                                                                                                                                |                                           |                                            | (17,365 | )                 |        
|Accumulated other comprehensive income                                                                                                                                                               |                                           |                                            | 778     |                   |        
|Retained earnings                                                                                                                                                                                    |                                           |                                            | 20,769  |                   |        
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|Total stockholders' equity                                                                                                                                                                           |                                           |                                            | 465,724 |                   |        
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        
|                                                                                                                                                                                                     |                                           | Total liabilities and stockholders' equity |         | $                 | 514,730
|                                                                                                                                                                                                     |                                           |                                            |         |                   |        

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



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

|                                                                                                                                                                   |                    | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------ | -------------------------------- | ------- | ------------------------------- | -
|
|Revenue                                                                                                                                                            |                    | $                                | 86,600  |                                 | $
|Cost of revenue                                                                                                                                                    |                    |                                  | 63,787  |                                 |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|                                                                                                                                                                   | Gross profit       |                                  |         | 22,813                          |  
|Operating expenses:                                                                                                                                                |                    |                                  |         |                                 |  
|Research and development                                                                                                                                           |                    |                                  | 13,411  |                                 |  
|Selling and marketing                                                                                                                                              |                    |                                  | 18,554  |                                 |  
|General and administrative                                                                                                                                         |                    |                                  | 4,683   |                                 |  
|Acquired in-process research & development and other acquisition-related costs                                                                                     |                    |                                  | 9,291   |                                 |  
|Amortization of deferred compensation (excludes amortization of deferred compensation included in cost of revenue of $274, $500, $1,266, and $1,436, respectively) |                    |                                  | 1,729   |                                 |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|                                                                                                                                                                   | Operating expenses |                                  |         | 47,668                          |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Income (loss) from operations                                                                                                                                      |                    |                                  | (24,855 | )                               |  
|Interest income                                                                                                                                                    |                    |                                  | 3,394   |                                 |  
|Interest expense                                                                                                                                                   |                    |                                  | (98     | )                               |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Income (loss) before income taxes                                                                                                                                  |                    |                                  | (21,559 | )                               |  
|Income tax expense (benefit)                                                                                                                                       |                    |                                  | (7,977  | )                               |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Net income (loss)                                                                                                                                                  |                    | $                                | (13,582 | )                               | $
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Basic net income (loss) per share                                                                                                                                  |                    | $                                | (0.12   | )                               | $
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Shares used in computing basic net income (loss) per share                                                                                                         |                    |                                  | 111,658 |                                 |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Diluted net income (loss) per share                                                                                                                                |                    | $                                | (0.12   | )                               | $
|                                                                                                                                                                   |                    |                                  |         |                                 |  
|Shares used in computing diluted net income (loss) per share                                                                                                       |                    |                                  | 111,658 |                                 |  
|                                                                                                                                                                   |                    |                                  |         |                                 |  

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



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

|                                                                                   |                                              | Nine Months Ended September 30,           |         
|---------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | --------
|
|Cash flows from operating activities:                                              |                                              |                                           |         
|Net income (loss)                                                                  |                                              | $                                         | (2,669  
|Adjustments to reconcile net income (loss) to cash flows from operating activities |                                              |                                           |         
|                                                                                   | Depreciation and amortization                |                                           |         
|                                                                                   | Gain on sale of assets                       |                                           |         
|                                                                                   | Acquired in-process research and development |                                           |         
|                                                                                   | Inventory provision                          |                                           |         
|                                                                                   | Non-cash compensation expense                |                                           |         
|                                                                                   | Tax benefit from stock options exercised     |                                           |         
|                                                                                   | Changes in net assets and liabilities:       |                                           |         
|                                                                                   |                                              | Accounts receivable                       |         
|                                                                                   |                                              | Inventories                               |         
|                                                                                   |                                              | Deferred tax asset                        |         
|                                                                                   |                                              | Prepaid expenses and other current assets |         
|                                                                                   |                                              | Other assets, net                         |         
|                                                                                   |                                              | Accounts payable                          |         
|                                                                                   |                                              | Accrued liabilities                       |         
|                                                                                   |                                              | Deferred revenue                          |         
|                                                                                   |                                              | Accrued income taxes                      |         
|                                                                                   |                                              | Deferred tax liability                    |         
|                                                                                   |                                              |                                           |         
|Net cash provided (used) by operating activities                                   |                                              |                                           | (14,266 
|Cash flows from investing activities:                                              |                                              |                                           |         
|Purchases of property and equipment                                                |                                              |                                           | (16,393 
|Acquisitions                                                                       |                                              |                                           | (29,750 
|Purchases of investments                                                           |                                              |                                           | (516,394
|Proceeds from disposition of investments                                           |                                              |                                           | 472,803 
|                                                                                   |                                              |                                           |         
|Net cash used in investing activities                                              |                                              |                                           | (89,734 
|Cash flows from financing activities:                                              |                                              |                                           |         
|Payment of obligations under capital leases                                        |                                              |                                           | (2,366  
|Payment of debt to former Parent                                                   |                                              |                                           |        
|Proceeds from the exercise of stock options                                        |                                              |                                           | 3,658   
|Proceeds from sale of common stock, net                                            |                                              |                                           |        
|                                                                                   |                                              |                                           |         
|Net cash provided by financing activities                                          |                                              |                                           | 1,292   
|                                                                                   |                                              |                                           |         
|Net increase (decrease) in cash and cash equivalents                               |                                              |                                           | (102,708
|Cash and cash equivalents, beginning of period                                     |                                              |                                           | 174,630 
|                                                                                   |                                              |                                           |         
|Cash and cash equivalents, end of period                                           |                                              | $                                         | 71,922  
|                                                                                   |                                              |                                           |         
|Supplemental Disclosure of Non-Cash Investing and Financing Activities             |                                              |                                           |         
|Capital lease obligations incurred                                                 |                                              | $                                         | 1,413   
|                                                                                   |                                              |                                           |         
|Transfer of inventory to fixed assets                                              |                                              | $                                         | 3,676   
|                                                                                   |                                              |                                           |         
|Acquisition of equipment with payables                                             |                                              | $                                         | 2,100   
|                                                                                   |                                              |                                           |         

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





McDATA CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (unaudited)

Note 1Background and Basis of Presentation

McDATA Corporation ("McDATA" or "the Company") designs, develops, manufactures and sells open storage networking solutions and provides highly available,
scalable and centrally managed storage area networks (SANs) that address enterprise-wise storage problems. The Company sells its products, software, services and solutions through original
equipment manufacturers ("OEM") and resellers, including EMC Corporation ("EMC"), Hewlett-Packard, Co., Hitachi Data Systems Corp., and IBM, as well as systems integrators. The Company also provides
services for EMC's proprietary mainframe protocol ("ESCON") switch business under a service agreement with EMC.

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

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

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

Certain
amounts in the Consolidated Balance Sheet as of December 31, 2000 and certain amounts in the Consolidated Income Statements for the nine months ended
September 30, 2000 have been reclassified in order to conform to the current presentation.

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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 is effective immediately and SFAS No. 142 will be effective January 2002. Beginning the first quarter of fiscal 2002,

goodwill will no longer be amortized but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. The new rules also
require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and stipulate that goodwill acquired after June 30, 2001 will not
be amortized. Accordingly, the Company will not amortize the goodwill resulting from the acquisition of SANavigator, Inc. which was completed in September 2001. During 2002, the Company
will begin to test goodwill for impairment under the new rules, applying a fair-value-based test.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The new standard is not expected to have a significant impact on our financial statements.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets." This Statement establishes standards for
long-lived assets to be disposed of and redefines the valuation and presentation of discontinued operations. This Statement is effective for fiscal year 2002. The Company believes that
this statement will not have a material impact on the Company's consolidated results of operations.

Note 2Acquisition

On September 21, 2001, the Company acquired the assets of SANavigator, Inc. (SANavigator) for a cash purchase price of $29.75 million. In
addition, one-time costs associated with the acquisition were $2.1 million. The results of SANavigator's operations have been included in the consolidated financial statements since
that date. SANavigator is a software company that designs and develops a scalable and stable SAN management tool that manages entry-level through complex SAN environments utilizing vendor- and
platform- independent software. As a result of the acquisition, the Company is expected to be in a leading position in offering storage network management software that provides visibility and
discovery in a multi-vendor fabric environment.

In
addition to the purchase price, the Company issued approximately 192,000 shares of Class B common stock, with a fair value of $1.9 million, for the completion of
ongoing employment arrangements with SANavigator employees. The stock awards are contingent upon the continued employment of certain employees. These awards have been recorded as deferred compensation
and will be recognized ratably through the expiration date of the employee agreements.

The
estimated excess of the purchase price over the fair value of the tangible net assets acquired has been valued at $28.7 million. Of this excess, $10.5 million was
allocated to developed technology, $7.2 million was allocated to in-process research and development, and the remaining $11.0 million was allocated to goodwill. The amount
allocated to developed technology is being amortized on a straight-line basis over 5 years. In accordance with the recently issued SFAS No. 141, "Business Combinations", the
amount allocated to goodwill is not being amortized and will be evaluated at least annually for impairment. The valuation is based upon a preliminary valuation, therefore the allocation of the
purchase price is subject to refinement.

The amount allocated to in-process research and development (IPR&D) was determined using the discounted cash flow method. This model employed cash flow projections for
revenue based on the projected incremental increase in revenue that the Company expects to receive from the completed IPR&D. Estimated operating expenses, capital charges and applicable income taxes
were deducted to arrive at an estimated after-tax cash flow. The Company discounted the after-tax cash flow projects using a risk-adjusted rate of return of 75%.
The resulting IPR&D was expensed at the time of purchase because technological feasibility had not been established and no future alternative use existed.

The
pro forma information below assumes that SANavigator was acquired at the beginning of the periods presented and includes the effect of amortization of identified intangibles and
costs from that date. The impact of charges for IPR&D and non-recurring employee compensation have been excluded. This is presented for informational purposes only and is not necessarily
indicative of the results of future operations or results that would have been achieved had the acquisitions taken place at the beginning of the periods presented.

|                                    |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30,
|----------------------------------- |  | -------------------------------- | ------ | -------------------------------
|
|Revenues                            |  | $                                | 86,740 |                                
|Net income (loss)                   |  |                                  | (9,250 | )                              
|Basic net income (loss) per share   |  | $                                | (0.08  | )                              
|Diluted net income (loss) per share |  | $                                | (0.08  | )                              

Note 3Earnings per Share

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

|                                                                                                        |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30,
|------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | -------------------------------
|
|Net income (loss)                                                                                       |  | $                                | (13,582 | )                              
|Weighted average shares of common stock outstanding used in computing basic net income (loss) per share |  |                                  | 111,658 |                                
|Effect of dilutive stock options                                                                        |  |                                  |        |                                
|                                                                                                        |  |                                  |         |                                
|Weighted average shares of common stock used in computing diluted net income (loss) per share           |  |                                  | 111,658 |                                
|                                                                                                        |  |                                  |         |                                
|Basic net income (loss) per share                                                                       |  | $                                | (0.12   | )                              
|                                                                                                        |  |                                  |         |                                
|Diluted net income (loss) per share                                                                     |  | $                                | (0.12   | )                              
|                                                                                                        |  |                                  |         |                                
|Options not included in diluted share base because of their exercise prices                             |  |                                  | 1,912   |                                
|                                                                                                        |  |                                  |         |                                
|Options not included in diluted share base because of the net loss                                      |  |                                  | 8,674   |                                
|                                                                                                        |  |                                  |         |                                



Note 4Restricted Investments

On February 9, 2001 (and amended on May 18, 2001 and November 9, 2001), the Company entered into a lease for an approximately 167,000
square foot multi-story office and engineering building to be constructed on a 106 acre parcel of land located in Broomfield, Colorado (see note 9). As part of the lease, the Company has agreed
to restrict a portion of its investment securities as collateral for specified obligations under the lease. As of September 30, 2001, the Company had restricted investments totaling
$29,788,000.

Note 5Comprehensive Income (Loss)

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

|                                           |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30,
|------------------------------------------ |  | -------------------------------- | ------- | -------------------------------
|
|Net income (loss)                          |  | $                                | (13,582 | )                              
|Unrealized gain on investments, net of tax |  |                                  | 365     |                                
|                                           |  |                                  |         |                                
|Comprehensive income (loss)                |  | $                                | (13,217 | )                              
|                                           |  |                                  |         |                                

Note 6Inventories

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

|                 |                           | September 30,
2001 |         | December 31,
2000 |  
|---------------- | ------------------------- | ------------------ | ------- | ----------------- | -
|Raw materials    |                           | $                  | 30,736  |                   | $
|Work-in-progress |                           |                    | 6,269   |                   |  
|Finished goods   |                           |                    | 15,759  |                   |  
|                 |                           |                    |         |                   |  
|                 | Total inventories at cost |                    |         | 52,764            |  
|Less reserves    |                           |                    | (16,172 | )                 |  
|                 |                           |                    |         |                   |  
|                 | Total inventories, net    |                    | $       | 36,592            |  
|                 |                           |                    |         |                   |  

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

Note 7Stockholders' Equity

On May 18, 2001, the Company's Board of Directors approved a Stockholder Rights Plan, which became effective on June 5, 2001. A dividend of one
Right per common share was distributed to stockholders of record on June 5, 2001. Each Right, expiring June 5, 2011, represents a right to buy from the Company one
ten-thousandth (1/10,000) of a share of Series A Junior Participating Preferred Stock, $0.01 par value, at a price of $200 per Right. This dividend distribution of the Rights was
not taxable to the Company or its stockholders.

Separate certificates for Rights will not be distributed, nor will the Rights be exercisable, unless a person or group acquires 15 percent or more, or announces an offer that
could result in acquiring 15 percent or more, of the aggregate number of votes entitled to be cast by all then outstanding shares of Common Stock (a Stock Acquisition). Following a Stock
Acquisition, each Right holder, except the 15 percent or more stockholder, has the right to receive, upon exercise, common shares valued at twice the then applicable exercise price of the Right
(or, under certain circumstances, cash, property or other Company securities), unless the 15 percent or more stockholder has offered to acquire all of the outstanding shares of the Company
under terms that a majority of the independent directors of the Company have determined to be fair and in the best interest of the Company and its stockholders. Similarly, unless certain conditions
are met, if the Company engages in a merger or other business combination following a Stock Acquisition where it does not survive or survives with a change or exchange of its common shares or if
50 percent or more of its assets, earning power, or cash flow is sold or transferred, the Rights will become exercisable for shares of the acquirer's stock having a value of twice the exercise
price (or under certain circumstances, cash or property). The Rights are not exercisable, however, until the Company's right of redemption described below has expired. Generally, Rights may be
redeemed for $0.01 each (in cash, common shares or other consideration the Company deems appropriate) until the earlier of (i) the tenth day following public announcement that a
15 percent or greater position has been acquired in the Company's stock or (ii) the final expiration of the Rights. Until exercise, a Right holder, as such, has no rights as a
stockholder of the Company.

Note 8Contingencies

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

The
Company has contracted with various manufacturers for the manufacture of printed circuit boards and box build assembly for specific Fibre Channel directors and switches. The
agreement with these entities requires the Company to submit purchasing forecasts, place orders and reschedule orders for products as necessary. At September 30, 2001 and December 31,
2000, the entities had on hand materials purchased on behalf of McDATA valued at approximately $37,488,000 and $33,205,000, respectively. In addition, these entities have purchase commitments related
to materials that they have also ordered on McDATA's behalf. The Company may be liable for materials purchased on McDATA's behalf if the Company's actual requirements do not meet or exceed its
forecasts and those materials cannot be redirected to other uses. Management does not currently expect these commitments to have a material adverse effect on the Company's business, results of
operations, financial position or cash flows, however, this assumes the Company meets or exceeds its forecasts going forward. The agreements renew monthly and all parties have customary termination
rights.

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

Note 9Commitments

On February 9, 2001 (and amended on May 18, 2001 and November 9, 2001), the Company entered into a lease with Deutsche Bank AG, New York
Branch ("Deutsche Bank") 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. Construction of the building has commenced and must be completed no later than February 2003. The initial term of the lease is for 78 months, with an
option to renew the lease for additional 12 month terms, subject to certain conditions. The Company, at its option, may purchase the facility during or at the end of the term of the lease at
approximately the amount expended by the lessor to acquire the land and construct the building (approximately $60 million). If the Company does not renew the lease, exercise the purchase option
by the end of the lease, or arrange for the sale of the property to a third-party, the Company has guaranteed a residual value of the facility as a percentage of the original costs (approximately 85%
of such original costs). As part of the lease, the Company has agreed to restrict up to $63 million of its investment securities as collateral for specified obligations under the lease. In
addition, the lease agreement requires that the Company maintain compliance with certain affirmative and negative covenants, representations and warranties, including certain defined financial
covenants. As a result of various charges in the quarter ended September 30, 2001, the fixed charge coverage ratio covenant with Deutsche Bank was not met. On November 9, 2001, Deutsche
Bank waived the noncompliance and redefined the fixed charge coverage ratio to exclude certain one-time non-cash charges. Management believes the Company is otherwise in
compliance with all covenants at September 30, 2001.

The
Company's die-cast chassis supplier for its low-end and mid range switch products experienced financial difficulties during 2001. To ensure continued
product supply until an alternate chassis supply source was secured, the Company provided an interim financing guarantee in the amount of $925,000 to the lender of that supplier. The Company's
obligation to pay amounts due under the guarantee is fully secured by cash collateral on deposit with an escrow agent. The Company has secured a new chassis supply source and is not obligated to
provide any additional financing for the benefit of the supplier. On October 30, 2001, we were notified by the lender that it intended to draw upon the financing guaranty by withdrawing all
cash collateral securing the $925,000 obligation. In consideration for providing the guarantee to the lender, the die-cast supplier provided the Company with subordinated secured
reimbursement promissory notes for the same amount as the guaranty. The Company is in discussion with the die-cast supplier regarding collection on these promissory notes. The Company has
reserved against the full value of these notes.

Note 10Litigation

The Company, two current officers, and a former officer have been named as defendants in purported securities class-action lawsuits filed in the United States
District Court, Southern District of New York.
The first of these lawsuits, filed on July 20, 2001, is captioned Gutner v. McDATA Corporation, Credit Suisse First Boston, Merrill Lynch, Pierce Fenner & Smith Incorporated, Bear,
Stearns & Co., Inc., FleetBoston Robertson Stephenset al., No. 01 CIV. 6627. Three other similar suits have been filed against the
Company. The complaints are substantially identical to numerous other complaints filed against other companies that went public over the last several years. These lawsuits generally allege,
among other things, that the registration statements and prospectus filed with the SEC by such companies were materially false and misleading because they failed to disclose (a) that certain
underwriters had solicited and received excessive and undisclosed commissions from certain investors in

exchange for which the underwriters allocated to those investors material portions of shares in connection with the initial public offerings ("IPOs") and (b) that certain of the underwriters
had entered into agreements with customers whereby the underwriters agreed to allocate IPO shares in exchange for which the customers agreed to purchase additional company shares in the aftermarket at
pre-determined prices. The complaints relating to the Company allege claims against the Company, two of the Company's current officers, a former officer of the Company and Credit Suisse
First Boston, the lead underwriter of the Company's August 9, 2000 initial public offering, under Sections 11 and 15 of the Securities Act of 1933, as amended. The complaints also allege
claims solely against Credit Suisse First Boston and the other underwriter defendants under Section 12(a)(2) of the Securities Act of 1933, as amended, and claims against the individual
defendants under Section 10(b) of the Securities Exchange Act of 1934, as amended. The Company believes that the lawsuits are without legal merit and intends to defend them vigorously.





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

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

Results of Operations

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

|                                  |                                                                                | Three Months Ended
September 30, |      | Nine Months Ended
September 30, |     
|--------------------------------- | ------------------------------------------------------------------------------ | -------------------------------- | ---- | ------------------------------- | ----
|
|Revenue                           |                                                                                | 100.0                            | %    | 100.0                           | %   
|Cost of revenue                   |                                                                                | 73.7                             |      | 46.6                            |     
|                                  |                                                                                |                                  |      |                                 |     
|Gross profit                      |                                                                                | 26.3                             |      | 53.4                            |     
|Operating expenses:               |                                                                                |                                  |      |                                 |     
|                                  | Research and development                                                       |                                  | 15.5 |                                 | 16.0
|                                  | Selling and marketing                                                          |                                  | 21.4 |                                 | 13.7
|                                  | General and administrative                                                     |                                  | 5.4  |                                 | 3.1 
|                                  | Acquired in-process research & development and other acquisition related costs |                                  | 10.7 |                                 |    
|                                  | Amortization of deferred compensation                                          |                                  | 2.0  |                                 | 2.4 
|                                  |                                                                                |                                  |      |                                 |     
|                                  |                                                                                | Total operating expenses         |      | 55.0                            |     
|Income (loss) from operations     |                                                                                | (28.7                            | )    | 18.2                            |     
|Interest income (expense), net    |                                                                                | 3.8                              |      | 4.7                             |     
|                                  |                                                                                |                                  |      |                                 |     
|Income (loss) before income taxes |                                                                                | (24.9                            | )    | 22.9                            |     
|Income tax expense (benefit)      |                                                                                | (9.2                             | )    | 9.5                             |     
|                                  |                                                                                |                                  |      |                                 |     
|Net income (loss)                 |                                                                                | (15.7                            | )%   | 13.4                            | %   
|                                  |                                                                                |                                  |      |                                 |     

Three Months ended September 30, 2001 and 2000



Total revenue increased by 29.7% to $86.6 million for the quarter ended September 30, 2001 from $66.8 million for the quarter ended
September 30, 2000. For the quarter ended September 30, 2001, approximately 68% of our revenues came from sales to EMC, excluding ESCON service fees. Although we anticipate this
percentage to decrease as we increase our revenue from other sources, we expect a majority of our revenues in the foreseeable future to be derived from EMC.

Approximately
80% of the increase in revenues from September 30, 2000 relates to product revenue, which increased to $76.0 million for the quarter ended
September 30, 2001 from $60.0 million for the quarter ended September 30, 2000. This increase reflects our continued leadership in the Director-class products, as well as
acceptance of our new switch products introduced in 2001. Software and professional service revenue increased 111% to $6.1 million for the quarter ended September 30, 2001
from $2.9 million for the quarter ended September 30, 2000. Other revenues for the quarter, including the ESCON service fee, increased 19% to $4.5 million for the quarter ended
September 30, 2001 from $3.8 million for the quarter ended September 30, 2000. This reflected the growth in maintenance fees, which outpaced declining service fees related to the
ESCON products. We anticipate

that service revenue from EMC under the ESCON service agreement will continue to decrease in future years.



Gross profit decreased by 36.0% to $22.8 million for the quarter ended September 30, 2001 from $35.7 million for the quarter ended
September 30, 2000. The gross profit percentage decreased to 26.3% at September 30, 2001 from 53.4% at September 30, 2000. During the third quarter of 2001, the Company completed
a thorough review of operations including an analysis of inventory transferred from its discontinued suppliers, a review of obsolescence, end-of-life inventories,
on-going inventory commitments and the completion of a physical inventory. Based on this review, the Company identified and recorded an inventory-related charge of $14.7 million.
There can be no assurance that additional inventory write-downs will not be needed in the future and future write-downs could have a material and adverse affect on the Company's future operating
results. Excluding the $14.7 million inventory-related charge, the gross profit percentage of revenue decreased to 42.9% in the quarter ended September 30, 2001. This decrease from the
quarter ended September 30, 2000, in gross profit percentage was primarily attributable to increased manufacturing and inventory 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 die-cast chassis supplier.



Research and Development Expenses.Research and development expenses were $13.4 million in the quarter ended
September 30, 2001 compared with $10.7 million in the quarter ended September 30, 2000. The $2.8 million or 25.9% increase in expenses was primarily attributable to
increased staffing levels, expenditures for prototype materials, design consulting services and other materials and services related to the design and development of new technology, and to new
products and enhancements to our existing products.

Selling and Marketing Expenses.Selling and marketing expenses increased by 102.7% to $18.6 million for the
third quarter of 2001 from $9.2 million for the third quarter of 2000. This increase was primarily attributable to increased sales force staffing, as the number of our sales force employees
increased to 196 at September 30, 2001 from 94 at September 30, 2000. There were also increases in costs of marketing and public relations programs and expansion of our field offices and
labs used for product demonstration and systems integration testing. This increase was part of the planned ramp-up of our direct assist sales organization and brand marketing in support of
new products and distribution channel expansion.

General and Administrative Expenses.General and administrative expenses increased by 126.5% to $4.7 million for
the third quarter of 2001 from $2.1 million for the third quarter of 2000. This increase was due primarily to increased staffing levels and costs of operating as a public company, including
proxy filing and annual meeting costs.

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

The IPR&D arose from SANavigator's on-going development of the next-generation of SANavigator software. This software is intended to significantly enhance the
features of the current version of SANavigator software. The status of the development and the complexity of the work completed at the acquisition date consisted of several factors including the
complexity of working with diverse servers and storage devices and integrating with other applications. Overall, SANavigator's IPR&D project was estimated to be approximately 40% complete. SANavigator
estimated that the project would be completed at the end of 2001, after which time it expected to begin generating economic benefits from the completed product. In total, costs to complete the IPR&D
are expected to be approximately $2.1 million. The nature of the efforts to develop the acquired technologies into a commercially viable product consists principally of designing and testing
activities, including qualification. Failure to bring this product to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on emerging markets and could
have a material adverse impact on our business and operating results.

Amortization of Deferred Compensation.In prior periods, we recorded deferred compensation in connection with stock
options grants. In addition, during the quarter ended September 30, 2001, stock awards were granted to certain employees of SANavigator contingent upon their continued
employment. These awards were recorded as deferred compensation. We are amortizing all deferred compensation on a straight-line basis over the vesting period of the applicable options and
awards, resulting in amortization expense of $2.0 million during the quarter ended September 30, 2001 and $2.1 million during the quarter ended September 30, 2000 (of which
approximately $0.3 million and $0.5 million was included in cost of revenue for the three months ended September 30, 2001 and 2000, respectively).

Interest Income, net.Interest income consisted primarily of interest earnings on our cash, cash equivalents and
various investment holdings. Increases in interest income were due primarily from the investment of the net proceeds from our initial public offering in August 2000. Net interest income
increased to $3.3 million for the quarter ended September 30, 2001 from $3.1 million for the quarter ended September 30, 2000.

Provision for Income Taxes.The effective tax rates for the quarters ended September 30, 2001 and 2000 were
37.0% and 41.4%, respectively. The effective tax rate in 2001 decreased primarily due to a higher percentage of our investments held in tax-exempt instruments. As we liquidate our
tax-exempt investments, our effective tax rate may increase.

Nine Months ended September 30, 2001 and 2000



Total revenue increased by 47.3% to $250.9 million for the nine months ended September 30, 2001 from $170.4 million for the
nine months ended September 30, 2000. Approximately 89% of the increase in revenues from September 30, 2000 relate to product revenue, which increased to $223.3 million for
the nine months, ended September 30, 2001 from $151.7 million for the nine months ended September 30, 2000. This increase reflects our continued leadership in the
Director-class products, as well as acceptance of our new switch products introduced in 2001. Software and professional services revenue increased 125% to $14.6 million for the
nine months ended September 30, 2001 from $6.5 million for the nine months ended September 30, 2000. Other revenues for the nine months ended
September 30, 2001, including the ESCON service fee, increased 7%to $13.0 million for the nine months ended September 30,
2001 from $12.2 million for the nine months ended September 30, 2000. We anticipate that service revenue from EMC under the ESCON service agreement will decrease in
future years.





Gross profit increased by 6.0% to $94.4 million for the nine months ended September 30, 2001 from $89.0 million for the nine months
ended September 30, 2000. The gross profit percentage decreased to 38% at September 30, 2001 from 52% at September 30, 2000. During the third quarter of 2001, the Company
completed a thorough review of operations including an analysis of inventory transferred from its discontinued suppliers, a review of obsolescence, end-of-life inventories,
on-going inventory commitments and the completion of a physical inventory. Based on this review, the Company identified and recorded an inventory-related charge of $14.7 million.
There can be no assurance that additional inventory write-downs will not be needed in the future and future write-downs could have a material and adverse affect on the Company's future operating
results. Excluding the $14.7 million inventory-related charge, the gross profit percentage of revenue decreased to 43.3% in the nine months ended September 30, 2001. This decrease
in gross profit percentage was attributable primarily to increased manufacturing and inventory 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 die-cast chassis supplier.



Research and Development Expenses.Research and development expenses were $34.9 million in the
nine months ended September 30, 2001 compared with $27.8 million in the nine months ended September 30, 2000. The $7.0 million or 25.2% increase in expenses
was primarily attributable to increased staffing levels, expenditures for prototype materials, design consulting services and other materials and services related to the design and development of new
technology, and to new products and enhancements to our existing products.

Selling and Marketing Expenses.Selling and marketing expenses increased by 106.9% to $47.9 million for the
nine months ended September 30, 2001 from $23.1 million for the nine months ended September 30, 2000. This increase was primarily attributable to increased sales
force staffing, as the number of our sales force employees increased to 196 at September 30, 2001 from 94 at September 30, 2000. There were also increases in costs of marketing and
public relations programs and expansion of our field offices and labs used for product demonstration and systems integration testing. This increase was part of the planned ramp-up of our
direct assist sales organization and brand marketing in support of new products and channel expansion.

General and Administrative Expenses.General and administrative expenses increased by 163.9% to $13.1 million
for the nine months ended September 30, 2001 from $5.0 million for the nine months ended
September 30, 2000. This increase was due primarily to increased staffing levels, expenses related to the distribution of McDATA common stock by EMC, and costs of operating as a public company.

Acquired In-Process Research and Development and Other Acquisition-related Costs. In connection with our acquisition of
SANavigator in September 2001, we incurred non-recurring acquisition costs and integration-related charges. Additionally, a portion of the SANavigator purchase price was allocated
to in-process research and development (IPR&D). This IPR&D was expensed at the time of purchase because technological feasibility had not been established and no future alternative use
existed. The IPR&D charge totaled $7.2 million for the nine months ended September 30, 2001. There were no corresponding charges for the nine months ended
September 30, 2000. The other acquisition-related charges recorded during the nine months ended September 30, 2001, related primarily to one-time consideration paid
for the completion of ongoing employment arrangements with SANavigator employees.

The
IPR&D arose from SANavigator's on-going development of the next-generation of SANavigator software. This software is intended to significantly enhance the
features of the current version of SANavigator software. The status of the development and the complexity of the work

completed at the acquisition date consisted of several factors including the complexity of working with diverse servers and storage devices and integrating with other applications. Overall,
SANavigator's IPR&D project was estimated to be approximately 40% complete. SANavigator estimated that the project would be completed at the end of 2001, after which time it expected to begin
generating economic benefits from the completed product. In total, costs to complete the IPR&D are expected to be approximately $2.1 million. The nature of the efforts to develop the acquired
technologies into a commercially viable product consists principally of designing and testing activities, including qualification. Failure to bring this product to market in a timely manner could
result in a loss of market share or a lost opportunity to capitalize on emerging markets and could have a material adverse impact on our business and operating
results.

Amortization of Deferred Compensation.In prior periods, we recorded deferred compensation in connection with stock
options grants. In addition, during the nine months ended September 30, 2001, stock awards were granted to certain employees of SANavigator contingent upon their continued employment.
These awards were recorded as deferred compensation. We are amortizing all deferred compensation on a straight-line basis over the vesting period of the applicable options and awards,
resulting in amortization expense of $6.4 million during the nine months ended September 30, 2001 and $6.1 million during the nine months ended September 30,
2000 (of which approximately $1.3 and $1.4 million was included in cost of revenue for these nine month periods ended September 30, 2001 and 2000, respectively).

Interest Income, net.Interest income consisted primarily of interest earnings on our cash, cash equivalents and
various investment holdings. Increases in interest income were due primarily from the
investment of the net proceeds from our initial public offering in August 2000. Net interest income increased to $11.7 million for the nine months ended September 30, 2001
from $3.2 million for the nine months ended September 30, 2000. If interest rates continue to decrease, interest income may decrease in future periods.

Provision for Income Taxes.The effective tax rates for the nine months ended September 30, 2001 and 2000
were 37.0% and 41.3%, respectively. The effective tax rate in 2001 decreased primarily due to a higher percentage of our investments held in tax-exempt instruments. As we liquidate our
tax-exempt investments, our effective tax rate may increase.

Liquidity and Capital Resources

Net cash used by operating activities was $14.3 million for the first nine months of 2001, reflecting net increases in working capital
components, particularly inventory related to the introduction and initial shipments of products introduced in 2001.

Net
cash used in investing activities for the first nine months of 2001 was $89.7 million, related to net purchases of long-term investments, purchases of
property and equipment and the third-quarter acquisition of SANavigator, Inc. for $29.75 million.

Net
cash provided by financing activities for the first nine months of 2001 totaled $1.3 million, reflecting proceeds from the exercise of employee stock options,
partially offset by repayment of capital lease obligations.

Our
principal sources of liquidity at September 30, 2001 consisted of our cash and short-term investment securities on hand, which totaled approximately
$219 million, and our equipment financing arrangements, which totaled approximately $3.1 million. Borrowings under our equipment financing arrangements are secured by the related capital
equipment and are payable through 2004. In addition, long-term investment securities totaled $81.0 million.



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

Inventories
increased 58.4% from December 31, 2000 to September 30, 2001. Inventory turns, excluding the $14.7 million inventory-related charge during the third
quarter of 2001, were 5.4 at September 30, 2001 and 6.6 at December 31, 2000. The inventory levels and inventory turns reflected new product introductions and purchases of certain
components with long lead times. 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.

On
February 9, 2001 (and amended on May 18, 2001 and November 9, 2001), we entered into a lease and associated agreements with Deutsche Bank AG, New York Branch
("Deutsche Bank") for the lease of a 167,000 (approx.) square foot multi-story office and engineering building to be constructed on a 106 acre parcel of land located in Broomfield, Colorado.
Construction must be completed no later than February 2003. As part of the transaction, we have guaranteed a residual value of the facility to Deutsche Bank of approximately 85% of the total
original cost. We have agreed to restrict up to $63 million of our investment securities as collateral for our specified obligations under the lease. These investment securities are restricted
as to withdrawal and are managed by a third party subject to certain limitations. In addition, the lease agreement requires that the Company maintain compliance with certain affirmative and negative
covenants, representations and warranties, including certain defined financial covenants. As a result of various charges in the quarter ended September 30, 2001, the fixed charge coverage ratio
covenant with Deutsche Bank was not met. On November 9, 2001, Deutsche Bank waived the noncompliance and redefined the fixed charge coverage ratio to exclude certain one-time
non-cash charges.

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

Risk Factors

RISKS
RELATED TO OUR BUSINESS

Recent risks related to the economy, terrorist attacks and inventory

The economic slowdown in 2001 and the September 11, 2001 terrorist attacks may delay purchasing decisions and capital spending by our customers. This
may have a material adverse affect on our revenues. During the first and second quarters of 2001, we experienced increased manufacturing and component costs related to the transition to multiple
product lines, and quality issues on parts. Specifically, we incurred 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 such products. During the third quarter of 2001, we continued to use such high cost inventory which negatively affected our
gross margins. Additionally, during the third quarter of 2001, we completed a thorough review of our operations including an analysis of inventory transferred from our discontinued suppliers, a review
of obsolescence, end-of-life inventories, on-going inventory commitments and the completion of a physical inventory. Based on this review, we recorded a
$14.7 million inventory charge. There can be no assurance that additional inventory write-downs will not be needed in the future and future write-downs could have a material and adverse affect
on our future operating results. Finally, our die cast chassis supplier for our low-end and mid range switch products experienced financial difficulties and, during 2001, we supplied an
interim financing guarantee in the amount of $925,000 to the lender of that supplier which was drawn upon on October 30, 2001. We have secured a new chassis

supply source and are not obligated to provide any additional financing for the benefit of the previous supplier.

We incurred losses in third quarter 2001 and may not sustain profitability in the future.

We incurred a substantial loss in third quarter 2001. Our future operating results will depend on many factors, including the growth of the Fibre Channel
market, market acceptance of new products, demand for our products and levels of product, price competition and reaching targeted costs for our products. In addition, we expect to incur continued
significant product development, sales and marketing, and general and administrative expenses.

SANavigator Acquisition

In late September 2001, we closed our acquisition of the assets of SANavigator. Sanavigator is in the early stages of selling its software product.
Factors that may affect the financial success of SANavigator
include our ability to quickly complete integration of SANavigator operationally, our ability to ramp software sales quickly and our ability to retain managerial, technical and sales talent.

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

We depend on EMC for most of our total revenue. Sales and services to EMC, which is an original equipment manufacturer customer, represented approximately 68%
of our revenue, excluding ESCON service revenue, for the quarter ended September 30, 2001. In addition, IBM represented approximately 14% of our total revenue for the same period. We anticipate
that our future operating results will continue to depend heavily on sales to EMC and IBM. Therefore, the loss of either EMC or IBM as a customer, or a significant reduction in sales to either EMC or
IBM in any fiscal period, could significantly reduce our revenue.

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

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



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

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

During the quarter ended September 30, 2001, we derived approximately 64% 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 original equipment manufacturers, 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.

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

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

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

We currently purchase several key components from single or limited sources. We purchase application specific integrated circuits, or ASICs, printed circuit
boards and power supplies from single sources, and gigabit interface converters and 1x9 transceivers from limited sources. Additional sole- or limited-sourced components may be
incorporated into our products in the future. Delays in the delivery of components for our products could result in decreased revenue. We do not have any long-term supply contracts to
ensure sources of supply. 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 Systems Inc. (SCI) to manufacture all of our circuit boards and to perform extensive testing and assembly of our products. We do not have
a long-term supply contract with this manufacturer and, therefore, it is not obligated to supply products to us for any specific period, or in any specific quantity, except as may be
provided in a particular purchase order. We generally place orders for circuit boards with our contract manufacturer approximately four to five months prior to the anticipated delivery date,
with order volumes based on forecasts of demand for our products. If we fail to forecast demand for our products accurately, we may be unable to obtain adequate manufacturing capacity from our
contract manufacturer to meet our customers' delivery requirements, or we may accumulate excess inventories. We may be unable to respond adequately to unexpected increases in customer purchase orders,
and therefore be unable to benefit from this incremental demand. Our contract manufacturer has not provided assurances to us that adequate capacity will be available to us within the time required to
meet additional demand for our products. We are in the process of implementing an "outsourcing-focused" manufacturing model with our contract manufacturer. This effort will take time and further
contract negotiations.

In
addition, we coordinate our efforts with those of our component suppliers and our contract manufacturer in order to rapidly achieve volume production. We have experienced and may
continue to experience production delays and quality control problems with certain of our suppliers and with our contract manufacturer, which, if not effectively managed, could prevent us from
satisfying our production requirements. If we should fail to manage effectively our relationships with our component suppliers and our contract manufacturer, or if any of our suppliers or our
manufacturer experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, our ability to ship products to our customers could be delayed, and our
competitive position and reputation could be harmed. Qualifying a new contract manufacturer and commencing volume production can be expensive and time consuming. If we are required to change or choose
to change contract manufacturers, we may lose revenue and damage our customer relationships.

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

Our name is not widely recognized as a brand in the marketplace. We have operated substantially as a separate company from EMC only since October 1997.
EMC, which currently accounts for the majority of our revenue, markets our products under its own brand name. As a result, we have not fully established our brand name. We believe that establishing
and maintaining the McDATA brand is a critical component in maintaining and developing strategic original equipment manufacturer, reseller and systems integrator relationships, and the importance of
brand recognition will increase as the number of vendors of competitive products increases. Our failure to successfully develop our brand

may prevent us from expanding our business and growing our revenue. Similarly, if we incur excessive expenses in an attempt to promote and maintain the McDATA brand, our business, financial condition
and results of operations could be seriously harmed.

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

The market for storage area networks, or SANs, and related products has only recently begun to develop and continues to evolve. Because this market is
relatively new, it is difficult to predict its potential size or future growth rate. Our Director-class products, from which we derived approximately 64% of our total revenues in the quarter ended
September 30, 2001, 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:



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

Our original equipment manufacturers, 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 any revenue from these relationships.

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

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

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

Our success depends to a significant degree upon the continued contributions of our key management, technical, sales and marketing, finance and operations
personnel, many of whom would be difficult to replace. In particular, we believe that our future success is highly dependent on John F. McDonnell, our Chief Executive Officer and the Chairman of our
Board of Directors. In addition, our engineering and product development teams are critical in developing our products and have developed important relationships with customers and their technical
staffs. The loss of any of these key personnel

could harm our operations and customer relationships. We do not have key person life insurance on any of our key personnel.

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

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

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

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

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

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

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







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

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

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

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



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

In
March 1999, we, as an EMC subsidiary, granted IBM a license to all of our patents under a cross license agreement between IBM and EMC. Under the terms of that agreement,
effective upon EMC's February 7, 2001 distribution of our Class A common stock indirectly held by it to its stockholders, the sublicense we previously held to those IBM patents
terminated. We believe that the termination of the sublicense does not materially affect our business. We are not aware of any issued or pending IBM patents that are infringed by our products, but if
IBM were to allege any such infringement, we may have difficulty negotiating a settlement. If we were unable to negotiate a settlement with IBM, our ability to produce an infringing product could be
affected, which could materially and adversely affect our business.

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

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

Our stock price is volatile.

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

Defending Lawsuits

As described in Part II, Item 1 of this Quarterly Report, several purported securities class action lawsuits have been filed against us. Even though we
believe the suits are without legal merit, we could incur substantial costs in defending ourselves. In addition, defending ourselves from such claims could divert the attention of management away from
our operations.

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 68% of our revenue, excluding ESCON service revenue, for the quarter ended September 30, 2001. In addition, in some instances, our ability to terminate these
agreements is limited, which may prevent us from being able to negotiate more favorable terms with EMC or from entering into similar agreements with third parties.

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

For the quarter ended September 30, 2001, our revenues from EMC represented approximately 68% of our total revenue, excluding ESCON service revenue. In
addition, during the same period, revenue under our service agreement with EMC Corporation, pursuant to which we manufacture and supply ESCON switching devices for IBM, represented approximately 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 indirectly held by it to its
stockholders may affect the operation of our business, limit our ability to finance our operations or prevent a change in control of our company.

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



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

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

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

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



As
a result, we may be liable to EMC under the Tax Sharing Agreement upon the occurrence of events that are beyond our control. If the distribution of our Class A common stock
fails to qualify as a

tax-free distribution, EMC would incur tax liability as if our Class A common stock that was distributed by EMC had been sold by EMC for its fair market value in a taxable
transaction. In the event that we
are required to indemnify EMC because the distribution of our Class A common stock fails to qualify as a tax-free distribution, our liability could exceed 35% of the value of the
Class A common stock distributed by EMC as determined on the date of the distribution.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risks

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

Interest Rate Risk

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

Foreign Currency Exchange Risk

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

Credit Risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of temporary cash investments, investments and trade
receivables. We place our temporary cash investments and investment securities in investment grade instruments and limit the amount of investment with any one financial institution. We evaluate the
credit risk associated with each of our customers and have concluded that we do not have a material exposure to credit risk with our customers.





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 operations. 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.

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

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, 2001. At that meeting, three proposals were submitted to a vote of the Company's
stockholders. Proposal 1 was a proposal to elect one director (with John Gerdelman being a nominee) to serve until the 2004 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, 2001. Proposal 3 was a proposal to approve the amendment to the
Company's Stock Option Plan. For further

information regarding the annual meeting, please see the Company's Proxy Statement on Schedule 14A filed on June 6, 2001.

|                                                                  |  | Number of Votes
|----------------------------------------------------------------- |  | ---------------
|
|Proposal 1Election of director: John Gerdelman                   |  | 70,544,807     
|Proposal 2Ratification of PricewaterhouseCoopers LLP appointment |  | 70,462,031     
|Proposal 3Approval of amendment to Stock Option Plan             |  | 41,230,534     

Consequently,
all proposals were passed by stockholders.

ITEM 5. Other Information

In early November, we announced that we had entered into a three year OEM agreement with Compaq Computer Corporation for the sale of certain of our products.

ITEM 6. Exhibits and Reports on Form 8-K

|(3.1    | ) | Amended and Restated Certificate of Incorporation of the Company                                                                                                                                         
|------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.2    | ) | Amended and Restated By-laws of the Company                                                                                                                                                              
|(4.1    | ) | Form of Company's Class B Common Stock Certificates                                                                                                                                                      
|(4.1.1  | ) | Form of Company's Class A Common Stock Certificates                                                                                                                                                      
|(4.2    | ) | Investors' Rights Agreement dated as of October 1, 1997 by and among the Company, EMC Corporation, McDATA Holdings Corporation and Certain Investors                                                     
|(4.3    | ) | Amendment No. 1 to the Investors' Rights Agreement dated May 23, 2000 by and among the Company, McDATA Holdings Corporation and certain Investors                                                        
|(4.4    | ) | Rights Agreement dated as of May 18, 2001, by and between the Company and the Bank of New York, as rights agent (Filed in Form 8-K dated May 21, 2001).                                                  
|(10.1   | ) | Asset Transfer Agreement dated as of October 1, 1997 by and among the Company, EMC Corporation, and McDATA Holdings Corporation                                                                          
|(10.2   | ) | Investors' Rights Agreement dated as of October 1, 1997 by and among the Company, EMC Corporation, McDATA Holdings Corporation and certain Investors (see Exhibit 4.2)                                   
|(10.3   | ) | Amendment No. 1 to the Investors' Rights Agreement dated May 23, 2000 by and among the Company, McDATA Holdings Corporation and certain Investors (see Exhibit 4.3)                                      
|(10.3.1 | ) | Termination of Investors' Rights Agreement, dated as of January 24, 2001, by and among the Company, McDATA Holdings Corporation and Certain Investors (Filed in Form 10-K for the fiscal year ended 2000)
|(10.4   | ) | Services Agreement dated as of October 1, 1997 by and among EMC Corporation, McDATA Holdings Corporation and the Company                                                                                 

|(10.5    | )  | Letter Agreement dated April 19, 1999 by and between the Company and McDATA Holdings Corporation                                                   
|-------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(10.6    | )  | Technology Rights Agreement dated as of October 1, 1997 by and among the Company, EMC Corporation and McDATA Holdings Corporation                  
|(10.7    | )  | Amended and Restated Tax Sharing Agreement dated as of May 31, 2000 by and among EMC Corporation, McDATA Holdings Corporation and the Company      
|(10.8    | )  | Form of Master Transaction Agreement entered into by and among the Company and EMC Corporation dated May 31, 2000                                  
|(10.9    | )  | Form of Indemnification and Insurance Matters Agreement entered into by and among the Company and EMC Corporation dated May 31, 2000               
|(10.10   | )  | Master Confidential Disclosure and License Agreement dated as of May 31, 2000 by and among the Company and EMC Corporation                         
|(10.11   | )+ | Reseller Agreement dated as of February 22, 2000 by and between International Business Machines Corporation and the Company                        
|(10.12   | )  | Amendment Number One to the Resale Agreement dated September 30, 2000 by and between International Business Machines Corporation and the Company   
|(10.13   | )+ | OEM Purchase and License Agreement dated as of May 19, 2000 by and between EMC Corporation and the Company                                         
|(10.13.1 | )+ | Amendment to OEM Purchase and License Agreement dated as of June 21, 2001, by and between EMC Corporation and the Company                          
|(10.14   | )+ | Development Agreement dated as of May 19, 2000 by and between EMC Corporation and the Company                                                      
|(10.15   | )+ | Manufacturing Agreement dated as of June 17, 1992 by and between SCI Systems, Inc. and the Company                                                 
|(10.16   | )+ | OEM and License Agreement dated as of April 27, 1999 by and between Brocade Communication Systems, Inc. and the Company                            
|(10.17   | )  | Lease dated September 12, 1997 by and between the Company and WHLNF Real Estate Limited Partnership                                                
|(10.18   | )  | Lease dated November 2, 1999 by and between the Company and the Mills Family LLC                                                                   
|(10.19   | )  | Lease dated May 28, 1997 by and between the Company and 1211486 Ontario Limited                                                                    
|(10.19.1 | )  | Lease dated October 6, 2000, by and between the Company and Amber Drive I, LLC (Filed in Form 10-Q for the fiscal quarter ended September 30, 2000)
|(10.19.2 | )  | Lease dated February 9, 2001 by and between the Company and Deutsche Bank (Filed in Form 10-K for the fiscal year ended 2000)                      
|(10.19.3 | )  | Participation Agreement dated February 9, 2001 by and between the Company and Deutsche Bank (Filed in Form 10-K for the fiscal year ended 2000)    
|10.19.4  |    | Second Amendment to Participation Agreement dated November 9, 2001 by and between the Company and Deutsche Bank                                    
|(10.20   | )* | Form of Severance Agreement                                                                                                                        
|(10.21   | )* | 1997 Stock Option Plan                                                                                                                             

|10.21.1 | *  | 2001 McDATA Equity Incentive 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 31, 2001 by and among the Company, SANavigator, Inc., Western Digital Corp., and Connex Inc.

---

We
filed a Current Report on Form 8-K dated September 7, 2001 to report the signing of an asset purchase agreement to acquire substantially all of the assets
of SANavigator, Inc.





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
|----------------- |  | ------------------
|November 14, 2001 |  | By: