Brocade Communications Systems (BRCD) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended July 30, 2011

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: 000-25601

Brocade Communications Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	77-0409517
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

130 Holger Way

San Jose, CA 95134

(408) 333-8000

(Address, including zip code, of registrant’s

principal executive offices and telephone

number, including area code)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock as of August 26, 2011 was 490,636,405 shares.

BROCADE COMMUNICATIONS SYSTEMS, INC.

FORM 10-Q

QUARTER ENDED July 30, 2011

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended July 30, 2011 and July 31, 2010		4
	Condensed Consolidated Balance Sheets as of July 30, 2011 and October 30, 2010		5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 30, 2011 and July 31, 2010		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		45
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		46
Item 1A.	Risk Factors		46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 5.	Other Information		59
Item 6.	Exhibits		60
SIGNATURES			62

2

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and future results. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding future revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, debt repayments, share repurchases or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning expected development, performance or market share relating to products or services; any statements regarding future economic conditions or performance; any statements regarding pending litigation, including claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Words such as “expects,” “anticipates,” “assumes,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which Brocade operates, and the beliefs and assumptions of management. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II - Other Information, Item 1A. Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Further, Brocade undertakes no obligation to revise or update any forward-looking statements for any reason.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010
	(In thousands, except per share amounts)
Net revenues
Product	$	414,298		$	415,441		$	1,328,821		$	1,272,207
Service		88,552			88,811			268,148			270,316
Total net revenues		502,850			504,252			1,596,969			1,542,523
Cost of revenues (1)
Product (1)		149,321			175,392			498,012			502,211
Service (1)		47,002			43,439			142,939			132,467
Total cost of revenues		196,323			218,831			640,951			634,678
Gross margin
Product		264,977			240,049			830,809			769,996
Service		41,550			45,372			125,209			137,849
Total gross margin		306,527			285,421			956,018			907,845
Operating expenses:
Research and development		87,320			85,884			270,669			265,317
Sales and marketing (1)		153,345			134,793			462,991			388,871
General and administrative		16,617			17,540			53,176			49,719
Legal fees associated with indemnification obligations and other related costs, net		—			(74	)		124			504
Amortization of intangible assets		15,023			16,190			46,236			49,433
Acquisition and integration costs		—			—			—			204
Total operating expenses		272,305			254,333			833,196			754,048
Income from operations		34,222			31,088			122,822			153,797
Interest and other income (loss), net		(673	)		(1,399	)		(297	)		(2,231	)
Interest expense		(42,066	)		(22,061	)		(84,357	)		(63,656	)
Gain (loss) on sale of investments and property, net		154			(24	)		137			(8,599	)
Income (loss) before income tax benefit		(8,363	)		7,604			38,305			79,311
Income tax benefit		(10,300	)		(14,926	)		(16,629	)		(14,985	)
Net income	$	1,937		$	22,530		$	54,934		$	94,296
Net income per share — basic	$	0.00		$	0.05		$	0.12		$	0.21
Net income per share — diluted	$	0.00		$	0.05		$	0.11		$	0.20
Shares used in per share calculation — basic		483,744			449,489			474,020			443,795
Shares used in per share calculation — diluted		509,548			481,863			500,741			481,764

(1) The three and nine months ended July 31, 2010 are as adjusted due to the reclassification of system engineer costs from cost of revenues to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

See accompanying notes to condensed consolidated financial statements.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	July 30, 2011			October 30, 2010
	(In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents	$	472,559		$	333,984
Short-term investments		781			1,998
Total cash, cash equivalents and short-term investments		473,340			335,982
Accounts receivable, net of allowances of $8,377 and $6,721 at July 30, 2011 and October 30, 2010, respectively		296,030			317,363
Inventories		78,430			76,808
Deferred tax assets		80,719			70,296
Prepaid expenses and other current assets		63,653			65,017
Total current assets		992,172			865,466
Property and equipment, net		534,179			539,117
Goodwill		1,635,499			1,644,950
Intangible assets, net		254,364			344,000
Non-current deferred tax assets		226,267			203,454
Other assets		38,444			48,203
Total assets	$	3,680,925		$	3,645,190
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	115,476		$	147,130
Accrued employee compensation		89,310			91,688
Deferred revenue		197,330			185,623
Current liabilities associated with facilities lease losses		2,168			5,992
Current portion of capital lease obligations		1,839			1,761
Current portion of term loan		48,552			28,779
Other accrued liabilities		77,653			107,957
Total current liabilities		532,328			568,930
Non-current capital lease obligations, net of current portion		5,392			6,782
Term loan, net of current portion		187,854			297,118
Senior Secured Notes		595,692			595,373
Non-current liabilities associated with facilities lease losses		2,601			3,984
Non-current deferred revenue		66,835			65,242
Non-current income tax liability		63,372			61,421
Other non-current liabilities		10,371			8,671
Total liabilities		1,464,445			1,607,521
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.001 par value, 800,000 shares authorized:
Issued and outstanding: 490,000 and 461,291 shares at July 30, 2011 and October 30, 2010, respectively		490			461
Additional paid-in capital		2,174,341			2,047,563
Accumulated other comprehensive loss		(5,757	)		(2,827	)
Retained earnings (Accumulated deficit)		47,406			(7,528	)
Total stockholders’ equity		2,216,480			2,037,669
Total liabilities and stockholders’ equity	$	3,680,925		$	3,645,190

See accompanying notes to condensed consolidated financial statements.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	July 30, 2011			July 31, 2010
	(In thousands)
Cash flows from operating activities:
Net income	$	54,934		$	94,296
Adjustments to reconcile net income to net cash provided by operating activities:
Excess tax benefits or detriments from stock-based compensation		81			(5,318	)
Depreciation and amortization		155,453			148,106
Loss on disposal of property and equipment		2,046			9,838
Amortization of debt issuance costs and original issue discount		11,924			16,419
Write-off of debt issuance costs and original issue discount on debt extinguishment		25,465			—
Net gains on investments		(348	)		(224	)
Provision for doubtful accounts receivable and sales allowances		8,057			8,706
Non-cash compensation expense		63,405			76,351
Capitalization of interest cost		—			(7,755	)
Changes in assets and liabilities:
Restricted cash		—			12,502
Accounts receivable		13,802			(5,980	)
Inventories		(2,931	)		(15,373	)
Prepaid expenses and other assets		(4,069	)		16,629
Deferred tax assets		23			(281	)
Accounts payable		(31,874	)		(30,122	)
Accrued employee compensation		(22,184	)		(97,970	)
Deferred revenue		13,299			12,503
Other accrued liabilities		(38,877	)		(31,405	)
Liabilities associated with facilities lease losses		(5,207	)		(8,832	)
Net cash provided by operating activities		242,999			192,090
Cash flows from investing activities:
Purchases of short-term investments		(38	)		(41	)
Proceeds from maturities and sale of short-term investments		1,604			1,788
Proceeds from sale of property		—			30,185
Purchases of property and equipment		(76,661	)		(155,970	)
Net cash used in investing activities		(75,095	)		(124,038	)
Cash flows from financing activities:
Payment of debt issuance fees related to the Senior Secured Notes		—			(3,665	)
Payment of principal related to the revolving credit facility		—			(14,050	)
Payment of principal related to the convertible subordinated debt		—			(172,500	)
Payment of principal related to the term loan		(309,897	)		(552,808	)
Payment of fees related to the term loan		(1,090	)		—
Proceeds from term loan		198,949			—
Common stock repurchases		(10,044	)		(25,004	)
Payment of principal related to capital leases		(1,311	)		(494	)
Proceeds from Senior Secured Notes		—			587,968
Proceeds from issuance of common stock, net		93,333			69,883
Excess tax benefits or detriments from stock-based compensation		(81	)		5,318
Net cash used in financing activities		(30,141	)		(105,352	)
Effect of exchange rate fluctuations on cash and cash equivalents		812			(4,356	)
Net increase (decrease) in cash and cash equivalents		138,575			(41,656	)
Cash and cash equivalents, beginning of period		333,984			334,193
Cash and cash equivalents, end of period	$	472,559		$	292,537
Supplemental schedule of non-cash investing and financing activities:
Acquisition of property and equipment through capital leases	$	—		$	9,127

See accompanying notes to condensed consolidated financial statements.

6

BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Brocade Communications Systems, Inc. (“Brocade” or the “Company”) has prepared the accompanying Condensed Consolidated Financial Statements as of July 30, 2011 and for the three and nine months ended July 30, 2011 and July 31, 2010, without audit, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The October 30, 2010 Condensed Consolidated Balance Sheet was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 30, 2010.

In the opinion of management, all adjustments (which include only normal recurring adjustments, except as otherwise indicated) necessary to present a fair statement of financial position as of July 30, 2011, results of operations for the three and nine months ended July 30, 2011 and July 31, 2010, and cash flows for the nine months ended July 30, 2011 and July 31, 2010, have been made. The results of operations for the three and nine months ended July 30, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future period.

The Company’s fiscal year is the 52 or 53 weeks ending on the last Saturday in October. As is customary for companies that use the 52/53-week convention, every fifth year contains a 53-week year. Both fiscal years 2011 and 2010 are 52-week fiscal years. The Company’s next 53-week fiscal year will be fiscal year 2014 and the Company’s next 14-week quarter will be in the second quarter of fiscal year 2014. The Condensed Consolidated Financial Statements include the accounts of Brocade and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, sales allowances and programs, allowance for doubtful accounts, stock-based compensation, purchase price allocations, warranty obligations, inventory valuation and purchase commitments, restructuring costs, facilities lease losses, impairment of goodwill and intangible assets, litigation, income taxes and investments. Actual results may differ materially from these estimates.

Reclassification

During fiscal year 2010, we reviewed our cost classification, primarily related to our system engineer (“SE”) costs that were previously classified within cost of revenues. The SE’s primary role has migrated over time from assisting with customer support to primarily performing pre-sales activity to generate future business, which was enabled by the growth of our support organization, such that in 2010 the majority of the SE’s time was spent on pre-sales activity. As a result of this change, we reclassified the SE costs within our Consolidated Statements of Income starting in fiscal year 2010. These costs are now presented within sales and marketing expenses, as opposed to cost of revenues. The three and nine months ended July 31, 2010 reflect the reclassification of $33.7 million and $97.6 million, respectively, of SE costs from cost of revenues to sales and marketing expenses. These reclassifications did not impact revenues, income from operations, net income or earnings per share for 2010.

Correction of Immaterial Error

The Company’s prior period financial results, including the three and nine months ending July 31, 2010 and six months ending April 30, 2011, have been adjusted to reflect an immaterial correction. During the third fiscal quarter of 2011, the Company identified an error in its accounting for certain sales discounts that impacted multiple prior periods and that had accumulated to an amount of $14.0 million. The Company concluded that the error was not material to any of its prior period financial statements under the applicable guidance for accounting changes and error corrections. The correction resulted in immaterial changes to sales discounts and allowances which affected net revenues during the fiscal years prior to 2009 and including 2009 and 2010 and the six months ended April 30, 2011, resulting in an overstatement of

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net revenues in some periods and an understatement in other periods. Although the error was and continues to be immaterial to prior periods, because of the impact of the cumulative out-of-period correction in the third fiscal quarter of 2011, the Company applied the guidance for accounting changes and error corrections and revised its prior period financial statements presented.

As a result of the revisions, net revenues were increased by $0.7 million for the three months ended July 31, 2010, and decreased by $1.5 million and $1.8 million for the nine months ended July 31, 2010 and six months ended April 30, 2011, respectively. Net current assets and stockholders’ equity were decreased by $8.6 million, net of tax effect, as of October 30, 2010. Additionally, after tax effects, net income increased by $0.6 million for the three months ended July 31, 2010, and decreased by $1.1 million and $1.8 million for the nine months ended July 31, 2010 and six months ended April 30, 2011, respectively.

2. Summary of Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies for the nine months ended July 30, 2011 as compared to those disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 30, 2010.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an update to ASC 220 Comprehensive Income (“ASC 220”): Presentation of Comprehensive Income. The amendments from this update will result in more converged guidance on how comprehensive income is presented under U.S. GAAP and International Financial Reporting Standards (“IFRS”). With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented. Current U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those alternatives is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update eliminates that option. The update to ASC 220 should be applied retrospectively and will be adopted by the Company in the first quarter of fiscal year 2013. The Company does not expect the adoption of ASC 220 to have a material impact on its financial position, results of operations or cash flows.

In May 2011, the FASB issued an update to ASC 820 Fair Value Measurement (“ASC 820”): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments result in common fair value measurement and disclosure requirements under U.S. GAAP and IFRS. The update also provides for certain changes in current U.S. GAAP disclosure requirements, for example with respect to the measurement of level 3 assets and for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The update to ASC 820 should be applied prospectively and it will be adopted by the Company in the second quarter of fiscal year 2012. The Company is currently evaluating the impact of the update but does not expect the adoption of ASC 820 to have a material impact on its financial position, results of operations or cash flows.

In December 2010, the FASB issued an update to ASC 350 Intangibles — Goodwill and Other (“ASC 350”): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The update requires an entity with reporting units that have carrying amounts that are zero or negative to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. This update to ASC 350 will be adopted by the Company in the first quarter of fiscal year 2012. The Company is currently evaluating the impact of the update, but does not expect the adoption of ASC 350 to have a material impact on its financial position, results of operations or cash flows.

In December 2010, the FASB issued an update to ASC 805 Business Combinations (“ASC 805”): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The

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amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The update to ASC 805 will be adopted by the Company for any acquisitions occurring after the beginning of the first quarter of fiscal year 2012, with earlier adoption permitted.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company’s cash, cash equivalents and short-term investments are primarily maintained at five major financial institutions in the United States. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits.

A majority of the Company’s accounts receivable balance is derived from sales to OEM partners in the computer storage and server industry. As of July 30, 2011, three customers accounted for 18%, 12% and 12%, respectively, of total accounts receivable. As of October 30, 2010, three customers accounted for 17%, 14% and 10%, respectively, of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable balances. The Company has established reserves for credit losses, sales allowances, and other allowances.

For the three months ended July 30, 2011, three customers each represented 10% or more of the Company’s total net revenues for a combined total of 43% of total net revenues (of which individual customers representing greater than 10% of total net revenues represented 16%, 15% and 12% of total net revenues, respectively). For the three months ended July 31, 2010, three customers each represented 10% or more of the Company’s total net revenues for a combined total of 44% of total net revenues (of which individual customers representing greater than 10% of total net revenues represented 17%, 15% and 12% of total net revenues, respectively).

The Company currently relies on single and limited sources for multiple key components used in the manufacture of its products. Additionally, the Company relies on multiple contract manufacturers (“CMs”) for the production of its products. Although the Company uses standard parts and components for its products where possible, the Company’s CMs currently purchase, on their behalf, several key components used in the manufacture of products from single or limited supplier sources.

3. Goodwill and Intangible Assets

The following table summarizes goodwill activity by reportable segment during the nine months ended July 30, 2011 (in thousands):

	Data Storage Products			Ethernet Products			Global Services		Total
Balance at October 30, 2010
Goodwill	$	176,989		$	1,356,704		$	157,089	$	1,690,782
Accumulated impairment losses		—			(45,832	)		—		(45,832	)
		176,989			1,310,872			157,089		1,644,950
Tax and other adjustments during the nine months ended July 30, 2011 (1)		(21	)		(9,430	)		—		(9,451	)
Balance at July 30, 2011
Goodwill	$	176,968		$	1,347,274		$	157,089	$	1,681,331
Accumulated impairment losses		—			(45,832	)		—		(45,832	)
	$	176,968		$	1,301,442		$	157,089	$	1,635,499

(1) The goodwill adjustment of $9.5 million was primarily a result of tax benefit from the exercise of stock awards of acquired companies.

The Company conducts its goodwill impairment test annually, as of the first day of the second fiscal quarter, or whenever events or changes in facts and circumstances indicate that the fair value of the reporting unit may be less than its carrying amount. For the annual goodwill impairment test, the Company uses the income approach, the market approach or a combination thereof, to determine each reporting unit’s fair value. The income approach provides an estimate of fair value based on discounted expected future cash flows (“DCF”). The market approach provides an estimate of fair value using various prices or market multiples applied to the reporting unit’s operating results and then applying an appropriate control premium. During the fiscal year 2011 annual goodwill

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impairment test under the first step, the Company used a combination of approaches to estimate each reporting unit’s fair value. The Company believed that at the time of impairment testing performed in second fiscal quarter of 2011, the income approach and the market approach were equally representative of a reporting unit’s fair value.

Determining the fair value of a reporting unit or an intangible asset requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of its reporting units using the income approach include, among other inputs:

• The Company’s operating forecasts;

• Revenue growth rates; and

• Risk-commensurate discount rates and costs of capital.

The Company’s estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of the Company’s regular long-range planning process. The control premium used in market or combined approaches is determined by considering control premiums offered as part of the acquisitions that have occurred in the reporting units’ comparable market segments. Based on goodwill impairment analysis results during the second fiscal quarter of 2011, the Company determined that no impairment needed to be recorded. During the three months ended July 30, 2011, there were no facts and circumstances that indicated that the fair value of the reporting units may be less than their current carrying amount.

Intangible assets other than goodwill are amortized on a straight-line basis over the following estimated remaining useful lives, unless the Company has determined these lives to be indefinite. The following tables present details of the Company’s intangible assets (in thousands, except for weighted-average remaining useful life):

July 30, 2011	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
Trade name	$	13,941	$	11,381	$	2,560		8.51
Core/developed technology		338,158		231,956		106,202		2.09
Customer relationships		364,981		219,379		145,602		2.56
Total intangible assets	$	717,080	$	462,716	$	254,364		2.42
October 30, 2010	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life (in years)
Trade name	$	13,941	$	11,150	$	2,791		9.24
Core/developed technology		338,158		189,643		148,515		2.75
Customer relationships		364,981		172,287		192,694		3.23
Total intangible assets	$	717,080	$	373,080	$	344,000		3.07

The following table presents the amortization of intangible assets included on the Condensed Consolidated Statements of Income (in thousands):

	Three Months Ended				Nine Months Ended
	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Cost of revenues	$	14,466	$	14,467	$	43,400	$	46,783
Operating expenses		15,023		16,190		46,236		49,433
Total	$	29,489	$	30,657	$	89,636	$	96,216

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The following table presents the estimated future amortization of intangible assets as of July 30, 2011 (in thousands):

	Estimated
	Future
Fiscal Year	Amortization
2011 (remaining three months)	$	30,134
2012		107,062
2013		94,057
2014		16,816
2015		1,449
Thereafter		4,846
Total	$	254,364

4. Balance Sheet Details

The following table provides details of selected balance sheet items (in thousands):

	July 30, 2011			October 30, 2010
Accounts Receivable:
Accounts receivable	$	304,407		$	324,084
Allowance for doubtful accounts		(2,644	)		(1,838	)
Sales allowances		(5,733	)		(4,883	)
Total	$	296,030		$	317,363
Inventories:
Raw materials	$	26,969		$	19,384
Finished goods		51,461			57,424
Total	$	78,430		$	76,808
Property and equipment, net:
Computer equipment and software	$	52,567		$	47,949
Engineering and other equipment		344,842			296,383
Furniture and fixtures (2)		28,706			28,283
Leasehold improvements		22,065			20,908
Land and building (3)		384,700			381,480
Subtotal		832,880			775,003
Less: Accumulated depreciation and amortization (1)		(298,701	)		(235,886	)
Total	$	534,179		$	539,117
Other accrued liabilities:
Income taxes payable	$	11,850		$	10,047
Accrued warranty		7,944			5,980
Inventory purchase commitments		4,719			4,930
Accrued sales programs		30,523			26,806
Accrued expenses		11,636			53,616
Others		10,981			6,578
Total	$	77,653		$	107,957

(1) The following table presents the depreciation and amortization of property and equipment included on the Condensed Consolidated Statements of Income (in thousands):

	Three Months Ended				Nine Months Ended
	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Depreciation expense	$	21,731	$	19,836	$	65,817	$	51,890

(2) Furniture and fixtures include the following amounts under leases as of July 30, 2011 and October 30, 2010 (in thousands):

	July 30, 2011			October 30, 2010
Cost	$	10,613		$	10,632
Accumulated depreciation		(1,752	)		(615	)
Total	$	8,861		$	10,017

(3) In connection with the purchase of property located in San Jose, California, the Company obtained a four-year option, exercisable at its sole discretion through May 22, 2012, to purchase a fourth unimproved approximate four acre parcel for a fixed price of approximately $26.0 million.

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Trade Receivables Factoring Facility

In April 2010, the Company entered into a trade receivables factoring facility with a financial institution to sell certain of its trade receivables from customers with limited, non-credit related, recourse provisions. The sale of receivables eliminates the credit exposure of the Company in relation to these receivables. The Company pays facility administration fees to the financial institution on a quarterly basis. Under the terms of the factoring agreement, the maximum available amount of the factoring facility outstanding at any one time is $50.0 million, which is subject to change based on the financial institution’s approval. During the three and nine months ended July 30, 2011, $20.6 million and $50.5 million, respectively, of trade receivables were sold under the terms of the factoring facility. During the three and nine months ended July 31, 2010, $17.9 million and $37.3 million, respectively, of trade receivables were sold under the terms of the factoring facility. Sales of trade receivables are recorded as a reduction of trade accounts receivable. The discounts on the sale of receivables for the three and nine months ended July 30, 2011 and the three and nine months ended July 31, 2010 were immaterial and are included in “Interest and other income (loss), net” on the Condensed Consolidated Statements of Income. Facility administration fees for the three and nine months ended July 30, 2011 and the three and nine months ended July 31, 2010 were immaterial and are included in “General and administrative expenses” on the Condensed Consolidated Statements of Income.

5. Investments

The following table summarizes the Company’s short-term investments (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
July 30, 2011
Corporate bonds	$	781	$	—	$	—	$	781
October 30, 2010
Corporate bonds	$	1,998	$	—	$	—	$	1,998

As of July 30, 2011 and October 30, 2010, the Company had no unrealized holding gains/losses on investments. Net unrealized holding gains or losses on investments, if any, are included in accumulated other comprehensive loss in the accompanying Condensed Consolidated Balance Sheets.

6. Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability. The Company applies fair value measurements for both financial and nonfinancial assets and liabilities. The Company has no nonfinancial assets and liabilities that are required to be measured at fair value on a recurring basis as of July 30, 2011.

The fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, approximate cost because of their short maturities.

The Company did not elect to measure any eligible financial instruments at fair value and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.

Fair Value Hierarchy

The Company utilizes a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

Level 1:Observable inputs that reflect quoted prices in active markets for identical assets or liabilities. Brocade’s assets utilizing Level 1 inputs include money market funds.

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Level 2:Inputs that reflect quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in less active markets, or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Brocade’s assets and liabilities utilizing Level 2 inputs include corporate bonds and derivative instruments, respectively.

Level 3:Unobservable inputs that reflect the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. Brocade has no assets or liabilities utilizing Level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis as of July 30, 2011 were as follows (in thousands):

			Fair Value Measurements Using
	Balance as of July  30, 2011		Quoted Prices in Active Markets For Identical Instruments (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (1)	$	89,168	$	89,168	$	—	$	—
Corporate bonds		781		—		781		—
Derivative assets		3,941		—		3,941		—
Total assets measured at fair value	$	93,890	$	89,168	$	4,722	$	—

(1) Money market funds are reported within “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

Assets and liabilities measured at fair value on a recurring basis as of October 30, 2010 were as follows (in thousands):

			Fair Value Measurements Using
	Balance as  of October 30, 2010		Quoted Prices in Active Markets For Identical Instruments (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds (1)	$	92,981	$	92,981	$	—	$	—
Corporate bonds		1,998		—		1,998		—
Derivative assets		6,450		—		6,450		—
Total assets measured at fair value	$	101,429	$	92,981	$	8,448	$	—

(1) Money market funds are reported within “Cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

The Company uses a midpoint of the highest bid and lowest offering obtained from market makers to value its corporate bonds. The Company uses observable market prices for comparable instruments to value its derivative instruments.

During the three and nine months ended July 30, 2011, the Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.

7. Liabilities Associated with Facilities Lease Losses

The Company reevaluates its estimates and assumptions on a quarterly basis and makes adjustments to the reserve balance if necessary. The following table summarizes the activity related to the facilities lease loss reserve, net of expected sublease income (in thousands):

	Lease Loss Reserve
Reserve balance at October 30, 2010	$	9,976
Cash payments on facilities leases		(5,207	)
Reserve balance at July 30, 2011	$	4,769

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Cash payments for facilities leases related to the above noted facilities lease losses will be paid over the respective lease terms through fiscal year 2017.

8. Borrowings

Senior Secured Notes

On January 20, 2010, the Company issued $300.0 million aggregate principal amount of its 6.625% Senior Secured Notes due 2018 at an issue price of 99.239% of the principal amount of the notes (the “2018 Notes”) and $300.0 million aggregate principal amount of its 6.875% Senior Secured Notes due 2020 at an issue price of 99.114% of the principal amount of the notes (the “2020 Notes” and, together with the 2018 Notes, the “Senior Secured Notes”), in a private placement to “qualified institutional buyers” in the United States defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States pursuant to Regulation S under the Securities Act (the “Notes Offering”). The 2018 Notes mature on January 15, 2018 and bear interest at a rate of 6.625% per annum, payable semi-annually on January 15 and July 15 of each year, commencing on July 15, 2010. The 2020 Notes mature on January 15, 2020 and bear interest at a rate of 6.875% per annum, payable semi-annually on January 15 and July 15 of each year, commencing on July 15, 2010. The Company’s obligations under the Senior Secured Notes are guaranteed by certain of the Company’s domestic subsidiaries (the “Subsidiary Guarantors”). The obligations of the Company and the Subsidiary Guarantors under the Senior Secured Notes and the related guarantees are secured by liens, subject to certain exceptions and permitted liens and subject to the terms of an intercreditor agreement, on all assets of the Company and the Subsidiary Guarantors that secure any obligations under the Senior Secured Credit Facility, as described below.

The Company used approximately $435.0 million of the net proceeds of the Notes Offering to prepay a portion of the outstanding term loan under the Senior Secured Credit Facility on January 20, 2010, and used the remaining net proceeds, together with cash on hand, to retire on February 16, 2010 the 2.25% subordinated convertible notes (“2.25% Notes”) originally issued by McDATA Corporation (“McDATA”), a wholly owned subsidiary of Brocade.

As of July 30, 2011, the liability associated with the 2018 Notes of $298.1 million, net of the debt discount of $1.9 million, and the liability associated with the 2020 Notes of $297.6 million, net of the debt discount of $2.4 million, are together reported as “Senior Secured Notes” on the Condensed Consolidated Balance Sheets. As of October 30, 2010, the liability associated with the 2018 Notes of $297.9 million, net of the debt discount of $2.1 million, and the liability associated with the 2020 Notes of $297.5 million, net of the debt discount of $2.5 million, are together reported as “Senior Secured Notes” on the Condensed Consolidated Balance Sheets.

Debt issuance costs totaling $11.0 million associated with the Senior Secured Notes are classified entirely as long-term and have been capitalized as deferred financing costs, with $1.4 million and $0.7 million amortized as of July 30, 2011 and October 30, 2010, respectively. As of July 30, 2011 and October 30, 2010, deferred financing costs were $9.6 million and $10.3 million, respectively, and are reported within “Other assets” on the Condensed Consolidated Balance Sheets. The deferred financing costs of the 2018 Notes and the 2020 Notes are being amortized using the effective interest method over the eight-year and ten-year term of the debt, respectively. No payments were made towards the principal of the Senior Secured Notes during the nine months ended July 30, 2011. As of July 30, 2011 and October 30, 2010, the fair value of the Company’s Senior Secured Notes was approximately $642.8 million and $645.4 million, respectively, estimated based on broker trading prices.

The 2018 Notes were issued pursuant to an indenture, dated as of January 20, 2010 (the “2018 Indenture”), among the Company, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as trustee. The 2020 Notes were issued pursuant to an indenture, dated as of January 20, 2010 (the “2020 Indenture” and, together with the 2018 Indenture, the “Indentures”), among the Company, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as trustee.

On or after January 15, 2013, the Company may redeem all or a part of the 2018 Notes at the redemption prices set forth in the 2018 Indenture, plus accrued and unpaid interest and special interest, if any, to the applicable redemption date. In addition, at any time prior to January 15, 2013, the Company may, on one or more than one occasion, redeem some or all of the 2018 Notes at any time at a redemption price equal to 100% of the principal amount of the 2018 Notes redeemed, plus a “make-whole” premium as of, and accrued and unpaid interest and special interest, if any, to the applicable redemption date. On or after January 15, 2015, the Company may redeem all or a part of the 2020 Notes at the redemption prices set forth in the 2020 Indenture, plus accrued and unpaid interest and special interest, if any, to the applicable redemption date. In addition, at any time prior to January 15, 2015, the Company may, on one or more than one occasion, redeem some or all of the 2020 Notes at any time at a redemption price equal to 100% of the principal

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amount of the 2020 Notes redeemed, plus a “make-whole” premium as of, and accrued and unpaid interest and special interest, if any, to the applicable redemption date. At any time prior to January 15, 2013, the Company may also redeem up to 35% of the aggregate principal amount of the 2018 Notes and 2020 Notes, using the proceeds of certain qualified equity offerings, at the redemption prices set forth in the 2018 Indenture and the 2020 Indenture, respectively.

If the Company experiences specified change of control triggering events, it must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date. If the Company or its subsidiaries sell assets under certain specified circumstances, the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 100% of the principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date.

Each of the Indentures contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to:

• pay dividends, make investments or make other restricted payments;

• incur additional indebtedness;

• sell assets;

• enter into transactions with affiliates;

• incur liens;

• permit consensual encumbrances or restrictions on the Company’s restricted subsidiaries’ ability to pay dividends or make certain other payments to the Company;

• consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s or its restricted subsidiaries’ assets; and

• designate subsidiaries as unrestricted.

These covenants are subject to a number of other limitations and exceptions set forth in the Indentures. The Company was in compliance with all applicable covenants as of July 30, 2011 and October 30, 2010.

Each of the Indentures provides for customary events of default, including, but not limited to, cross defaults to specified other debt of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Senior Secured Notes will become due and payable immediately without further action or notice. If any other event of default under either indenture occurs or is continuing, the applicable trustee or holders of at least 25% in aggregate principal amount of the then outstanding 2018 Notes or 2020 Notes, as applicable, may declare all of the 2018 Notes or 2020 Notes, respectively, to be due and payable immediately.

In connection with the issuance of the Senior Secured Notes, the Company and the Subsidiary Guarantors also entered into registration rights agreements with the initial purchasers relating to each series of the Senior Secured Notes. On June 18, 2010, the Company and the Subsidiary Guarantors filed a registration statement on Form S-4 with respect to each series of the Senior Secured Notes relating to an offer to exchange the applicable series of notes for an issue of SEC-registered notes, with terms identical to the applicable series of the Senior Secured Notes (except that the Exchange Notes will not be subject to restrictions on transfer or to any increase in annual interest rate). The registration statement was declared effective by the SEC on August 24, 2010, and both exchange offers were consummated on October 1, 2010. On May 20, 2011, a post-effective amendment to the registration statement was filed to remove from registration $0.5 million of the 2018 Notes that were not issued during the exchange offer.

Senior Secured Credit Facility

On October 7, 2008, the Company entered into a credit agreement with Bank of America, N.A., Morgan Stanley Senior Funding, Inc., HSBC Bank USA National Association, Keybank National Association and the other lenders party thereto. The credit agreement provided for (i) a five-year $1,100.0 million term loan facility and (ii) a five-year $125.0 million revolving credit facility, which includes a $25.0 million swing line loan sub-facility and a $25.0 million letter of credit sub-facility. The net proceeds of the term loan facility were used to finance a portion of the Company’s acquisition of Foundry Networks, Inc. (“Foundry”). Debt issuance costs totaling $31.6 million associated with financing the acquisition was capitalized as deferred financing costs. In addition to the term loan facility, during the year ended October 31, 2009, the Company drew $14.1 million from the $125.0 million revolving credit facility to finance a small portion of the merger. The Company may draw additional proceeds from the revolving credit facility in the future for

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ongoing working capital and other general corporate purposes. The term loan facility and revolving credit facility are referred to together as the “Senior Secured Credit Facility.”

On January 8, 2010, the Company entered into an amendment and waiver to the credit agreement, among other things, (i) increase flexibility under certain financial and other covenants, (ii) permit the Company to issue additional senior indebtedness in aggregate principal amount outstanding at any time of up to $600.0 million, (iii) permit the Company to issue additional subordinated indebtedness in aggregate principal amount outstanding at any time of up to $600.0 million, and (iv) permit the Company to sell its accounts receivable and lease receivables for fair market value with the aggregate amount paid for such receivables, net of collections, not at any time exceeding $125.0 million. On January 20, 2010, the Company closed its offering of its 2018 Notes and its 2020 Notes as described above. The Company applied approximately $435.0 million of the proceeds of this offering to prepay the term loan, whereupon the amendment and waiver to credit agreement became effective.

On April 30, 2010, the Company fully paid off the principal of the revolving credit facility for an approximate total amount of $14.1 million. There were no amounts outstanding under the terms of the revolving credit facility as of July 30, 2011 and October 30, 2010.

On June 10, 2011, the Company entered into a second amendment to the credit agreement (“Amendment No. 2”) to refinance all of the outstanding term loan with a replacement term loan that reduced interest rates on the term loan facility, and to amend certain other provisions of the Credit Agreement to provide the Company with greater operating flexibility, including extending the maturity date of the term loan facility to October 31, 2014 and removing certain restrictions on the repurchase of the Company shares, provided the consolidated senior secured leverage ratio is under 2.00. In accordance with the applicable accounting guidance for debt modification and extinguishment, $51.1 million and $198.9 million of the $250.0 million refinanced was accounted as debt modification and debt extinguishment, respectively. The Company expensed $25.5 million of debt issuance cost and original issue discount relating to the portion of the term loan that was extinguished, which was reported within “Interest Expense” on the Condensed Consolidated Statements of Income. Additionally, debt issuance costs totaling $1.2 million associated with the refinancing was capitalized as deferred financing costs.

Prior to Amendment No. 2, loans under the Senior Secured Credit Facility bore interest, at the Company’s option, at a rate equal to either the London Interbank Offered Rate (“LIBOR”) rate, plus an applicable margin equal to 4.0% per annum or the prime lending rate, plus an applicable margin equal to 3.0% per annum. The applicable margin with respect to revolving loans was subject to adjustment based on the Company’s consolidated senior secured leverage ratio, as defined in the credit agreement. The LIBOR rate “floor” was 3.0% per annum and the prime lending rate “floor” was 4.0% per annum, in each case, for the life of the Senior Secured Credit Facility. Amendment No. 2 reduced the applicable margin on the term loan to a level not in excess of LIBOR plus 2.375% or the prime lending rate plus 1.375% and eliminated the minimum LIBOR rate “floor” and prime rate “floor” with respect to the term loan facility. For the nine months ended July 30, 2011, the weighted-average interest rate on the term loan was 6.26%. As of July 30, 2011, the weighted-average annualized interest rate on the term loan was 2.96%.

The Company is permitted to make voluntary prepayments at any time (without payment of a premium, other than in the case of a repricing transaction in respect of the term loan facility), and is required to make mandatory prepayments on the term loan (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (ii) net cash proceeds from issuances of debt (other than certain permitted debt), and (iii) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions). Prior to Amendment No. 2, the Company was required to pay quarterly installments on the term loan equal to an aggregate annual amount of 5% of the original principal amount thereof in the first and second year, 10% in the third year, 20% in the fourth year and 60% in the fifth year, with any remaining balance payable on the final maturity date of the term loan. Upon a repricing of the term loan (including through a refinancing) that results in the weighted-average yield or applicable rate of such term loan immediately after such repricing to be lower than such yield or rate immediately prior to such repricing, a 2.0% premium was payable during the first year following the closing and a 1.0% premium was payable during the second year following the closing. Under Amendment No. 2, the Company is required to pay quarterly installments of $12.5 million on the term loan, as adjusted for any voluntary prepayments, with any remaining balance payable on the final maturity date of the term loan. In addition to the refinancing of the term loan facility, during the nine months ended July 30, 2011, the Company paid $110.9 million towards the principal of the term loan, $92.3 million of which were voluntary prepayments.

The deferred financing costs are being amortized using the effective interest method over the term of the debt. As of July 30, 2011 and October 30, 2010, deferred financing costs were $3.6 million and $17.3 million, respectively, and are reported within “Other assets” on the Condensed Consolidated Balance Sheets. As of July 30, 2011 and October 30, 2010, the approximate fair value of the Company’s Senior Secured Credit Facility was $240.3 million and $354.5 million, respectively, estimated based on broker trading prices.

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The obligations of the Company and its subsidiary guarantors under the Senior Secured Credit Facility and the related guarantees there under are secured, subject to customary permitted liens and other agreed upon exceptions, by (i) a first priority pledge of all of the equity interests of each of the Company’s direct and indirect subsidiaries and (ii) a perfected first priority interest in and mortgages on all tangible and intangible assets of the Company and each subsidiary guarantor, except, in the case of a foreign subsidiary, to the extent such pledge would be prohibited by applicable law or would result in materially adverse tax consequences (limited, in the case of a first-tier foreign subsidiary, to 65% of the voting stock and 100% of the non-voting stock of such first-tier foreign subsidiary).

The credit agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, capital expenditures, prepayment of other indebtedness, redemption or repurchase of subordinated indebtedness, share repurchases, dividends and other distributions. The credit agreement contains financial covenants that require the Company to maintain a minimum consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio and a maximum consolidated senior secured leverage ratio, each as defined in the credit agreement and described further below. The credit agreement also includes customary events of default, including cross-defaults on the Company’s material indebtedness and change of control. The Company was in compliance with all applicable covenants as of July 30, 2011 and October 30, 2010.

Covenant Compliance

Under the Senior Secured Credit Facility, certain limitations, restrictions and defaults could occur if the Company is not able to satisfy and remain in compliance with specified financial ratios.

Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined in the credit agreement, is used to determine the Company’s compliance with certain covenants in the Senior Secured Credit Facility. Consolidated EBITDA is defined as:

• Consolidated net income

Plus:

• Consolidated interest charges;

• Provision for federal, state, local and foreign income taxes;

• Depreciation and amortization expense;

• Fees, costs and expenses incurred on or prior to the closing date in connection with the acquisition and the financing thereof;

• Any cash restructuring charges and integration costs in connection with the Foundry acquisition, in an aggregate amount not to exceed $75.0 million;

• Non-cash restructuring charges incurred in connection with the Foundry acquisition, all as approved by Banc of America Securities LLC and Morgan Stanley Senior Funding, Inc.;

• Other non-recurring expenses reducing consolidated net income which do not represent a cash item in such period or future periods;

• Any non-cash stock-based compensation expense; and

• Legal fees associated with the indemnification obligations for the benefit of former officers and directors in connection with Brocade’s historical stock option litigation;

Minus:

• Federal, state, local and foreign income tax credits; and

• All non-cash items increasing consolidated net income.

In addition, the Company must comply with the following financial covenants as noted below:

Consolidated Fixed Charge Coverage Ratio

Consolidated fixed charge coverage ratio means, at any date of determination, the ratio of (a) (i) consolidated EBITDA (excluding interest expense, if any, attributable to the campus sale-leaseback), plus (ii) rentals payable under leases of real property, less (iii) the aggregate amount of all capital expenditures to (b) consolidated fixed charges; provided that, for purposes of calculating the consolidated fixed charge coverage ratio for any period ending prior to the first anniversary of the closing date, consolidated interest

17

charges shall be an amount equal to actual consolidated interest charges from the closing date through the date of determination multiplied by a fraction the numerator of which is 365 and the denominator of which is the number of days from the closing date through the date of determination.

In accordance with the amendment and waiver to the credit agreement, the Company has agreed that it will not permit the consolidated fixed charge coverage ratio as of the end of any fiscal quarter during any period set forth below to be less than the ratio set forth below opposite such period:

Four Fiscal Quarters Ending During Period:	Minimum Consolidated Fixed Charge Coverage Ratio
November 1, 2009 through October 30, 2010	1.25:1.00
October 31, 2010 through October 29, 2011	1.50:1.00
October 30, 2011 through October 27, 2012	1.75:1.00
October 28, 2012 and thereafter	1.75:1.00

Consolidated Leverage Ratio

Consolidated leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date to (b) consolidated EBITDA for the measurement period ending on such date.

In accordance with the amendment and waiver to the credit agreement, the Company has agreed that it will not permit the consolidated leverage ratio at any time during any period set forth below to be greater than the ratio set forth below opposite such period:

Four Fiscal Quarters Ending During Period:	Maximum Consolidated Leverage Ratio
November 1, 2009 through October 30, 2010	3.75:1.00
October 31, 2010 through October 29, 2011	3.00:1.00
October 30, 2011 through October 27, 2012	2.75:1.00
October 28, 2012 and thereafter	2.75:1.00

Consolidated Senior Secured Leverage Ratio

Consolidated senior secured leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date, minus, without duplication, all unsecured senior subordinated or subordinated indebtedness of Brocade or its subsidiaries on a consolidated basis as of such date (including the McDATA convertible subordinated debt prior to being retired on February 16, 2010), to (b) consolidated EBITDA for the measurement period ending on such date.

In accordance with the amendment and waiver to the credit agreement, the Company has agreed that it will not permit the consolidated senior secured leverage ratio at any time during any period set forth below to be greater than the ratio set forth below opposite such period:

Four Fiscal Quarters Ending During Period:	Maximum Consolidated Senior Secured Leverage Ratio
November 1, 2009 through October 30, 2010	2.50:1.00
October 31, 2010 through October 29, 2011	2.50:1.00
October 30, 2011 through October 27, 2012	2.25:1.00
October 28, 2012 and thereafter	2.00:1.00

Convertible Subordinated Debt

The 2.25% Notes originally issued by McDATA paid a fixed rate of interest semiannually. The Company capitalized a portion of the interest associated with this debt during the nine months ended July 31, 2010. In addition, the effective interest rate for the 2.25% Notes was 8.63% for fiscal year 2010 for the period through February 15, 2010 when the convertible subordinated debt was due. The amount of interest cost recognized relating to both the contractual interest coupon and amortization of the discount on the liability component of the 2.25% Notes was as follows:

	Nine Months Ended
In thousands	July 30, 2011		July 31, 2010
Interest expense	$	—	$	4,305

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On February 16, 2010, the Company fully paid off the principal of the 2.25% Notes for a total amount of $172.5 million. There were no interest expenses during the three months ended July 31, 2010.

9. Commitments and Contingencies

Product Warranties

The Company’s accrued liability for estimated future warranty costs is included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty costs during the nine months ended July 30, 2011 and July 31, 2010 (in thousands):

	Accrued Warranty
	Nine Months Ended
	July 30, 2011			July 31, 2010
Beginning balance	$	5,980		$	5,808
Liabilities accrued for warranties issued during the period		4,501			2,583
Warranty claims paid and used during the period		(1,093	)		(1,301	)
Changes in liability for pre-existing warranties during the period		(1,444	)		(1,675	)
Ending balance	$	7,944		$	5,415

In addition, the Company has standard indemnification clauses contained within its various customer contracts. As such, the Company indemnifies the parties to whom it sells its products with respect to the Company’s product, alone or potentially in combination with others, infringing upon any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product. As of July 30, 2011, there have been no known material events or circumstances that have resulted in a customer contract-related indemnification liability to the Company.

Manufacturing and Purchase Commitments

Brocade has manufacturing arrangements with CMs under which Brocade provides twelve-month product forecasts and places purchase orders in advance of the scheduled delivery of products to Brocade’s customers. The required lead time for placing orders with the CMs depends on the specific product. Brocade issues purchase orders and the CMs then generate invoices based on prices and payment terms mutually agreed upon and set forth in those purchase orders. Although the purchase orders Brocade places with its CMs are cancelable, the terms of the agreements require Brocade to purchase all inventory components not returnable, usable by, or sold to other customers of the CMs.

As of July 30, 2011, the Company’s aggregate commitment to the CMs for inventory components used in the manufacture of Brocade products was $279.9 million, which the Company expects to utilize during future normal ongoing operations, net of a purchase commitments reserve of $4.7 million. The Company’s purchase commitments reserve reflects the Company’s estimate of purchase commitments it does not expect to consume in normal ongoing operations within the next twelve months.

Income Taxes

The Company is subject to several ongoing income tax audits. For additional discussion, see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements. The Company believes it has adequate reserves for all open tax years.

Legal Proceedings

Initial Public Offering Litigation

On July 20, 2001, the first of a number of putative class actions for violations of the federal securities laws was filed in the United States District Court for the Southern District of New York against Brocade, certain of its officers and directors, and certain of the underwriters for Brocade’s initial public offering (“IPO”) of securities. A consolidated amended class action captioned, In re Brocade Communications Systems, Inc. Initial Public Offering Securities Litigation, No. 01 Civ. 6613, was filed on April 19, 2002. The complaint generally alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares

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in Brocade’s initial public offering and seeks unspecified damages for claims under the Exchange Act on behalf of a purported class of purchasers of common stock from May 24, 1999 to December 6, 2000. The lawsuit against Brocade was coordinated for pretrial proceedings with a number of other pending litigations challenging underwriter practices in over 300 cases as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS), including actions against McDATA Corporation, Inrange Technologies Corporation (“Inrange”) (which was first acquired by Computer Network Technology Corporation (“CNT”) and subsequently acquired by McDATA as part of the CNT acquisition), and Foundry (collectively, the “Brocade Entities”), and certain of each entity’s respective officers and directors, and initial public offering underwriters.

The parties have reached a global settlement of the coordinated litigation, under which the insurers will pay the full amount of settlement share allocated to the Brocade Entities, and the Brocade Entities will bear no financial liability. In 2009, the Court granted final approval of the settlement and certain filed appeals. A number of those appeals have now been dismissed. In May 2011, the Second Circuit issued an order remanding the remaining appeals to the district court for determination of certain matters.

Intellectual Property Litigation

On June 21, 2005, Enterasys Networks, Inc. (“Enterasys”) filed a lawsuit against Foundry (and Extreme Networks, Inc.) in the United States District Court for the District of Massachusetts alleging that certain of Foundry’s products infringe six of Enterasys’ patents and seeking injunctive relief, as well as unspecified damages. Enterasys subsequently added Brocade as a defendant. On August 28, 2007, the Court granted Foundry’s motion to stay the case based on petitions that Foundry had filed with the United States Patent and Trademark Office (“USPTO”) in 2007 for reexamination of five of the six Enterasys patents. Two of the patents received final rejections during their respective reexaminations, in which the USPTO held that the claims were invalid. Enterasys filed appeals of those rejections with the USPTO’s Board of Patent Appeals and Interferences in 2009. The Board partially affirmed and partially reversed one of those rejections on January 24, 2011, and Enterasys did not appeal further, which ended the proceedings on those two patents. The USPTO has issued reexamination certificates for the two of the remaining three patents undergoing reexamination indicating that the patents were valid over the references that Foundry had submitted. On March 7, 2011 the USPTO issued a Notice of Intent to Issue a Re-examination Certificate upholding the validity of the third patent. Meanwhile, on May 21, 2010, the Court lifted the stay of the litigation, and Enterasys subsequently dropped from the litigation the two patents it appealed at the USPTO. Accordingly, four patents remain at issue in the litigation. No trial date has been set.

On September 6, 2006, Chrimar Systems, Inc. (“Chrimar”) filed a lawsuit against Foundry (and D-Link Corporation and PowerDsine, Ltd.) in the United States District Court for the Eastern District of Michigan alleging that certain of Foundry’s products infringe Chrimar’s U.S. Patent 5,406,260 and seeking injunctive relief, as well as unspecified damages. Discovery has been completed. No trial date has been set.

On August 4, 2010, Brocade and Foundry Networks LLC (“Plaintiffs”) filed a lawsuit against A10 Networks, Inc. (“A10”), A10’s founder and other individuals in the United States District Court for the Northern District of California. On October 29, 2010, Plaintiffs filed an amended complaint. In the amended complaint, Brocade alleged that A10 and the individual defendants have misappropriated Plaintiff’s trade secrets, infringed copyrighted works, interfered with existing contracts between the Plaintiffs and their employees, breached contracts, breached their fiduciary duties and duties of loyalty, and that certain of A10’s products infringe ten of Brocade’s patents. Brocade is seeking injunctive relief, as well as monetary damages. On May 16, 2011, A10 filed an answer and counterclaim alleging that certain of Brocade’s products infringe a patent recently acquired by A10 and seeking injunctive relief, as well as unspecified damages. Trial is scheduled for July 17, 2012.

General

From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and/or other intellectual property rights and commercial contract disputes. Third parties assert patent infringement claims against the Company from time to time in the form of letters, lawsuits and other forms of communication. In addition, from time to time, the Company receives notification from customers claiming that they are entitled to indemnification or other obligations from the Company related to infringement claims made against them by third parties. Litigation, even if the Company is ultimately successful, can be costly and divert management’s attention away from the day-to-day operations of the Company.

The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis. Except as may be noted above, the Company has not recorded any such material liabilities as of July 30, 2011.

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10. Derivative Instruments and Hedging Activities

In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. The Company’s primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk. The Company currently does not enter into derivative instruments to manage credit risk. However, the Company manages its exposure to credit risk through its investment policies. The Company generally enters into derivative transactions with high-credit quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty based on its analysis of that counterparty’s relative credit standing. The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which a counterparty’s obligations exceed the Company’s obligations with that counterparty.

Foreign Currency Exchange Rate Risk

A majority of the Company’s revenue, expense and capital purchasing activities is transacted in U.S. dollars. However, the Company is exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to its operations for the nine months ended July 30, 2011 were the Chinese yuan, the euro, the Japanese yen, the Indian rupee, the British pound, the Singapore dollar and the Swiss franc. The Company is primarily exposed to foreign currency fluctuations related to operating expenses denominated in currencies other than the U.S. dollar. The Company has established a foreign currency risk management program to protect against fluctuations in the volatility of future cash flows caused by changes in foreign currency exchange rates. This program reduces, but does not always entirely eliminate, the impact of foreign currency exchange rate movements. The Company’s foreign currency risk management program includes foreign currency derivatives with cash flow hedge accounting designation that utilizes foreign currency forward contracts to hedge exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. These instruments generally have a maturity of less than one year. For these derivatives, the Company reports the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive loss in stockholders’ equity and reclassifies it into earnings in the same period in which the hedged transaction affects earnings. Prior to fiscal year 2011, these gains or losses were included in “Interest and other income (loss), net” on the condensed consolidated statements of income. Beginning in the first fiscal quarter of 2011, these gains or losses are now presented within “Cost of revenues” and “Operating expenses,” to match the underlying exposure to the related hedge results. Prior period amounts are not material and have not been reclassified. Net gains (losses) relating to the effective portion of foreign currency derivatives recorded in the condensed consolidated statements of income are as follows (in thousands):

	Three Months Ended					Nine Months Ended
	July 30, 2011		July 31, 2010			July 30, 2011		July 31, 2010
Cost of revenues	$	311	$	—		$	597	$	—
Research and development		96		—			282		—
Sales and marketing		1,817		—			3,740		—
General and Administrative		167		—			297		��
Interest and other income (loss), net		—		(3,087	)		—		(3,492	)
Total	$	2,391	$	(3,087	)	$	4,916	$	(3,492	)

The net foreign currency exchange gains and losses recorded as part of “Interest and other income (loss), net,” were losses of $0.9 million and $0.4 million for the three and nine months ended July 30, 2011, respectively, and losses of $2.7 million and $3.0 million for the three and nine months ended July 31, 2010, respectively.

Volume of Derivative Activity

Total gross notional amounts, presented by currency, are as follows (in thousands):

In United States Dollars	As of July  30, 2011		As of October  30, 2010
Euro	$	20,614	$	53,700
British pound		8,434		22,018
Japanese yen		5,577		14,306
Singapore dollar		5,009		12,427
Swiss franc		4,650		9,554
Total	$	44,284	$	112,005

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The Company utilizes a rolling hedge strategy for the majority of its foreign currency forward contracts with cash flow hedge accounting designation that hedges exposures to the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar-denominated cash flows. All of the Company’s foreign currency forward contracts are single delivery, which are settled at maturity involving one cash payment exchange.

Gross unrealized loss positions are recorded within “Other accrued liabilities” and gross unrealized gain positions are recorded within “Prepaid and other current assets.” As of July 30, 2011, the Company had gross unrealized loss positions of $0.1 million and gross unrealized gain positions of $4.0 million included in “Other accrued liabilities” and “Prepaid and other current assets,” respectively. Effective cash flow hedges are reported as a component of accumulated other comprehensive loss. Cash flow hedge ineffectiveness, which is included in the Company’s net income as part of “Interest and other income (loss), net,” was not significant.

11. Sale-Leaseback Transactions

During the nine months ended July 31, 2010, the Company sold an owned real estate property to an unrelated third party. Net proceeds from this sale were $30.2 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of two years. The Company considers this lease as a normal leaseback and classified the lease as an operating lease. An $8.7 million loss on the sale of the property was recognized immediately upon execution of the sale and is recorded within “Gain (loss) on sale of investments and property, net” on the Condensed Consolidated Statements of Income.

12. Stock-Based Compensation

Stock-based compensation expense, net of estimated forfeitures, was included in the following line items on the Condensed Consolidated Statements of Income as follows (in thousands):

	Three Months Ended				Nine Months Ended
	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Cost of revenues (1)	$	4,235	$	3,324	$	11,262	$	10,373
Research and development		5,581		6,392		14,975		21,508
Sales and marketing (1)		8,670		10,969		27,081		33,813
General and administrative		2,483		3,997		10,087		10,657
Total stock-based compensation	$	20,969	$	24,682	$	63,405	$	76,351

(1) The three and nine months ended July 31, 2010 reflects the reclassification of SE costs from cost of revenue to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):

	Three Months Ended				Nine Months Ended
	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Stock options, including variable options	$	563	$	2,229	$	3,211	$	10,136
Restricted stock awards and restricted stock units (“RSUs”)		15,253		13,888		40,636		40,973
Employee stock purchase plan (“ESPP”)		5,153		8,565		19,558		25,242
Total stock-based compensation	$	20,969	$	24,682	$	63,405	$	76,351

The following table presents unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of July 30, 2011, which is expected to be recognized over the following weighted-average periods, (in thousands, except for weighted-average period):

	Unrecognized Compensation Expense		Weighted- Average Period (in years)
Stock options	$	2,850		0.93
RSUs	$	105,778		2.11
ESPP	$	15,516		1.01

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The following table presents details on grants made by the Company for the following periods:

	Nine Months Ended				Nine Months Ended
	July 30, 2011				July 31, 2010
	Granted (in  thousands)		Weighted-Average Grant Date  Fair Value		Granted (in  thousands)		Weighted-Average Grant Date  Fair Value
Stock options		243	$	2.23		1,840	$	2.90
RSUs		9,185	$	6.12		9,669	$	5.87

The total intrinsic value of stock options exercised for the nine months ended July 30, 2011 and July 31, 2010 was $44.3 million and $41.6 million, respectively.

13. Income Taxes

For the three and nine months ended July 30, 2011, the Company recorded an income tax benefit of $10.3 million and $16.6 million, respectively, primarily as a result of discrete benefits from the retroactive reinstatement of the federal research and development tax credit provision as a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act”), reserve releases from the settlement with the IRS regarding the Company’s fiscal year 2007 and 2008 audits, and reserve release from the expiration of the statute of limitation, offset by foreign tax expense.

For the three and nine months ended July 31, 2010, the Company recorded an income tax benefit of $14.9 million and $15.0 million, respectively.

The total amount of unrecognized tax benefits of $140.8 million as of July 30, 2011 would affect the Company’s effective tax rate, if recognized. Although the timing of the closure of audits is highly uncertain, it is reasonably possible that the balance of unrecognized tax benefits could significantly change during fiscal year 2011.

The IRS and other tax authorities regularly examine our income tax returns. We are currently under negotiations with the Appeals division of the IRS for the audit of fiscal years 2004 through 2006, which we expect to resolve during the next twelve months. In addition, we are in negotiations with foreign tax authorities to receive correlative relief on transfer pricing settlements with the IRS. We believe that our reserves for unrecognized tax benefits are adequate for all open tax years. The timing of the resolution of income tax examinations, as well as the amounts and timing of related settlements, is highly uncertain. The Company believes that before the end of fiscal year 2011, it is reasonably possible that either certain audits will conclude or the statute of limitations relating to certain income tax examination periods will expire, or both. As such, after we reach settlement with the IRS, we expect to record a corresponding adjustment to our unrecognized tax benefits. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $24 million in the next twelve months.

In May 2011, the Company received the IRS revenue agent’s report for fiscal years 2007 and 2008. The IRS is contesting the Company’s transfer pricing for the cost sharing and buy-in arrangements with its foreign subsidiaries. The IRS’ proposed adjustment would offset approximately $317.4 million of the Company’s net operating loss carryforwards. In June 2011, the Company filed a protest with the Appeals Office of the IRS to challenge the IRS’ proposed adjustment and assessment. The Franchise Tax Board is auditing Foundry’s California income tax returns for calendar years 2006 and 2007. These audits and appeals are still ongoing and the Company believes its reserves are adequate to cover any potential assessments and settlements that may result from these examinations. Due to the availability of net operating losses and credits, the Company does not expect a significant tax liability from the settlement of the audits.

The Company believes that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that the Company will realize its deferred tax assets. Accordingly, the Company applies a valuation allowance only on the deferred tax assets relating to capital loss and investments loss carryforwards, due to limited carryforward periods and the character of such tax attributes. As part of the 2011-2012 budget, the Governor of the State of California has introduced tax proposals affecting future state income tax apportionment that may have a significant impact on the Company’s ability to realize certain California deferred tax assets. The Company will reevaluate the realization of its California deferred tax assets if and when the current law changes.

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14. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Currently, the CODM is the Chief Executive Officer.

Brocade is organized into four operating segments, of which two are individually reportable segments: Data Storage Products and Global Services; and the two other operating segments, Ethernet Switching & Internet Protocol (“IP”) Routing and Application Delivery Products (“ADP”), combine to form a third reportable segment: Ethernet Products. These segments are organized principally by product category. The types of products and services from which each reportable segment derives its revenues are as follows:

• Data Storage Products includes infrastructure products and solutions including directors, switches, routers, fabric-based software applications, distance/extension products, as well as management applications and utilities to centralize data management. Data Storage Products also includes the server portfolio, which is comprised of host bus adapters (“HBAs”), mezzanine cards, as well as switch modules for bladed servers;

• Ethernet Products includes Open Systems Interconnection Reference Model (“OSI”) Layer 2-3 switches and routers which enable efficient use of bandwidth-intensive network business applications and digital entertainment on both local area networks and wide area networks, converged network products, and OSI Layer 4-7 switches which allow enterprises and service providers to build highly available network infrastructures that efficiently direct the flow of traffic; and

• Global Services include break/fix maintenance, extended warranty, installation, consulting, network management, and related software maintenance and support revenue.

Financial decisions and the allocation of resources are based on the information from the Company’s internal management reporting system. At this point in time, the Company does not track all of its assets by operating segments. The majority of the Company’s assets as of July 30, 2011 were attributable to its United States operations.

Summarized financial information by reportable segment for the three and nine months ended July 30, 2011 and July 31, 2010, based on the internal management reporting system, is as follows (in thousands):

	Data Storage Products		Ethernet Products		Global Services		Total
Three months ended July 30, 2011
Net revenues	$	275,391	$	138,907	$	88,552	$	502,850
Cost of revenues		69,219		80,102		47,002		196,323
Gross margin	$	206,172	$	58,805	$	41,550	$	306.527
Three months ended July 31, 2010 (1)
Net revenues	$	293,380	$	122,061	$	88,811	$	504,252
Cost of revenues		95,613		79,779		43,439		218,831
Gross margin	$	197,767	$	42,282	$	45,372	$	285,421
Nine months ended July 30, 2011
Net revenues	$	935,129	$	393,692	$	268,148	$	1,596,969
Cost of revenues		267,522		230,490		142,939		640,951
Gross margin	$	667,607	$	163,202	$	125,209	$	956,018
Nine months ended July 31, 2010 (1)
Net revenues	$	926,576	$	345,631	$	270,316	$	1,542,523
Cost of revenues		297,908		204,303		132,467		634,678
Gross margin	$	628,668	$	141,328	$	137,849	$	907,845

(1) The three and nine months ended July 31, 2010 reflects the reclassification of SE costs from cost of revenue to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

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15. Net Income per Share

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Basic net income per share
Net income	$	1,937	$	22,530	$	54,934	$	94,296
Weighted-average shares used in computing basic net income per share		483,744		449,489		474,020		443,795
Basic net income per share	$	0.00	$	0.05	$	0.12	$	0.21
Diluted net income per share
Net income	$	1,937	$	22,530	$	54,934	$	94,296
Weighted-average shares used in computing basic net income per share		483,744		449,489		474,020		443,795
Dilutive potential common shares in the form of stock options		14,657		18,484		15,664		23,565
Dilutive potential common shares in the form of stock awards		10,354		13,756		9,960		14,118
Dilutive potential common shares in the form of ESPP shares		793		134		1,097		286
Weighted-average shares used in computing diluted net income per share		509,548		481,863		500,741		481,764
Diluted net income per share	$	0.00	$	0.05	$	0.11	$	0.20
Antidilutive potential common shares in the form of (1)
Stock options		15,367		26,845		19,493		19,829
Stock awards		67		1,121		537		709
Antidilutive potential common shares resulting from the potential conversion of (1)
Convertible subordinated debt		—		—		—		4,736

(1) These amounts are excluded from the computation of diluted net income per share.

16. Comprehensive Income

The components of comprehensive income, net of tax, are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010
Net income	$	1,937		$	22,530		$	54,934		$	94,296
Other comprehensive income (loss):
Change in net unrealized gains (losses) on cash flow hedges		(2,953	)		3,124			(3,818	)		(2,788	)
Change in cumulative translation adjustments		(316	)		(2,027	)		888			(4,472	)
Total comprehensive income (loss)	$	(1,332	)	$	23,627		$	52,004		$	87,036

17. Guarantor and Non-Guarantor Subsidiaries

On January 20, 2010, the Company issued in total $600.0 million aggregate principal amount of its Senior Secured Notes. As discussed in Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements, the Company’s obligations under the Senior Secured Notes are guaranteed by certain of the Company’s domestic subsidiaries. The Senior Secured Notes are not guaranteed by the Company’s Canadian or other foreign subsidiaries. The following tables present condensed consolidated financial statements for the parent company, the Subsidiary Guarantors and the foreign non-guarantor subsidiaries, respectively.

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The following is the condensed consolidated balance sheet as of July 30, 2011 (in thousands):

	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Foreign Non- Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash, cash equivalents and short-term investments	$	57,786	$	9,660	$	405,894	$	—		$	473,340
Accounts receivable, net		176,776		3,010		116,244		—			296,030
Inventories		56,255		—		22,175		—			78,430
Intercompany receivables		—		455,596		—		(455,596	)		—
Other current assets		122,894		569		15,291		5,618			144,372
Total current assets		413,711		468,835		559,604		(449,978	)		992,172
Property and equipment, net		463,159		56,182		14,838		—			534,179
Other non-current assets		1,502,805		643,656		8,113		—			2,154,574
Total assets	$	2,379,675	$	1,168,673	$	582,555	$	(449,978	)	$	3,680,925
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	86,272	$	2,458	$	26,746	$	—		$	115,476
Current portion of debt		50,391		—		—		—			50,391
Intercompany payables		443,914		—		11,682		(455,596	)		—
Other current liabilities		228,538		19,857		112,448		5,618			366,461
Total current liabilities		809,115		22,315		150,876		(449,978	)		532,328
Debt, net of current portion		788,938		—		—		—			788,938
Other non-current liabilities		103,368		771		39,040		—			143,179
Total liabilities		1,701,421		23,086		189,916		(449,978	)		1,464,445
Total stockholders’ equity		678,254		1,145,587		392,639		—			2,216,480
Total liabilities and stockholders’ equity	$	2,379,675	$	1,168,673	$	582,555	$	(449,978	)	$	3,680,925

The following is the condensed consolidated balance sheet as of October 30, 2010 (in thousands):

	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Assets
Current assets:
Cash, cash equivalents and short-term investments	$	23,455	$	8,905	$	303,622		$	—		$	335,982
Accounts receivable, net		212,542		1,698		103,456			(333	)		317,363
Inventories		63,713		—		13,095			—			76,808
Intercompany receivables		—		399,868		—			(399,868	)		—
Other current assets		121,370		875		9,999			3,069			135,313
Total current assets		421,080		411,346		430,172			(397,132	)		865,466
Property and equipment, net		466,247		58,040		14,830			—			539,117
Other non-current assets		1,499,774		734,469		6,364			—			2,240,607
Total assets	$	2,387,101	$	1,203,855	$	451,366		$	(397,132	)	$	3,645,190
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	128,182	$	389	$	18,892		$	(333	)	$	147,130
Current portion of debt		30,540		—		—			—			30,540
Intercompany payables		412,555		—		(12,687	)		(399,868	)		—
Other current liabilities		256,710		29,752		101,729			3,069			391,260
Total current liabilities		827,987		30,141		107,934			(397,132	)		568,930
Debt, net of current portion		899,273		—		—			—			899,273
Other non-current liabilities		99,679		3,361		36,278			—			139,318
Total liabilities		1,826,939		33,502		144,212			(397,132	)		1,607,521
Total stockholders’ equity		560,162		1,170,353		307,154			—			2,037,669
Total liabilities and stockholders’ equity	$	2,387,101	$	1,203,855	$	451,366		$	(397,132	)	$	3,645,190

26

The following is the condensed consolidated statement of income for the three months ended July 30, 2011 (in thousands):

	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	299,841		$	7,526		$	195,483		$	—		$	502,850
Intercompany revenues		15,753			367			11,211			(27,331	)		—
Total net revenues		315,594			7,893			206,694			(27,331	)		502,850
Cost of revenues		120,070			19,209			53,669			3,375			196,323
Intercompany cost of revenues		(8,122	)		—			35,452			(27,330	)		—
Total cost of revenues		111,948			19,209			89,121			(23,955	)		196,323
Gross margin (loss)		203,646			(11,316	)		117,573			(3,376	)		306,527
Operating expenses		204,259			14,794			56,628			(3,376	)		272,305
Intercompany operating expenses		(32,891	)		(6,280	)		39,171			—			—
Total operating expenses		171,368			8,514			95,799			(3,376	)		272,305
Income (loss) from operations		32,278			(19,830	)		21,774			—			34,222
Other expense		(41,934	)		(76	)		(575	)		—			(42,585	)
Income (loss) before income tax provision (benefit)		(9,656	)		(19,906	)		21,199			—			(8,363	)
Income tax provision (benefit)		(3,751	)		(7,734	)		1,185			—			(10,300	)
Net income (loss)	$	(5,905	)	$	(12,172	)	$	20,014		$	—		$	1,937

The following is the condensed consolidated statement of income for the three months ended July 31, 2010 (in thousands):

	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	300,676		$	9,424		$	194,152		$	—		$	504,252
Intercompany revenues		26,051			3,995			5,921			(35,967	)		—
Total net revenues		326,727			13,419			200,073			(35,967	)		504,252
Cost of revenues (1)		116,965			30,470			65,777			5,619			218,831
Intercompany cost of revenues		10,024			—			25,943			(35,967	)		—
Total cost of revenues		126,989			30,470			91,720			(30,348	)		218,831
Gross margin (loss)		199,738			(17,051	)		108,353			(5,619	)		285,421
Operating expenses (1)		212,959			14,541			32,452			(5,619	)		254,333
Intercompany operating expenses		(73,973	)		(4,372	)		78,345			—			—
Total operating expenses		138,986			10,169			110,797			(5,619	)		254,333
Income (loss) from operations		60,752			(27,220	)		(2,444	)		—			31,088
Total other income (expense)		(10,027	)		655			(14,112	)		—			(23,484	)
Income (loss) before income tax provision (benefit)		50,725			(26,565	)		(16,556	)		—			7,604
Income tax provision (benefit)		(32,463	)		17,251			286			—			(14,926	)
Net income (loss)	$	83,188		$	(43,816	)	$	(16,842	)	$	—		$	22,530

(1) As adjusted due to the reclassification of system engineer costs from cost of revenues to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

27

The following is the condensed consolidated statement of income for the nine months ended July 30, 2011 (in thousands):

	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	948,200		$	22,407		$	626,362		$	—		$	1,596,969
Intercompany revenues		76,729			1,571			26,521			(104,821	)		—
Total net revenues		1,024,929			23,978			652,883			(104,821	)		1,596,969
Cost of revenues		397,419			62,416			170,470			10,646			640,951
Intercompany cost of revenues		4,962			—			99,858			(104,820	)		—
Total cost of revenues		402,381			62,416			270,328			(94,174	)		640,951
Gross margin (loss)		622,548			(38,438	)		382,555			(10,647	)		956,018
Operating expenses		636,393			43,614			163,836			(10,647	)		833,196
Intercompany operating expenses		(110,684	)		(19,133	)		129,817			—			—
Total operating expenses		525,709			24,481			293,653			(10,647	)		833,196
Income (loss) from operations		96,839			(62,919	)		88,902			—			122,822
Other expense		(83,231	)		(502	)		(784	)		—			(84,517	)
Income (loss) before income tax provision (benefit)		13,608			(63,421	)		88,118			—			38,305
Income tax provision (benefit)		58,195			(80,135	)		5,311			—			(16,629	)
Net income (loss)	$	(44,587	)	$	16,714		$	82,807		$	—		$	54,934

The following is the condensed consolidated statement of income for the nine months ended July 31, 2010 (in thousands):

	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	911,777		$	42,481		$	588,265		$	—		$	1,542,523
Intercompany revenues		74,283			10,467			17,156			(101,906	)		—
Total net revenues		986,060			52,948			605,421			(101,906	)		1,542,523
Cost of revenues (1)		338,628			86,480			194,648			14,922			634,678
Intercompany cost of revenues		25,648			—			76,258			(101,906	)		—
Total cost of revenues		364,276			86,480			270,906			(86,984	)		634,678
Gross margin (loss)		621,784			(33,532	)		334,515			(14,922	)		907,845
Operating expenses (1)		622,601			49,152			97,217			(14,922	)		754,048
Intercompany operating expenses		(139,913	)		(17,762	)		157,675			—			—
Total operating expenses		482,688			31,390			254,892			(14,922	)		754,048
Income (loss) from operations		139,096			(64,922	)		79,623			—			153,797
Total other income (expense)		(61,998	)		2,421			(14,909	)		—			(74,486	)
Income (loss) before income tax provision (benefit)		77,098			(62,501	)		64,714			—			79,311
Income tax provision (benefit)		54,737			(74,810	)		5,088			—			(14,985	)
Net income	$	22,361		$	12,309		$	59,626		$	—		$	94,296

(1) As adjusted due to the reclassification of system engineer costs from cost of revenues to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

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The following is the condensed consolidated statement of cash flows for the nine months ended July 30, 2011 (in thousands):

	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	135,029		$	431		$	107,539		$	—	$	242,999
Cash flows from investing activities:
Purchases of short-term investments		—			(38	)		—			—		(38	)
Proceeds from maturities and sale of short-term investments		—			1,604			—			—		1,604
Purchases of property and equipment		(70,389	)		(24	)		(6,248	)		—		(76,661	)
Net cash provided by (used in) investing activities		(70,389	)		1,542			(6,248	)		—		(75,095	)
Cash flows from financing activities:
Payment of principal related to the term loan		(309,897	)		—			—			—		(309,897	)
Payment of fees related to the term loan		(1,090	)		—			—			—		(1,090	)
Proceeds from term loan		198,949			—			—			—		198,949
Common stock repurchases		(10,044	)		—			—			—		(10,044	)
Payment of principal related to capital leases		(1,311	)		—			—			—		(1,311	)
Proceeds from issuance of common stock, net		93,333			—			—			—		93,333
Excess tax benefits or detriments from stock-based compensation		(249	)		—			168			—		(81	)
Net cash provided by (used in) financing activities		(30,309	)		—			168			—		(30,141	)
Effect of exchange rate fluctuations on cash and cash equivalents		—			—			812			—		812
Net increase in cash and cash equivalents		34,331			1,973			102,271			—		138,575
Cash and cash equivalents, beginning of period		23,455			6,907			303,622			—		333,984
Cash and cash equivalents, end of period	$	57,786		$	8,880		$	405,893		$	—	$	472,559

The following is the condensed consolidated statement of cash flows for the nine months ended July 31, 2010 (in thousands):

	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Foreign Non- Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by (used in) operating activities	$	(15,055	)	$	168,697		$	38,448		$	—	$	192,090
Cash flows from investing activities:
Purchases of short-term investments		—			(41	)		—			—		(41	)
Proceeds from maturities and sale of short-term investments		—			1,788			—			—		1,788
Proceeds from sale of property		30,185			—			—			—		30,185
Purchases of property and equipment		(151,662	)		372			(4,680	)		—		(155,970	)
Net cash provided by (used in) investing activities		(121,477	)		2,119			(4,680	)		—		(124,038	)
Cash flows from financing activities:
Payment of debt issuance costs related to the Senior Secured Notes		(3,665	)		—			—			—		(3,665	)
Payment of principal related to the revolving credit facility		(14,050	)		—			—			—		(14,050	)
Payment of principal related to the convertible subordinated debt		—			(172,500	)		—			—		(172,500	)
Payment of principal related to the term loan		(552,808	)		—			—			—		(552,808	)
Payment of principal related to capital leases		(494	)		—			—			—		(494	)
Common stock repurchases		(25,004	)		—			—			—		(25,004	)

29

Proceeds from Senior Secured Notes		587,968			—			—			—		587,968
Proceeds from issuance of common stock, net		69,883			—			—			—		69,883
Excess tax benefits or detriments from stock-based compensation		5,318			—			—			—		5,318
Net cash provided by (used in) financing activities		67,148			(172,500	)		—			—		(105,352	)
Effect of exchange rate fluctuations on cash and cash equivalents		—			—			(4,356	)		—		(4,356	)
Net increase (decrease) in cash and cash equivalents		(69,384	)		(1,684	)		29,412			—		(41,656	)
Cash and cash equivalents, beginning of period		74,509			5,748			253,936			—		334,193
Cash and cash equivalents, end of period	$	5,125		$	4,064		$	283,348		$	—	$	292,537

18. Subsequent Events

In August 2011, the Company committed to a plan to exit a portion of its Global Services business through the sale of Strategic Business Systems, Inc. (“SBS”), a wholly-owned subsidiary of the Company and has signed a Stock Purchase Agreement (“SPA”) to sell SBS. SBS was acquired in the second quarter of fiscal year 2008. We expect that the sale of SBS will enable the Company’s Global Services organization to focus on the execution of strategic and core offerings such as support and service for the Company’s products as well as professional consulting.

The SPA is subject to certain closing conditions and is expected to be completed within fiscal 2011. As of the end of the third quarter of fiscal year 2011, the net carrying amount of assets and liabilities that became held for sale in the fourth quarter of fiscal year 2011 as result of the Company’s commitment and actions was $16.2 million, comprising primarily of intangible assets with net book value of $11.1 million. We do not believe that the sale will have a material impact on our recurring net income.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q 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 December 17, 2010.

Overview

We are a leading supplier of end-to-end networking solutions and services for businesses and organizations of many types and sizes, including global enterprises, and service providers. Our business model is driven by our two key markets, namely our core Data Storage business, where we offer directors, switches, host bus adapters (“HBAs”), and server virtualization solutions, and our newer Ethernet business, which we acquired in December 2008 as part of our acquisition of Foundry Networks, Inc. (“Foundry”), where we offer modular and stackable 1 Gigabit Ethernet (“GbE”), 10 GbE, and 100 GbE solutions, converged network products, as well as application delivery, security and wireless solutions.

Growth opportunities in the Data Storage market are expected to be driven by key customer IT initiatives such as server virtualization, enterprise mobility, data center consolidation, migration to higher performance technologies and private “cloud” initiatives. Our Ethernet business strategies are intended to increase new Ethernet accounts, and expand our market share. Moreover, we plan to continue to support our Data Storage and Ethernet growth plans by enhancing our existing partnerships and forming new ones, through continuous innovation, new product introductions, and through investing in sales and marketing.

We continue to face challenges, such as the uncertainty in the worldwide macroeconomic climate and its impact on IT spending patterns globally, as well as the federal government spending in the United States. We also continue to monitor the stability and health of other international markets, including China and Europe. We are cautious about the current global and country specific dynamics, including inflationary risks in China and the continuing sovereign debt risk in Europe, which may impact our business and that of our partners. While the diversification of our business model helps mitigate the effect of some of these challenges and we expect IT spending levels to generally rise in the long-term, it is generally difficult to offset short-term reductions of IT spending.

Going forward, we expect the number of Data Storage and Ethernet products we ship to fluctuate depending on the demand for our existing and recently introduced products, as well as the timing of product transitions by our OEM partners. We currently expect that average selling prices per port for our Data Storage and Ethernet products will likely decline at rates of low single digits for the fourth fiscal quarter of 2011.

We also plan to continue to focus on increasing operating cash flows, with which we intend to reduce our existing term loan, repurchase our Company’s stock, consider strategic opportunities in adjacent businesses and/or acquisition of key technologies and other general corporate purchases. In June 2011, we amended our credit agreement for our Senior Secured Credit Facility to refinance all of the outstanding term loan that effectively reduced interest rates, and is expected to provide us greater flexibility, including extending the maturity date on the term loan to October 31, 2014, reducing the required principal payments on a quarterly basis, and providing more flexibility in the use of our cash from operations, including for our share repurchase program.

Results of Operations

Our results of operations for the three and nine months ended July 30, 2011 and July 31, 2010 are reported in this discussion and analysis as a percentage of total net revenues, except for gross margin with respect to each segment, which is indicated as a percentage of the respective segment net revenues.

Revenues.Our revenues are derived primarily from sales of our Data Storage products, sales of our Ethernet products, and our service and support offerings related to those products.

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Our total net revenues are summarized as follows (in thousands, except percentages):

	Three Months Ended
	July 30, 2011		% of Net Revenues			Jul 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
Data Storage Products	$	275,391		54.8	%	$	293,380		58.2	%	$	(17,989	)		(6.1	)%
Ethernet Products		138,907		27.6	%		122,061		24.2	%		16,846			13.8	%
Global Services		88,552		17.6	%		88,811		17.6	%		(259	)		(0.3	)%
Total net revenues	$	502,850		100.0	%	$	504,252		100.0	%	$	(1,402	)		(0.3	)%
	Nine Months Ended
	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
Data Storage Products	$	935,129		58.6	%	$	926,576		60.1	%	$	8,553			0.9	%
Ethernet Products		393,692		24.6	%		345,631		22.4	%		48,061			13.9	%
Global Services		268,148		16.8	%		270,316		17.5	%		(2,168	)		(0.8	)%
Total net revenues	$	1,596,969		100.0	%	$	1,542,523		100.0	%	$	54,446			3.5	%

The decrease in total net revenues for the three months ended July 30, 2011 compared with the three months ended July 31, 2010 reflects lower revenues from Data Storage Products, partially offset by higher Ethernet Products revenues.

• The decrease in Data Storage Products revenues for the period reflects a decrease of 4.5% in the number of ports shipped and a 1.7% decrease in average selling price per port, partially offset by a mix shift from 4 Gb director and switch products to 8 Gb director and switch products, which carry a higher price per port;

• The increase in Ethernet Products revenues for the period reflects relatively higher revenues from our enterprise and service provider customers, and implementation of initiatives to drive both immediate and long-term growth in our Ethernet business, which was offset by lower revenues from federal customers and a decrease in average selling price of approximately 1.7%; and

• The marginal decrease in Global Services revenues was primarily a result of lower Data Storage support and service revenues during the period, which was partially offset by an increase in Ethernet support revenues.

The increase in total net revenues for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 reflects higher sales of Data Storage Products and Ethernet Products, partially offset by lower revenues from our Global Services offerings.

• The increase in Data Storage Products revenues for the period reflects an increase of 3.5% in the number of ports shipped and a mix shift from 4 Gb director and switch products to 8 Gb director and switch products, which carry a higher price per port, partially offset by a 2.5% decrease in average selling price per port;

• The increase in Ethernet Products revenues for the period reflects relatively higher revenues from our enterprise and service provider customers, and implementation of initiatives to drive both immediate and long-term growth in our Ethernet business, which offset the impact of lower pricing and lower revenues from federal customers; and

• The decrease in Global Services revenues was primarily a result of lower Data Storage support and service revenues during the period.

Our total net revenues by geographical area are summarized as follows (in thousands, except percentages):

	Three Months Ended
	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
United States	$	307,357		61.1	%	$	321,516		63.8	%	$	(14,159	)		(4.4	)%
Europe, the Middle East and Africa (1)		115,173		22.9	%		114,438		22.6	%		735			0.6	%
Asia Pacific		50,566		10.1	%		44,905		8.9	%		5,661			12.6	%
Japan		19,390		3.9	%		14,985		3.0	%		4,405			29.4	%
Canada, Central and South America		10,364		2.0	%		8,408		1.7	%		1,956			23.3	%
Total net revenues	$	502,850		100.0	%	$	504,252		100.0	%	$	(1,402	)		(0.3	)%

(1) Includes net revenues of $64.3 million and $63.2 million for the three months ended July 30, 2011 and July 31, 2010 respectively, relating to the Netherlands.

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	Nine Months Ended
	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
United States	$	970,603		60.8	%	$	981,473		63.6	%	$	(10,870	)		(1.1	)%
Europe, the Middle East and Africa (1)		378,038		23.6	%		364,744		23.7	%		13,294			3.6	%
Asia Pacific		160,618		10.1	%		124,394		8.1	%		36,224			29.1	%
Japan		55,816		3.5	%		43,483		2.8	%		12,333			28.4	%
Canada, Central and South America		31,894		2.0	%		28,429		1.8	%		3,465			12.2	%
Total net revenues	$	1,596,969		100.0	%	$	1,542,523		100.0	%	$	54,446			3.5	%

(1) Includes net revenues of $197.3 million and $191.1 million for the nine months ended July 30, 2011 and July 31, 2010 respectively, relating to the Netherlands.

International revenues increased as a percentage of total net revenues for the three and nine months ended July 30, 2011 compared with the three and nine months ended July 31, 2010 primarily as a result of increased product volumes in Asia Pacific and Japan. Revenues are attributed to geographic areas based on where our products are shipped. However, certain OEM partners take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the practices of our OEM partners, but we believe that international revenues comprise a larger percentage of our total net revenues than the attributed revenues may indicate.

A significant portion of our revenue is concentrated among a relatively small number of OEM customers. For the three months ended July 30, 2011, three customers each represented 10% or more of our total net revenues for a combined total of 43% of our total net revenues (of which individual customers representing greater than 10% of total net revenues represented 16%, 15% and 12% of total net revenues, respectively). For the three months ended July 31, 2010, three customers each represented 10% or more of our total net revenues for a combined total of 44% of our total net revenues (of which individual customers representing greater than 10% of total net revenues represented 17%, 15% and 12% of total net revenues, respectively). We expect that a significant portion of our future revenues will continue to come from sales of products to a relatively small number of OEM partners and to the U.S. government or individual agencies within the U.S. government through our distributors. Therefore, the loss of, or a decrease in the level of sales to, or a change in the ordering pattern of any one of these customers could seriously harm our financial condition and results of operations.

Gross margin. Gross margin as stated below is indicated as a percentage of the respective segment net revenues, except for total gross margin, which is stated as a percentage of total net revenues. Gross margin is summarized as follows (in thousands, except percentages):

	Three Months Ended
	July 30, 2011		% of Net Revenues			July 31, 2010 (1)		% of Net Revenues			Increase/ (Decrease)			% Points Change
Data Storage Products	$	206,172		74.9	%	$	197,767		67.4	%	$	8,405			7.5	%
Ethernet Products		58,805		42.3	%		42,282		34.6	%		16,523			7.7	%
Global Services		41,550		46.9	%		45,372		51.1	%		(3,822	)		(4.2	)%
Total gross margin	$	306,527		61.0	%	$	285,421		56.6	%	$	21,106			4.4	%

	Nine Months Ended
	July 30, 2011		% of Net Revenues			July 31, 2010 (1)		% of Net Revenues			Increase/ (Decrease)			% Points Change
Data Storage Products	$	667,607		71.4	%	$	628,668		67.8	%	$	38,939			3.6	%
Ethernet Products		163,202		41.5	%		141,328		40.9	%		21,874			0.6	%
Global Services		125,209		46.7	%		137,849		51.0	%		(12,640	)		(4.3	)%
Total gross margin	$	956,018		59.9	%	$	907,845		58.9	%	$	48,173			1.0	%

(1) Gross margin for the three and nine months ended July 31, 2010 is as adjusted due to the reclassification of system engineer costs from cost of revenues to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

For the three months ended July 30, 2011 compared with the three months ended July 31, 2010, total gross margin increased in absolute dollars and percentage primarily due to higher margins on Data Storage Products and Ethernet Products. This was partially offset by lower margins on our Global Services offerings, and increased mix of Ethernet Products revenues, which carry a lower overall gross margin.

33

Gross margin percentage by reportable segment increased or decreased for the three months ended July 30, 2011 compared with the three months ended July 31, 2010 primarily due to the following factors (the percentages below reflect the impact on gross margin):

• Data Storage Products gross margins relative to net revenues increased primarily due to a benefit of 5.2% from the $14.3 million release of a reserve for certain pre-acquisition litigation and a decrease of 1.7% in other manufacturing costs, relative to net revenues. Additionally, product costs relative to net revenues decreased 0.6%, which more than offset the decline in average selling price.

• Ethernet Products gross margins relative to net revenues increased due to a 3.4% decrease in product costs relative to net revenues, and a 3.3% decrease in other manufacturing costs, primarily on account of provision for a litigation settlement and higher manufacturing costs tied to new products in the third fiscal quarter of 2010. Additionally, amortization of intangible assets related to the Foundry acquisition decreased by 1% relative to net revenues; and

• Global Services gross margins relative to net revenues decreased due to a 3.3% increase in service and support costs, primarily due to increased headcount. Additionally, stock-based compensation relative to net revenues increased 0.9%.

For the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010, total gross margin increased in absolute dollars and percentage primarily due to higher revenues, as well as higher margins on Data Storage Products and Ethernet Products. This was partially offset by a decrease in Global Services gross margins, and increased mix of Ethernet Products revenues, which carry a lower overall gross margin.

Gross margin percentage by reportable segment increased or decreased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 primarily due to the following factors (the percentages below reflect the impact on gross margin):

• Data Storage Products gross margins relative to net revenues increased primarily due to a benefit of 1.5% from the release of a reserve for certain pre-acquisition litigation, and a 1.3% decrease in product costs relative to net revenues, which more than offset the decline in average selling price. Additionally, amortization of intangible assets related to the McDATA acquisition decreased by 0.4% and other manufacturing costs relative to net revenues decreased by 0.4%;

• Ethernet Products gross margins relative to net revenues increased due to a 1.1% decrease in amortization of intangible assets related to the Foundry acquisition and 0.3% decrease in other manufacturing costs. This was partially offset by a 0.8% increase in product costs relative to net revenues, which includes the impact of lower average selling prices and shifting product mix; and

• Global Services gross margins relative to net revenues decreased due to a 3.8% increase in service and support costs, primarily due to increased headcount, which offset the impact of a one-time settlement of a litigation matter during the first fiscal quarter of 2010. Additionally, stock-based compensation relative to net revenues increased 0.5%.

Stock-based compensation expense. Stock-based compensation expense is summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
Three months ended	$	20,969		4.2	%	$	24,682		4.9	%	$	(3,713	)		(15.0	)%
Nine months ended	$	63,405		4.0	%	$	76,351		4.9	%	$	(12,946	)		(17.0	)%

The decrease in stock-based compensation expense for the three and nine months ended July 30, 2011 compared with the three and nine months ended July 31, 2010 was primarily due to the decrease in Foundry-related deferred compensation and lower ESPP expenses, which was partially offset by higher expenses from an increase in new equity grants.

Research and development expenses.Research and development (“R&D”) expenses consist primarily of salaries and related expenses for personnel engaged in engineering and R&D activities, fees paid to consultants and outside service providers, nonrecurring engineering charges, prototyping expenses related to the design, development, testing and enhancement of our products, depreciation related to engineering and test equipment, and related IT and facilities expenses.

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R&D expenses are summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)		% Change
Three months ended	$	87,320		17.4	%	$	85,884		17.0	%	$	1,436		1.7	%
Nine months ended	$	270,669		16.9	%	$	265,317		17.2	%	$	5,352		2.0	%

R&D expenses increased for the three months ended July 30, 2011 compared with the three months ended July 31, 2010 due to the following (in thousands):

	$ Change 2010 to 2011 Quarter-to-Date (“QTD”)
Salaries and wages	$	3,565
Outside services		1,377
The increase in R&D expenses was partially offset by the decrease in the following:
Nonrecurring engineering expenses		(2,693	)
Various individually insignificant items		(813	)
Total change	$	1,436

Salaries and wages increased primarily due to increased headcount. Outside services increased primarily due to projects related to our new Ethernet product offerings. Nonrecurring engineering expenses decreased primarily due to lower prototype costs and a decrease in chip design expenses.

R&D expenses increased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 due to the following (in thousands):

	$ Change 2010 to 2011 Year-to-Date (“YTD”)
Salaries and wages	$	12,027
Outside services		4,937
Depreciation and amortization		2,313
Various individually insignificant items		1,280
The increase in R&D expenses was partially offset by the decrease in the following:
Stock-based compensation		(6,533	)
Nonrecurring engineering expenses		(6,068	)
Sustaining engineering expenses allocated to cost of revenues		(2,604	)
Total change	$	5,352

Salaries and wages increased primarily due to increased headcount. Outside services increased primarily due to projects related to our new Ethernet product offerings. Depreciation and amortization increased primarily due to the continued build-up of our development and testing labs. Nonrecurring engineering expenses decreased primarily due to lower prototype costs and a decrease in chip design expenses. Sustaining engineering expenses allocated to cost of revenues increased primarily as a result of new Ethernet products launched, partially offsetting the increase in R&D expenses.

Sales and marketing expenses.Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in sales, marketing and customer service functions, costs associated with promotional and marketing programs, travel expenses, and related IT and facilities expenses.

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Sales and marketing expenses are summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010 (1)		% of Net Revenues			Increase/ (Decrease)		% Change
Three months ended	$	153,345		30.5	%	$	134,793		26.7	%	$	18,552		13.8	%
Nine months ended	$	462,991		29.0	%	$	388,871		25.2	%	$	74,120		19.1	%

(1) The three and nine months ended July 31, 2010 is as adjusted due to the reclassification of system engineer costs from cost of revenues to sales and marketing expenses. See Note 1, “Basis of Presentation,” of the Notes to Condensed Consolidated Financial Statements.

Sales and marketing expenses increased for the three months ended July 30, 2011 compared with the three months ended July 31, 2010 due to the following (in thousands):

	$ Change 2010 to 2011 QTD
Salaries and wages	$	18,653
Other marketing expenses		2,696
Various individually insignificant items		799
The increase in sales and marketing expenses was partially offset by the decrease in the following:
Stock-based compensation		(2,300	)
Expenses related to IT, facilities and other shared functions		(1,296	)
Total change	$	18,552

Salaries and wages increased primarily due to headcount growth. Other marketing expenses increased primarily due to our new marketing awareness campaign. Expenses related to IT, facilities and other shared functions decreased primarily due to higher moving costs associated with preparing our new company campus for occupancy in the third fiscal quarter of 2010.

Sales and marketing expenses increased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 due to the following (in thousands):

	$ Change 2010 to 2011 YTD
Salaries and wages	$	59,761
Other marketing expenses		8,452
Travel expenses		4,323
Expenses related to IT, facilities and other shared functions		4,051
Other facility expenses		2,113
Depreciation and amortization		1,580
Various individually insignificant items		571
The increase in sales and marketing expenses was partially offset by the decrease in the following:
Stock-based compensation		(6,731	)
Total change	$	74,120

Salaries and wages, travel expenses, expenses related to IT, facilities and other shared functions, other facility expenses and depreciation and amortization increased primarily due to headcount growth. Other marketing expenses increased primarily due to our new marketing awareness campaign, and consulting expenses related to our business model and growth strategy.

General and administrative expenses.General and administrative (“G&A”) expenses consist primarily of salaries and related expenses for corporate executives, finance, human resources, legal and investor relations, as well as recruiting expenses, professional fees, other corporate expenses, and related IT and facilities expenses.

G&A expenses are summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
Three months ended	$	16,617		3.3	%	$	17,540		3.5	%	$	(923	)		(5.3	)%
Nine months ended	$	53,176		3.3	%	$	49,719		3.2	%	$	3,457			7.0	%

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G&A expenses decreased for the three months ended July 30, 2011 compared with the three months ended July 31, 2010 due to the following (in thousands):

	$ Change 2010 to  2011 QTD
Salaries and wages	$	2,891
The increase in general and administrative expenses was partially offset by the decrease in the following:
Outside services		(2,186	)
Stock-based compensation		(1,514	)
Various individually insignificant items		(114	)
Total change	$	(923	)

Salaries and wages increased primarily due to headcount growth. Outside services decreased primarily due to higher moving costs associated with preparing our company campus for occupancy in the third fiscal quarter of 2010.

G&A expenses increased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 due to the following (in thousands):

	$ Change 2010 to 2011 YTD
Depreciation and amortization	$	9,001
Salaries and wages		7,875
Outside services		1,086
The increase in general and administrative expenses was partially offset by the decrease in the following:
Other facility expenses		(12,112	)
Various individually insignificant items		(2,393	)
Total change	$	3,457

Depreciation and amortization increased primarily due to additional furniture and equipment and depreciation related to our new campus that was completed in the third fiscal quarter of 2010. Salaries and wages increased due to headcount growth. Outside services increased primarily due to higher legal expenses related to ongoing disputes. Other facility expenses decreased primarily due to decrease in rent and related expenses after moving into our new campus in the third fiscal quarter of 2010.

Legal fees associated with indemnification obligations and other related costs, net.Legal fees associated with indemnification obligations and other related costs, net, were immaterial for the three and nine months ended July 30, 2011 and July 31, 2010. We believe our obligations relating to stock option backdating and related matters have substantially ended.

Amortization of intangible assets. Amortization of intangible assets is summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
Three months ended	$	15,023		3.0	%	$	16,190		3.2	%	$	(1,167	)		(7.2	)%
Nine months ended	$	46,236		2.9	%	$	49,433		3.2	%	$	(3,197	)		(6.5	)%

During the three and nine months ended July 30, 2011 and July 31, 2010, we recorded amortization of intangible assets related to the acquisitions of McDATA, Silverback Systems, Inc., Strategic Business Systems, Inc. and Foundry. The decrease in amortization of intangible assets for the three and nine months ended July 30, 2011 compared with the three and nine months ended July 31, 2010 was primarily due to the full amortization of a portion of the McDATA related intangible assets.

Acquisition and integration costs. Acquisition and integration costs are summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010		% of Net Revenues			Increase/ (Decrease)			% Change
Nine months ended	$	—		—	%	$	204		—	%	$	(204	)		(100.0	)%

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For the nine months ended July 31, 2010, we recorded acquisition and integration costs primarily for consulting services and other professional fees in connection with our integration of Foundry. We did not incur any acquisition and integration costs during the three and nine months ended July 30, 2011 and three months ended July 31, 2010.

Interest and other income (loss), net. Interest and other income (loss), net, are summarized as follows (in thousands, except percentages):

	July 30, 2011			% of Net Revenues			July 31, 2010			% of Net Revenues			Increase/ (Decrease)		% Change
Three months ended	$	(673	)		(0.1	)%	$	(1,399	)		(0.3	)%	$	726		51.9	%
Nine months ended	$	(297	)		0.0	%	$	(2,231	)		(0.1	)%	$	1,934		86.7	%

For the three and nine months ended July 30, 2011 compared with the three and nine months ended July 31, 2010, the increase in interest and other income (loss), net, was primarily due to higher foreign exchange losses recognized during the three and nine months ended July 31, 2010. Additionally, beginning in the first fiscal quarter of 2011, gains or losses relating to the effective portion of foreign currency cash flow derivatives are recorded in cost of revenues and operating expenses to match the underlying exposure to the related hedge results (see Note 10, “Derivative Instruments and Hedging Activities” of the Notes to the Condensed Consolidated Financial Statements). In the prior period, net losses recorded in interest and other income (loss), net were not material, and have not been reclassified.

Interest expense. Interest expense primarily represents the interest cost associated with our term loan, Senior Secured Notes and convertible subordinated debt (see Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements). Interest expense is summarized as follows (in thousands, except percentages):

	July 30, 2011			% of Net Revenues			July 31, 2010			% of Net Revenues			Increase/ (Decrease)		% Change
Three months ended	$	(42,066	)		(8.4	)%	$	(22,061	)		(4.4	)%	$	20,005		90.7	%
Nine months ended	$	(84,357	)		(5.3	)%	$	(63,656	)		(4.1	)%	$	20,701		32.5	%

Interest expense increased for the three and nine months ended July 30, 2011 compared with the three and nine months ended July 31, 2010 primarily as a result of the write-off of debt issuance costs and debt discount of $25.5 million related to the refinancing of the term loan facility in the third fiscal quarter of 2011, and capitalization of a portion of interest cost in connection with the development of our campus in 2010. This was partially offset by a reduction in debt, with Brocade electing to make accelerated payments towards the principal of the term loan, and the retirement of the 2.25% Notes on February 16, 2010, as well as lower interest rates on amending the term debt credit agreement. During the nine months ended July 30, 2011, we made net debt payments of $110.9 million toward the principal of the Senior Secured Credit Facility, $92.3 million of which were voluntary prepayments. During the fiscal year 2010, we paid $583.0 million toward the principal of the Senior Secured Credit Facility, $560.0 million of which were voluntary prepayments.

Gain (loss) on sale of investments and property, net.Gain (loss) on sale of investments and property, net, is summarized as follows (in thousands, except percentages):

	July 30, 2011		% of Net Revenues			July 31, 2010			% of Net Revenues			Increase/ (Decrease)		% Change
Three months ended	$	154		0.0	%	$	(24	)		—	%	$	178		741.7	%
Nine months ended	$	137		0.0	%	$	(8,599	)		(0.6	)%	$	8,736		101.6	%

Gain (loss) on sale of investments and property, net was immaterial for the three months ended July 30, 2011 and July 31, 2010. For the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010, the increase in gain on sale of investments and property, net, was primarily due to an immaterial gain on sale of investments, net, for the nine months ended July 30, 2011 as compared to an $8.7 million loss on the sale of owned property in San Jose during the nine months ended July 31, 2010, to an unrelated third party.

Income tax benefit.Income tax benefit and the effective tax rates are summarized as follows (in thousands, except effective tax rates):

	Three Months Ended						Nine Months Ended
	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010
Income tax benefit	$	(10,300	)	$	(14,926	)	$	(16,629	)	$	(14,985	)
Effective tax rate		123.2	%		(196.3	)%		(43.4	)%		(18.9	)%

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We recorded a tax benefit for the three and nine months ended July 30, 2011 and July 31, 2010, respectively, primarily due to a discrete benefit from the retroactive reinstatement of the federal research and development tax credit provision from January 1, 2010 to December 31, 2011, as a result of the Tax Relief Act enacted on December 17, 2010, and reserve releases from the settlement with the IRS regarding our fiscal year 2007 and 2008 audit and expiring statute of limitation (see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements).

Based on our current forecasted results, we expect a tax benefit for fiscal year 2011 compared to tax expense for fiscal year 2010. However, factors such as the mix of Ethernet versus Data Storage products and domestic versus international profits could affect our tax expense. As estimates and judgments are used to project such international earnings, the impact to our tax provision could vary if the current planning or assumptions change. In addition, we do not forecast discrete events, such as a settlement of tax audits with governmental authorities due to their inherent uncertainty. Such settlements could materially impact our tax expense. Given that the tax rate is driven by several different factors, it is not possible to estimate our future tax rate with a high degree of certainty.

Our income tax provision could change from either effects of changing tax laws and regulations, or differences in international revenues and earnings from those historically achieved, a factor largely influenced by the buying behavior of our OEM and channel partners.

The IRS and other tax authorities regularly examine our income tax returns. For additional discussion, see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements. We are currently undergoing an IRS audit for fiscal years 2004 through 2008, for which we expect to resolve fiscal years 2004 through 2006 during the next twelve months. As such, after we reach settlement with the IRS, we expect to record a corresponding adjustment to our unrecognized tax benefits. Due to availability of net operating losses and credits, the IRS audit settlement is not expected to result in a significant tax payment. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $24 million in the next twelve months.

We believe that sufficient positive evidence exists from historical operations and projections of taxable income in future years to conclude that it is more likely than not that we will realize our deferred tax assets. Accordingly, we apply a valuation allowance only on the deferred tax assets relating to capital loss and investment loss carryforwards due to limited carryforward periods and the character of such tax attributes. The Governor of the State of California has introduced tax proposals affecting future state income tax apportionment that may have a significant impact on our ability to realize certain California deferred tax assets. We will reevaluate the realization of its California deferred tax assets if and when the current law changes.

Liquidity and Capital Resources

	July 30, 2011			October 30, 2010			Increase/ (Decrease)
	(in thousands)
Cash and cash equivalents	$	472,559		$	333,984		$	138,575
Short-term investments		781			1,998			(1,217	)
Total	$	473,340		$	335,982		$	137,358
Percentage of total assets		13	%		9	%

We use cash generated by operations as our primary source of liquidity. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our revenues, the rate at which products are shipped during the quarter, accounts receivable collections, inventory and supply chain management, and the timing and amount of tax and other payments. For additional discussion, see “Part II - Other Information, Item 1A. Risk Factors.”

During the third quarter of fiscal year 2011, we amended our term debt credit agreement to refinance all of the outstanding term loan with a replacement term loan that reduced interest rates on the term loan facility, and to amend certain other provisions of the Credit Agreement to provide us with greater flexibility, including extending the maturity date of the term loan facility to October 31, 2014.

Based on past performance and current expectations, we believe that internally generated cash flows are generally sufficient to support business operations, capital expenditures, contractual obligations, and other liquidity requirements associated with our operations for at least the next twelve months. Also, we have up to $125 million available under our revolving credit facility, and we

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can factor our trade receivables up to the maximum amount available at any time of our $50 million factoring facility to provide additional liquidity. There are no other transactions, arrangements, or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity and the availability of and our requirements for capital resources.

Financial Condition

Cash and cash equivalents and short-term investments as of July 30, 2011 increased by $137.4 million over the balance as of October 30, 2010 primarily due to increased cash from operating activities and decreased purchases of property and equipment due to completion of campus construction during fiscal year 2010, partially offset by accelerated payments towards the principal of the term loan.

For the nine months ended July 30, 2011, we generated $243.0 million in cash from operating activities, which was higher than our net income for the same period primarily as a result of adjustments to net income for non-cash items related to depreciation and amortization, stock-based compensation expense and write-off of debt issuance costs and debt discount, in addition to decrease in account receivables and increase in deferred revenues. This was partially offset by decreases in other accrued liabilities, accounts payable and accrued employee compensation.

Accounts receivable days sales outstanding, which is a measure of the average number of days that a company takes to collect revenue after a sale has been made, for the nine months ended July 30, 2011 and July 31, 2010 was 51 days. A majority of our accounts receivable balance is derived from sales to OEM partners in the computer storage and server industry. As of July 30, 2011, three customers accounted for 18%, 12% and 12%, respectively, of total accounts receivable. As of October 30, 2010, three customers accounted for 17%, 14% and 10%, respectively, of total accounts receivable. We perform ongoing credit evaluations of our customers and generally do not require collateral or security interests on accounts receivable balances. We have established reserves for credit losses, sales allowances, and other allowances. While we have not experienced material credit losses in any of the periods presented, there can be no assurance that we will not experience material credit losses in the future.

Net cash used in investing activities for the nine months ended July 30, 2011 totaled $75.1 million and was primarily the result of $76.7 million in purchases of property and equipment, partially offset by sales of investments.

Net cash used in financing activities for the nine months ended July 30, 2011 totaled $30.1 million and was primarily the result of net debt payment related to the term loan of $110.9 million and stock repurchases of $10.0 million, partially offset by proceeds from the issuance of common stock from ESPP purchases and stock option exercises of $93.3 million. Additionally, during the third quarter of fiscal year 2011, we refinanced all of the outstanding term loan with a replacement term loan.

Net proceeds from the issuance of common stock in connection with employee participation in our equity compensation plans have historically been a significant component of our liquidity. The extent to which our employees participate in these programs generally increases or decreases based upon changes in the market price of our common stock. As a result, our cash flow resulting from the issuance of common stock in connection with employee participation in equity compensation plans will vary.

Nine Months Ended July 30, 2011 Compared to Nine Months Ended July 31, 2010

Operating Activities.Net cash provided by operating activities increased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 by $50.9 million. The increase was primarily due to increased accounts receivable collections and decreased payment with respect to accrued employee compensation, partially offset by a decrease in net income during the nine months ended July 30, 2011.

Investing Activities.Net cash used in investing activities decreased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 by $48.9 million. The decrease was primarily due to lower purchases of property and equipment in the nine months ended July 30, 2011, partially offset by proceeds of $30.2 million from sale of property in the first fiscal quarter of 2010.

Financing Activities.Net cash used in financing activities decreased for the nine months ended July 30, 2011 compared with the nine months ended July 31, 2010 by $75.2 million. The decrease was primarily due to higher net debt payments and common stock repurchases during the nine months ended July 31, 2010 as well as increased proceeds from issuance of common stock during the nine months ended July 30, 2011.

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Liquidity

Manufacturing and Purchase Commitments.We have manufacturing arrangements with contract manufacturers under which we provide twelve-month product forecasts and place purchase orders in advance of the scheduled delivery of products to our customers. Our purchase commitments reserve reflects our estimate of purchase commitments we do not expect to consume in normal operations within the next twelve months, in accordance with our policy (see Note 9, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements).

Income Taxes.We accrue U.S. income taxes on the earnings of our foreign subsidiaries unless the earnings are considered indefinitely reinvested outside of the United States. We intend to reinvest current and accumulated earnings of our foreign subsidiaries for expansion of our business operations outside the United States for an indefinite period of time.

The IRS and other tax authorities regularly examine our income tax returns (see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements). We believe we have adequate reserves for all open tax years.

Senior Secured Credit Facility.A portion of our outstanding debt is related to the financing of the Foundry acquisition, the costs and expenses related to the merger, and the ongoing working capital and other general corporate purposes of the combined organization after consummation of the merger (see Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements). During the third quarter of fiscal year 2011, we amended our term debt credit agreement to refinance all of the outstanding term loan with a replacement term loan that reduced interest rates on the term loan facility, and to amend certain other provisions of the Credit Agreement to provide us with greater operating flexibility, including extending the maturity date of the term loan facility to October 31, 2014 and removing certain restrictions on the repurchase of the Company’s shares, provided the consolidated senior secured leverage ratio is under 2.00. In addition to the refinancing, during the nine months ended July 30, 2011, we paid $110.9 million towards the principal of the Senior Secured Credit Facility, $92.3 million of which were voluntary prepayments. We have the following resources available to obtain short-term or long-term financing, if we need additional liquidity, as of July 30, 2011 (in thousands):

	Original Amount Available		July 30, 2011
			Used		Available
Revolving credit facility	$	125,000	$	—	$	125,000
Total	$	125,000	$	—	$	125,000

Senior Secured Notes.In January 2010, we issued $600 million of long-term fixed rate notes and used the proceeds to pay down a substantial portion of the outstanding term loan, with the remaining net proceeds used to retire the convertible subordinated debt due on February 15, 2010 (see Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements).

Trade Receivables Factoring Facility. We have an agreement with a financial institution to sell certain of our trade receivables from customers with limited, non-credit related, recourse provisions. The sale of receivables eliminates our credit exposure in relation to these receivables. Total trade receivables sold under our factoring facility are summarized as follows (in thousands):

	Three Months Ended				Nine Months Ended
	July 30, 2011		July 31, 2010		July 30, 2011		July 31, 2010
Trade receivables sold under factoring agreement	$	20,581	$	17,854	$	50,534	$	37,323

Under the terms of the factoring agreement, the remaining available amount of the factoring facility as of July 30, 2011 is $29.4 million.

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Contractual Obligations

The following table summarizes our contractual obligations, including interest expense, and commitments as of July 30, 2011 (in thousands):

	Total		Less than 1 Year		1—3 Years		3—5 Years		More than 5 Years
Contractual Obligations:
Term loan (1)	$	256,151	$	54,567	$	104,874	$	96,710	$	—
Senior Secured Notes due 2018 (1)		429,188		19,875		39,750		39,750		329,813
Senior Secured Notes due 2020 (1)		475,313		20,625		41,250		41,250		372,188
Non-cancelable operating leases (2)		103,164		25,609		35,224		27,244		15,087
Non-cancelable capital leases		8,080		2,221		4,441		1,418		—
Purchase commitments, gross (3)		284,584		284,584		—		—		—
Total contractual obligations	$	1,556,480	$	407,481	$	225,539	$	206,372	$	717,088
Other Commitments:
Standby letters of credit	$	295	$	n/a	$	n/a	$	n/a	$	n/a
Unrecognized tax benefits and related accrued interest (4)	$	152,949	$	n/a	$	n/a	$	n/a	$	n/a

(1) Amount reflects total anticipated cash payments, including anticipated interest payments.

(2) Amount excludes contractual sublease income of $36.6 million, which consists of $6.6 million to be received in less than one year, $13.6 million to be received in one to three years, $14.0 million to be received in three to five years and $2.4 million to be received in more than five years.

(3) Amount reflects total gross purchase commitments under our manufacturing arrangements with third-party contract manufacturers. Of this amount, we have accrued $4.7 million for estimated purchase commitments that we do not expect to consume in normal operations within the next twelve months, in accordance with our policy.

(4) As of July 30, 2011, we had a liability for unrecognized tax benefits of $149.7 million and a net accrual for the payment of related interest and penalties of $3.3 million. We expect to resolve the fiscal years 2004 through 2006 IRS audit during the next twelve months. As such, after we reach settlement with the IRS, we expect to record a corresponding adjustment to our unrecognized tax benefits. Due to availability of net operating losses and credits, the IRS audit settlement is not expected to result in a significant tax payment. Given the uncertainty as to settlement terms, the timing of payments and the impact of such settlements on other uncertain tax positions, the range of estimated potential decreases in underlying uncertain tax positions is between $0 and $24 million in the next twelve months.

Share Repurchase Program.As of November 29, 2007, our Board of Directors authorized a total of $800.0 million for the repurchase of our common stock. The purchases may be made, from time to time, in the open market or by privately negotiated transactions and will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the level of our cash balances, general business and market conditions, our debt covenants and other factors, including alternative investment opportunities. For the three months ended July 30, 2011, we repurchased 1.5 million shares for an aggregate purchase price of $10.0 million. Approximately $379.1 million remains authorized for future repurchases under this program as of July 30, 2011. We are subject to certain covenants relating to our borrowings that restrict the amount of our Company’s shares that we can repurchase. There is no restriction on the repurchase of our Company’s shares under the terms of our Senior Secured Credit Facility, provided our consolidated senior secured leverage ratio as defined in the credit agreement is under 2.00.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of July 30, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Estimates

There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our condensed consolidated financial statements during the nine months ended July 30, 2011 as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 30, 2010.

Impairment of goodwill and intangible assets. Goodwill is generated as a result of business combinations. We conduct our goodwill impairment test annually, as of the first day of the second fiscal quarter, or whenever events or changes in facts and circumstances indicate that the fair value of the reporting unit may be less than its carrying amount. Events which might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant decline in our stock price for a sustained period. Consistent with prior years, we performed our annual goodwill impairment test using measurement data as of the first day of the second fiscal quarter of 2011.

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We apply a two-step approach in testing goodwill for impairment for each reporting unit, which we have determined to be at the operating segment level. The reporting units are determined by the components of our operating segments that constitute a business for which both (i) discrete financial information is available and (ii) segment management regularly reviews the operating results of that component. Our four reporting units are: Data Storage Products; Ethernet Switching & Internet Protocol (“IP”) Routing, which includes Open Systems Interconnection Reference Model (“OSI”) Layer 2-3 products; Application Delivery Products (“ADP”), which includes OSI Layer 4-7 products; and Global Services.

The first step tests for potential impairment by comparing the fair value of reporting units with reporting units’ net asset values. If the fair value of the reporting unit exceeds the carrying value of the reporting unit’s net assets, then goodwill is not impaired and no further testing is required. If the fair value of reporting unit is below the reporting unit’s carrying value, then the second step is required to measure the amount of potential impairment. The second step requires an assignment of the reporting unit’s fair value to the reporting unit’s assets and liabilities, using the initial acquisition accounting guidance related to business combinations, to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the reporting unit’s goodwill is then compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss to be recognized, if any. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.

To determine the reporting unit’s fair values, we use the income approach, the market approach, or a combination thereof. The income approach provides an estimate of fair value based on discounted expected future cash flows. The market approach provides an estimate of the fair value of our four reporting units using various prices or market multiples applied to the reporting unit’s operating results and then applying an appropriate control premium. During our fiscal year 2011 annual goodwill impairment test under the first step, we used a combination of approaches to estimate reporting units’ fair values. We believed that at the time of impairment testing performed in second fiscal quarter of 2011, the income approach and the market approach were equally representative of a reporting unit’s fair value.

Determining the fair value of a reporting unit or an intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. We based our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and inherently uncertain. Estimates and assumptions with respect to the determination of the fair value of our reporting units using the income approach include, among other inputs:

• Our operating forecasts;

• Revenue growth rates; and

• Risk-commensurate discount rates and costs of capital.

Our estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our regular long-range planning process. The control premium used in market or combined approaches is determined by considering control premiums offered as part of acquisitions that have occurred in a reporting unit’s comparable market segments.

Based on our step one analysis results, we believe that all our reporting units pass the step one test and no further testing is required. However, because some of the inherent assumptions and estimates used in determining the fair value of these reportable segments are outside the control of management, changes in these underlying assumptions can adversely impact fair value. The sensitivity analysis below quantifies the impact of key assumptions on certain reporting units’ fair value estimates. The principal key assumptions impacting our estimates were (i) discount rates and (ii) DCF terminal value multipliers. As the discount rates, ultimately, reflect the risk of achieving reporting units’ revenue and cash flow projections, we do not believe that a separate sensitivity analysis for changes in revenue and cash flow projections is meaningful or useful.

The estimated fair value of ADP reporting unit exceeded its carrying value by approximately $34 million. The respective fair values of our remaining reporting units exceeded carrying value by significant amounts and were not subject to the sensitivity analysis presented below.

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The following table summarizes the approximate impact that a change in principal key assumptions would have on the estimated fair value of ADP reporting unit, leaving all other assumptions unchanged:

	Change			Approximate Impact on  Fair Value (In millions)		Excess of Fair Value over Carrying Value (In millions)
Discount rate		±1	%	$	(5) – 5	$	29 – 39
DCF terminal value multiplier		±0.5x		$	(6) – 6	$	28 – 40

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies,” of the Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we are exposed to market risks related to changes in interest rates, foreign currency exchange rates and equity prices that could impact our financial position and results of operations. Our risk management strategy with respect to these three market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing underlying exposures of the Company. Accordingly, we do not use derivative contracts for speculative purposes. Our risks and risk management strategy are outlined below. Actual gains and losses in the future may differ materially from the sensitivity analyses presented below based on changes in the timing and amount of interest rates and our actual exposures and hedges.

Interest Rate Risk

Our exposure to market risk due to changes in the general level of United States interest rates relates primarily to our term loan and cash equivalents.

We are exposed to changes in interest rates as a result of our borrowings under our term loan. As of July 30, 2011, the weighted-average annualized interest rate on the term loan was 3.0%. Based on outstanding principal indebtedness of $240.0 million under our term loan as of July 30, 2011, if market rates average 1% above the current interest rate, our annual interest expense would increase by approximately $2.4 million.

Our cash and cash equivalents are primarily maintained at five major financial institutions in the United States. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk.

The Company did not have any material investments as of July 30, 2011 that are sensitive to changes in interest rates.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk inherent in conducting business globally in numerous currencies, of which the most significant to our operations for the nine months ended July 30, 2011 were the Chinese yuan, the euro, the Japanese yen, the Indian rupee, the British pound, the Singapore dollar and the Swiss franc. We are primarily exposed to foreign currency fluctuations related to operating expenses and cost of inventory components denominated in currencies other than the U.S. dollar. As such, we benefit from a stronger U.S. dollar and may be adversely affected by a weaker U.S. dollar relative to the foreign currency. We use foreign currency forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted operating expenses denominated in currencies other than the U.S. dollar. We recognize the gains and losses on foreign currency forward contracts in the same period as the remeasurement losses and gains of the related foreign currency denominated exposures.

We also may enter into other non-designated derivatives that consist primarily of forward contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and any associated outstanding forward contracts are marked-to-market with realized and unrealized gains and losses included in earnings.

Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures if we believe such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or if the currency is difficult or too expensive to hedge. As of July 30, 2011, we held $44.3 million in cash flow derivative instruments. The maximum length of time over which we are hedged as of July 30, 2011 is through January 10, 2012.

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We have performed a sensitivity analysis as of July 30, 2011, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analysis covers all of our foreign currency contracts offset by the underlying exposures. The foreign currency exchange rates we used were based on market rates in effect at July 30, 2011. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would not result in a material foreign exchange loss as of July 30, 2011.

Equity Price Risk

We had no investments in publicly traded equity securities as of July 30, 2011. The aggregate cost of our equity investments in non-publicly traded companies was $7.0 million as of July 30, 2011. We monitor our equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value, and we determine the decline in value to be other-than-temporary, we reduce the carrying value to its current fair value. Generally, we do not attempt to reduce or eliminate our market exposure on these equity securities. We do not purchase our equity securities with the intent to use them for speculative purposes.

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “BRCD.” On July 29, 2011, the last business day of our third fiscal quarter of 2011, the last reported sale price of our common stock on the NASDAQ Global Select Market was $5.48 per share.

Item 4. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures.Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”).

The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures are effective such that the information required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

(b)Changes in Internal Control over Financial Reporting.While there were no changes in our internal control over financial reporting that occurred during the quarter ended July 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as part of continuous process improvements, the Company implemented certain enhancements to processes relating to sales discounts, including implementation of improved information systems, in the beginning of fiscal year 2011. As a result of these improvements, the Company identified certain immaterial errors in its prior period financial statements as described in Note 1, “Basis of Presentation” of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Limitations on the Effectiveness of Disclosure Controls and Procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

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Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Information set forth in the Legal Proceedings portion of Note 9, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

Uncertainty about or a slowdown in the domestic and global economies may increasingly adversely affect Brocade’s operating results and financial condition.

There is ongoing uncertainty about the domestic and global economies and there may be a prolonged period of significant slowdown. Such uncertainty or slowdown may result in lower growth in the networking industry and reduced demand for information technology, including high-performance data networking solutions. Information technology spending has historically declined as federal spending decreases and general economic and market conditions have worsened. If the domestic and/or global economy undergoes a prolonged period of uncertainty or a significant downturn, such as the debt crisis occurring in the Eurozone economy, or if Brocade’s customers believe such a period of uncertainty or a downturn will continue for a sustained period they will likely reduce their information technology spending and future budgets. Brocade is particularly susceptible to reductions in information technology spending because the purchase of Brocade’s products is often discretionary and may involve a significant commitment of capital and other resources. Future delays or reductions in information technology spending, domestically and/or internationally, could harm Brocade’s business, results of operations and financial condition in a number of ways, including longer sales cycles, increased inventory provisions, increased production costs, lowered prices for products and reduced sales volumes. Similarly, as Brocade’s suppliers face challenges in obtaining credit or otherwise in operating their businesses, they may become unable to continue to offer the materials Brocade uses to manufacture its products. These events have caused, and may cause further, reductions in Brocade’s revenue, profitability and cash flows, increased price competition, increased operating costs and longer fulfillment cycles and exacerbate many other risks noted in this Form 10-Q, which adversely affect Brocade’s business, results of operations and financial condition.

Given the current uncertainty about the extent and duration of the global financial recovery, it is increasingly difficult for Brocade, Brocade’s customers and Brocade’s suppliers to accurately forecast future product demand trends, which could cause Brocade to produce excess products that would increase Brocade’s inventory carrying costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products or materials used in Brocade’s products that would result in an inability to satisfy demand for Brocade’s products and a loss of market share.

A period of uncertainty or economic downturn may also significantly affect financing markets, the availability of capital and the terms and conditions of financing arrangements, including the overall cost of financing. Circumstances may arise in which Brocade needs, or desires, to raise additional capital. Such capital may not be available on commercially reasonable terms, or at all, which in turn could adversely affect Brocade’s financial condition.

Intense competition in the market for networking solutions could prevent Brocade from increasing or maintaining revenue, profitability and cash flows with respect to its networking solutions.

The networking market is increasingly competitive. While Cisco maintains a dominant position in the Ethernet networking market, other companies have strengthened their networking portfolios through acquisitions, including Dell’s acquisition of Force10 Networks, HP’s acquisition of 3Com, and IBM’s acquisition of Blade Network Technologies. These acquisitions will significantly limit Brocade’s ability to sell Ethernet products through these companies and may also indirectly impact the Fibre Channel business. HP, IBM and, to a lesser extent, Dell are important OEM partners for Brocade in the Fibre Channel switching market, yet also are competitive with Brocade in other respects. Other competitors in the Ethernet networking market include Arista Networks, Alcatel-Lucent, Enterasys Networks, Inc., Extreme Networks, Inc., F5 Networks, Inc., Huawei Technologies Co. Ltd., and Juniper Networks, Inc.

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Brocade also competes with Cisco and QLogic Corporation in the Fibre Channel switching market and with QLogic and Emulex Corporation in the server connectivity or HBA market. In addition, EMC, one of Brocade’s top OEM customers in terms of Fibre Channel sales and a go-to-market and technology partner since 1997, has formed a separate venture with Cisco and VMware called the “Virtual Computing Environment” (VCE) that enables the new company to sell packaged “cloud computing” and data center virtualization solutions.

The above-referenced acquisitions and business partnerships demonstrate the increasingly complex nature of relationships within the networking industry, especially as the IT industry migrates to cloud computing models. This trend has led the networking industry to introduce new solutions and technology architectures to support cloud computing. Brocade calls this category “Ethernet fabrics” and has introduced a new solution portfolio through the Brocade VDX 6720 Data Center Switch and the Brocade Virtual Cluster Switching (VCS) software. Brocade’s competitors also recently introduced new products focused on cloud computing such as Juniper Networks and its QFabric architecture. Other examples include Arista Networks, Avaya, Alacatel Lucent, Cisco and Force10 Networks-Dell who have all recently introduced roadmaps and solutions targeted at cloud computing users.

Some of Brocade’s competitors have greater market leverage, longer operating histories, greater financial, technical, sales, marketing and other resources, more name recognition and larger installed customer bases. Brocade’s competitors could also adopt more aggressive pricing policies than Brocade. Brocade believes that competition based on price may become more aggressive than it has traditionally experienced. As a result of these factors, Brocade’s competitors could also devote greater resources to the development, promotion and sale of their products than Brocade and, as a result, may be able to respond more quickly to changes in customer or market requirements. Brocade’s failure to successfully compete in the market would harm Brocade’s business and financial results.

The prices of Brocade’s products have declined in the past and Brocade expects the prices of Brocade’s products to continue to decline, which could reduce Brocade’s revenues, gross margins and profitability.

The average selling price for Brocade’s products has declined in the past, and Brocade expects it to continue to decline in the future as a result of changes in competitive pricing pressure, broader macroeconomic factors, product mix, enhanced marketing programs, increased sales discounts, new product introductions by Brocade or Brocade’s competitors, the entrance of new competitors and other factors. Brocade expects that average selling prices per port for Data Storage products will continue to decline at rates consistent with historical rates of low single digits per quarter, and that average selling prices per port for Brocade’s Ethernet products will decline at a rate in the low- to mid-single digits; however, average selling prices could decline much faster. Price declines may also increase as competitors ramp up product releases that compete with Brocade’s products. Furthermore, particularly as economic conditions deteriorate and drive a more cautious capital spending environment in the technology sector, both Brocade and its competitors could pursue more aggressive pricing strategies in an effort to maintain or seek to increase sales levels. If Brocade is unable to offset any negative impact from the above factors on the average selling price of Brocade’s products by increasing the volume of products shipped or reducing product manufacturing costs, Brocade’s total revenues and gross margins will be negatively impacted.

In addition, to maintain Brocade’s gross margins, Brocade must maintain or increase the number of existing products shipped and develop and introduce new products and product enhancements with improved costs, and continue to reduce the overall manufacturing costs of Brocade’s products. While Brocade has successfully reduced the cost of manufacturing Brocade’s products in the past, Brocade may not be able to continue to reduce cost of production at historical rates. Moreover, most of Brocade’s expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenue. As a result, Brocade may not be able to decrease its spending quickly enough or in sufficient amounts to offset any unexpected shortfall in revenues. If this occurs, Brocade could incur losses and Brocade’s operating results and gross margins could be below expectations. Additionally, Brocade’s gross margins may be negatively affected by fluctuations in manufacturing volumes, component costs, foreign currency exchange rates, the mix of product configurations sold and the mix of distribution channels through which its products are sold. In addition, if product or related warranty costs associated with Brocade’s products are greater than previously experienced, Brocade’s gross margins may also be adversely affected. Brocade has also announced its plans to increase non-GAAP gross margins for its Ethernet products by a combination of initiatives, including new product introductions with improved gross margins, normalized pricing, inventory management and increased product volumes. If Brocade is not able to successfully execute on one or more of these on-going initiatives, gross margin improvements may not be realized.

The loss of any of Brocade’s major OEM customers, the failure to successfully build a direct and channel model or any other significant failure to execute on Brocade’s overall sales strategy could significantly reduce Brocade’s revenues and negatively affect Brocade’s financial results.

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Brocade storage area networking (“SAN”) business depends on recurring purchases from a limited number of large OEM partners for a substantial portion of its revenues. As a result, these large OEM partners have a significant influence on Brocade’s quarterly and annual financial results. For fiscal years 2010, 2009 and 2008, the same three customers each represented 10% or more of Brocade’s total net revenues. Brocade’s agreements with its OEM partners are typically cancelable, non-exclusive, have no minimum purchase requirements and have no specific timing requirements for purchases. Brocade’s OEM partners could also elect to eliminate, reduce, or rebalance the amount they purchase from Brocade and/or increase the amount purchased from Brocade’s competitors or introduce their own technology. Changes to inventory levels at one or multiple partners can negatively impact Brocade’s revenue and earnings results and may mask underlying end-user demand. Also, one or more of Brocade’s OEM partners could elect to consolidate or enter into a strategic partnership with one of Brocade’s competitors, which could reduce or eliminate Brocade’s future revenue opportunities with that OEM partner. Brocade anticipates that a significant portion of its revenues and operating results from its SAN business will continue to depend on sales to a relatively small number of OEM partners. The loss of any one significant OEM partner, or a decrease in the level of sales to any one significant OEM partner, or unsuccessful quarterly negotiation on key terms, conditions or timing of purchase orders placed during a quarter, would likely cause serious harm to Brocade’s business and financial results.

Brocade’s OEM partners evaluate and qualify Brocade’s SAN products for a limited time period before they begin to market and sell them. Assisting Brocade’s OEM partners through the evaluation process requires significant sales, marketing and engineering management efforts on Brocade’s part, particularly if Brocade’s SAN products are being qualified with multiple distribution partners at the same time. In addition, once Brocade’s SAN products have been qualified, its customer agreements have no minimum purchase commitments. Brocade may not be able to effectively maintain or expand its distribution channels, manage distribution relationships successfully, or market its products through distribution partners.

Brocade offers its products through a multipath distribution strategy, including through resellers, distributors and direct, and its Ethernet products through OEMs that have historically offered Brocade SAN products. However, these new and expanded channels may not generate much, if any, revenue opportunities for Brocade. This is further compounded by the fact that several major OEMs, including Dell, IBM and HP, have acquired companies who offer Ethernet products competitive to Brocade’s offerings.

Additionally, Brocade has focused substantial resources to emphasize the Ethernet networking market through a channels strategy. This focus towards the Ethernet networking market may negatively impact Brocade’s other businesses such as its Data Storage networking products because management’s attention and limited resources such as employees may be reallocated away from Brocade’s Data Storage products and towards Ethernet products instead. Brocade must continually anticipate and respond to the needs of its distribution partners and their customers, and ensure that its products integrate with their solutions. Brocade’s failure to successfully manage its distribution relationships or the failure of its distribution partners to sell Brocade’s products could reduce Brocade’s revenues significantly. In addition, Brocade’s ability to respond to the needs of its distribution partners in the future may depend on third parties producing complementary products and applications for Brocade’s products. There can be no assurance that Brocade will be successful in expanding its go to market objectives. If Brocade fails to respond successfully to the needs of these groups, its business and financial results could be harmed.

The loss or delay of continued orders from any of Brocade’s more significant customers, such as the U.S. government or individual agencies within the U.S. government such as the Department of Defense or Intelligence where Brocade’s revenue is highly concentrated, or companies within the financial services, education and health sectors, could also cause its revenue and profitability to suffer. For example, if Brocade is unable to offer qualified products to such government customers due to regulations and requirements with respect to country of origin designation, or if Brocade experiences governmental procurement delays due to the timing of approval of the federal budget, budget reductions that target specific agencies where Brocade’s revenue is concentrated, or other reasons, Brocade’s revenue and operating results could be negatively impacted. In addition, a change in the mix of Brocade’s customers, or a change in the mix of direct and indirect sales, could adversely affect its revenue and gross margins. Also, such governmental delays or budget reductions could negatively impact IT spending across the broader economy and therefore negatively impact Brocade’s revenue and operating results.

Brocade’s future revenue growth depends on its ability to introduce new products and services on a timely basis and achieve market acceptance of these new products and services.

Developing new offerings requires significant upfront investments that may not result in revenue for an extended period of time, if at all. Brocade must achieve widespread market acceptance of Brocade’s new product and service offerings on a timely basis in order to realize the benefits of Brocade’s investments. The market for networking solutions, however, is characterized by rapidly changing technology, accelerating product introduction cycles, changes in customer requirements and evolving industry standards. Brocade’s future success depends largely upon its ability to address the rapidly changing needs of its customers by developing and supplying

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high-quality, cost-effective products, product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. This risk will likely become more pronounced as the networking markets become more competitive and as demand for new and improved technologies increases.

Examples of such technological developments include adoption of network attached storage and Internet Small Computer System Interface (“iSCSI”) in storage networks, which may displace existing solutions in actual customer implementations and may erode the total addressable market (“TAM”) for Fibre Channel products. Brocade recently introduced its newest portfolio of Fibre Channel switching products that support the new 16 Gigabits per second (Gbps) technology. The transition to this new Fibre Channel technology may be negatively impacted if customers accelerate their adoption of alternative storage networking technologies.

Brocade is also an early developer of, and the vendor who was first-to-market for, Ethernet fabrics based on the Brocade VDX 6720 and Brocade VCS software, which were built to provide the features necessary to support virtualization and private clouds. The success of Ethernet fabrics will depend on customers recognizing the need to upgrade their data center LANs to fabric-based architectures. Although Brocade plans to continue to invest in this area with new and enhanced Ethernet fabric solutions, Brocade’s future success would be negatively impacted if this technological transition does not occur at the anticipated rate or at all.

Other factors that may affect Brocade’s successful introduction of new product and service offerings include Brocade’s ability to:

• Properly determine the market for and define new products and services, which can be particularly challenging for initial product offerings in new markets;

• Differentiate Brocade’s new products and services from its competitors’ technology and product offerings;

• Address the complexities of interoperability of Brocade’s products with its installed base, OEM partners’ server and storage products and its competitors’ products;

• Meet or exceed customer requirements for product features, cost-effectiveness, and scalability; and

• Maintain high levels of product quality and reliability.

Various factors impacting market acceptance are outside of Brocade’s control, including the following:

• The availability and price of competing products and alternative technologies;

• The cost of certain product subcomponents, which could cause Brocade to modify prices to maintain adequate gross margins;

• Product qualification requirements by Brocade’s OEM partners, which can cause delays in the market acceptance;

• The timing of the adoption of new industry standards relative to Brocade’s development of new technologies and products;

• The ability of its OEM partners to successfully distribute, support and provide training for its products; and

• Customer acceptance of Brocade’s products, including its Ethernet solutions.

If Brocade is not able to successfully develop and market new and enhanced products and services on a timely basis, its business and results of operations will likely be harmed.

As Brocade introduces new or enhanced products, Brocade must also successfully manage the transition from older products to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and provide sufficient supplies of new products to meet customer demands. When Brocade introduces new or enhanced products, Brocade faces numerous risks relating to product transitions, including the inability to accurately forecast demand, manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new products. In addition, any customer uncertainty regarding the timeline for rolling out new products or Brocade’s plans for future support of existing products may negatively impact customer purchase decisions.

If Brocade loses key talent or is unable to hire additional qualified talent, Brocade’s business may be harmed.

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Brocade’s success depends, to a significant degree, upon the continued contributions of key management, engineering, sales and other talent, many of whom would be difficult to replace. Brocade believes its future success depends, in large part, upon Brocade’s ability to effectively attract highly skilled sales talent in addition to managerial, engineering and other talent, and on the ability of management to operate effectively, both individually and as a group, in geographically diverse locations. There is a limited number of qualified talent in each applicable market and competition for such talent has become much more aggressive. Other companies in Brocade’s industry and geographic regions are recruiting from the same limited talent pool which creates further compression on the availability of qualified talent. In particular, Brocade operates in various locations with highly competitive labor markets including Bangalore, India and San Jose, California, as well as certain emerging labor markets, such as the Eastern European and Latin American markets. Brocade may experience difficulty in hiring qualified talent with skills in areas such as sales, ASICs, software, system and test, product management, marketing, service, customer support and key management.

In addition, future declines in Brocade’s stock price will reduce the value of equity awards and may result in additional “underwater” stock options held by its employees. If such a decline in Brocade’s stock price were to occur, Brocade’s ability to incentivize, retain or attract qualified talent could be negatively impacted. Brocade’s ability to retain qualified talent may also be affected by future and recent acquisitions, which may cause uncertainty and loss of key talent. The loss of the services of any of Brocade’s key employees, the inability to attract or retain qualified talent in the future, or delays in hiring required talent, particularly sales and engineering talent, could delay the development and introduction of Brocade’s products or services, and negatively affect Brocade’s ability to sell its products or services.

In addition, companies in the computer storage, networking and server industries whose employees accept positions with competitors may claim that their competitors have engaged in unfair hiring practices or that there will be inappropriate disclosure of confidential or proprietary information. Brocade may be subject to such claims in the future as Brocade seeks to hire additional qualified talent. Such claims could result in litigation. As a result, Brocade could incur substantial costs in defending against these claims, regardless of their merits, and be subject to additional restrictions if any such litigation is resolved against Brocade.

The failure to accurately forecast demand for Brocade’s products or the failure to successfully manage the production of Brocade’s products could negatively affect Brocade’s product cost or Brocade’s ability to manufacture and sell Brocade’s products.

Brocade provides product forecasts to its contract manufacturers and places purchase orders with them in advance of the scheduled delivery of products to Brocade’s customers. In preparing sales and demand forecasts, Brocade relies largely on input from its sales force, partners, resellers and end-user customers. Therefore, if Brocade or its partners are unable to accurately forecast demand, or if Brocade fails to effectively communicate with its distribution partners about end-user demand or other time-sensitive information, the sales and demand forecasts may not reflect the most accurate, up-to-date information. If these forecasts are inaccurate, Brocade may be unable to obtain adequate manufacturing capacity from its contract manufacturers to meet customers’ delivery requirements or Brocade may accumulate excess inventories. Furthermore, Brocade may not be able to identify forecast discrepancies until late in its fiscal quarter. Consequently, Brocade may not be able to make timely adjustments to its business model. If Brocade is unable to obtain adequate manufacturing capacity from its contract manufacturers, or if Brocade is unable to make necessary adjustments to Brocade’s business model, revenue may be delayed or even lost to Brocade’s competitors and Brocade’s business and financial results may be harmed. If excess inventories accumulate, Brocade’s gross margins may be negatively impacted by write-downs for excess and/or obsolete inventory. In addition, Brocade may experience higher fixed costs as it expands its contract manufacturer capabilities, which could negatively affect Brocade’s ability to react quickly if demand suddenly decreases.

Brocade’s ability to accurately forecast demand also may become increasingly more difficult as Brocade introduces new or enhanced products, begins phasing out certain products, or acquires other companies or businesses. Both forecasting demand for products that are nearing end of life or are being replaced by new versions, and decreasing production on the older products and ramp up production on the new products, may be difficult. Brocade may be unable to obtain adequate supply of new product components and/or manufacturing capacity from its contract manufacturers to meet customers’ delivery requirements that may negatively impact revenues. Brocade may also accumulate excess inventories that may negatively impact gross margins due to write-downs for excess and/or obsolete inventory.

In addition, although the purchase orders placed with Brocade’s contract manufacturers are cancelable in certain circumstances, Brocade could be required to purchase certain unused material not returnable, usable by, or sold to other customers if Brocade cancels any of Brocade’s orders. This purchase commitment exposure is particularly high in periods of new product introductions and product transitions. If Brocade is required to purchase unused material from Brocade’s contract manufacturers, Brocade could incur unanticipated expenses, including write-downs for excess and/or obsolete inventory, and Brocade’s business and financial results

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could be negatively affected. In the past, Brocade has experienced delays in shipments of its Ethernet products from its contract manufacturers and OEMs, which in turn delayed product shipments to its customers. Brocade may in the future experience similar delays or other problems, such as insufficient quantity of product, acquisition by a competitor or loss of business from one or more of its OEMs, any of which could harm Brocade’s business and operating results.

Brocade’s balance sheet carries a substantial amount of acquired intangible assets, goodwill and deferred tax assets, and Brocade could be required to record impairment charges for these assets; Any impairment of the carrying value of those assets could adversely affect Brocade’s business and financial results.

Brocade carries a substantial amount of acquired intangible assets, goodwill and deferred tax assets on its balance sheet. The goodwill and acquired intangibles relate to Brocade’s prior strategic acquisitions. In response to changes in industry and market conditions, Brocade may elect to realign its resources strategically and consider restructuring, selling, disposing of, or otherwise exiting businesses. Any decision to limit investment in, sell, dispose of or otherwise exit businesses may result in the recording of special charges, such as inventory and technology-related write-offs, goodwill impairment charges, intangible asset write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products.

As a result of Brocade’s acquisition of Foundry in December 2008, Brocade reorganized into four operating segments, of which two are individually reportable segments: Data Storage Products and Global Services; and the two other operating segments, Ethernet Switching & IP Routing and ADP, combine to form a third reportable segment: Ethernet Products. Brocade’s determination of fair value of long-lived assets relies on management’s assumptions of future revenues, operating costs, and other relevant factors. If management’s estimates of future operating results change or if there are changes to other assumptions, such as the discount rate applied to future cash flows, the estimate of the fair value of Brocade’s reporting units could change significantly, which could result in goodwill impairment charges. Brocade’s estimates with respect to the useful life or ultimate recoverability of Brocade’s carrying basis of assets, including purchased intangible assets, could change as a result of such assessments and decisions. Brocade is required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances, and future goodwill impairment tests may result in a charge to earnings. Brocade conducted its annual goodwill impairment test during the second fiscal quarter of 2011, and determined that no impairment needed to be recorded (see Note 3, “Goodwill and Intangible Assets,” of the Notes to Condensed Consolidated Financial Statements, and sensitivity analysis performed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations). If future goodwill impairment tests result in a charge to earnings, Brocade’s financial results would be adversely affected.

Brocade has determined that more-likely-than-not it will realize its deferred tax assets based on positive evidence of its history of profits and projections of future income. Accordingly, the Company only applies a valuation allowance on the deferred tax assets relating to capital loss and investment loss carryforwards. In the event future income by jurisdiction is less than what is currently projected, Brocade may be required to apply a valuation allowance to these deferred tax assets in jurisdictions where realization of such assets are no longer more-likely-than-not (see Note 13, “Income Taxes,” of the Notes to Condensed Consolidated Financial Statements).

Brocade’s estimates relating to the liabilities for excess facilities are also affected by changes in real estate market conditions. In addition, Brocade has made investments in certain private companies which could become impaired if the operating results of those companies change adversely.

Brocade’s revenues and operating results and financial position may fluctuate in future periods due to a number of factors, which make predicting results of operations difficult and could adversely affect the trading price of Brocade’s stock.

Information technology spending is subject to cyclical and uneven fluctuations. It can be difficult to predict the degree to which the seasonality and uneven sales patterns of Brocade’s OEM partners or other customers will affect Brocade’s business in the future, particularly as Brocade releases new products. While Brocade’s first and fourth fiscal quarters have typically been seasonally stronger quarters than its second and third fiscal quarters, particularly for storage networking products, future buying patterns may differ from historical seasonality. In addition, the Federal budget for government IT spending can be subject to delay, reductions and uncertainty from time to time due to political and legislative volatility, which can cause Brocade’s financial results to fluctuate unevenly and unpredictably.

Uneven sales patterns are not only difficult to predict, but also can result in irregular shipment patterns that can cause shortages or underutilized capacity, increase costs due to higher inventory levels, and otherwise adversely impact inventory planning. For

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example, Brocade’s Ethernet networking business has experienced significantly higher levels of sales towards the end of a period. Orders received towards the end of the period may not ship within the period due to Brocade’s manufacturing lead times. This exposes Brocade to additional inventory risk because Brocade must order products in anticipation of expected future orders and additional sales risk if Brocade is unable to fulfill unanticipated demand.

Brocade’s quarterly and annual revenues and operating results and financial position may vary significantly in the future due to the factors noted above as well as other factors, including but not limited to, the following:

• Receipt of a high number of customer orders towards the end of a fiscal quarter will increase reported receivables outstanding as a fraction of reported sales and result in higher days sales outstanding;

• Disruptions, or a continued decline, in general economic conditions, particularly in the information technology industry and U.S. federal government budget cycles, especially those governmental departments such as the Department of Defense and Intelligence that are likely to be negatively impacted by budget reductions and where Brocade’s revenue is highly concentrated;

• Announcements of pending or completed acquisitions or other strategic transactions by Brocade, its competitors or its partners;

• Announcements, introductions and transitions of new products by Brocade, its competitors or its partners;

• The timing of customer orders, product qualifications and product introductions of Brocade’s partners;

• Long and complex sales cycles;

• Internal supply and inventory management objectives of Brocade’s OEM partners and other customers;

• Brocade’s ability to timely produce products that comply with new environmental restrictions or related requirements of its customers;

• Brocade’s ability to obtain sufficient supplies of sole- or limited-sourced components, including ASICs, microprocessors, certain connectors, certain logic chips and programmable logic devices;

• Availability of supply or increases in prices of components used in the manufacture of Brocade’s products;

• Variations in the mix of Brocade’s products sold and the mix of distribution channels and geographies through which they are sold;

• Pending or threatened litigation, including any settlements or judgments related to such litigation;

• Stock-based compensation expense that is affected by Brocade’s stock price;

• Examinations by government tax authorities that may have unfavorable outcomes and subject Brocade to additional tax liabilities;

• New legislation and regulatory developments, including increases to tax rates or changes to treatment of an income or expense item; and

• Other risk factors detailed in this section.

Accordingly, Brocade’s quarterly and annual revenues and operating results may vary significantly in future. The results of any prior periods should not be relied upon as an indication of future performance. Brocade cannot assure you that in some future quarter Brocade’s revenues or operating results will not be below Brocade’s projections or the expectations of stock market analysts or investors, which could cause Brocade’s stock price to decline.

Brocade has extensive international operations, which subjects it to additional business risks.

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A significant portion of Brocade’s sales occur in international jurisdictions. In addition, Brocade’s contract manufacturers have significant operations in China. Brocade plans to continue to expand its international operations and sales activities. Brocade’s international sales of its Ethernet networking products have primarily depended on a variety of its resellers, including Avnet Technology Solutions and Computacenter AG & Co. OHG in Europe, Net One Systems in Japan and Samsung Corporation in Korea. The failure by international resellers to sell Brocade’s products could limit its ability to sustain and grow revenue. Maintenance or expansion of international operations involves inherent risks that Brocade may not be able to control, including:

• Exposure to economic instability or fluctuations in international markets that could cause customer reductions in IT spending;

• Exposure to inflationary risks in China and the continuing sovereign debt risk in Europe;

• Reduced or limited protection of intellectual property rights, particularly in jurisdictions that have less developed intellectual property regimes such as China and India;

• Managing research and development teams in geographically diverse locations, including teams divided between the United States and India;

• Significant wage inflation in certain growing economies such as India;

• Increased exposure to foreign currency exchange rate fluctuations, including the appreciation of foreign currencies such as the Chinese yuan or European Union’s euro;

• Communicating effectively across multiple geographies, cultures and languages;

• Recruiting sales and technical support personnel with the skills to design, manufacture, sell and support Brocade’s products in international markets;

• Complying with governmental regulation of encryption technology and regulation of imports and exports, including obtaining required import or export approval for its products;

• Increased complexity and costs of managing international operations;

• Commercial laws and business practices that favor local competition;

• Multiple, potentially conflicting, and changing governmental laws, regulations and practices, including differing export, import, tax, labor, anti-bribery and employment laws;

• Longer sales cycles and manufacturing lead times;

• Increased complexity and cost of providing customer support and maintenance for international customers;

• Difficulties in collecting accounts receivable; and

• Increased complexity of logistics and distribution arrangements.

Failure to manage expansion effectively could seriously harm Brocade’s business, financial condition and prospects. In addition, international political instability may halt or hinder Brocade’s ability to do business and may increase Brocade’s costs. Various events, including the occurrence or threat of terrorist attacks, increased national security measures in the United States and other countries, and military action and armed conflicts, may suddenly increase international tensions. Such events may have an adverse effect on the world economy and could adversely affect Brocade’s business operations or the operations of Brocade’s OEM partners, end-user customers and channels, contract manufacturers and suppliers.

To date, no material amount of Brocade’s international revenues and cost of revenues 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 Brocade’s products more expensive and, thus, not competitively priced in foreign markets. Additionally, a decrease in the value of the U.S. dollar relative to foreign currencies could increase Brocade’s product and operating costs in foreign locations (e.g., appreciation of the European

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Union’s euro and Chinese yuan). In the future, a larger portion of Brocade’s international revenues may be denominated in foreign currencies, which will subject Brocade to additional risks associated with fluctuations in those foreign currencies. In addition, Brocade may be unable to successfully hedge against any such fluctuations.

Brocade is subject to, and may in the future be subject to other, intellectual property infringement claims and litigation that are costly to defend and/or settle, and that could result in significant damage and cost awards against Brocade and limit Brocade’s ability to use certain technologies in the future.

Brocade competes in markets that are frequently subject to claims and related litigation regarding patent and other intellectual property (“IP”) rights. From time to time, third parties have asserted patent, copyright, trade secret, and/or other IP-related claims against Brocade and/or employees of Brocade. These claims may be, and have been in the past, made against Brocade’s products and services, subcomponents of its products, methods performed by its products or combination of products including third party products or used in its operations, or uses of its products by its customers, or may concern Brocade’s hiring of a former employee of the third party claimant. Brocade and companies acquired by Brocade, such as Foundry, have in the past incurred, are currently incurring, and will in the future incur, substantial expenses to defend against such third-party claims. For instance, Brocade currently is defending patent-related lawsuits, including lawsuits filed by A10 Networks, Inc., Enterasys Networks, Inc. and Chrimar Systems, Inc. Brocade’s suppliers and customers also may be subject to third party IP claims, which could negatively impact their ability to supply Brocade or their willingness to purchase from Brocade, respectively. In addition, Brocade may be subject to claims and indemnification obligations with respect to third-party IP rights pursuant to Brocade agreements with suppliers, OEM and channel partners, or customers. The third party asserters of such IP claims may be unreasonable in their demands, or may simply refuse to settle, which could lead to expensive settlement payments, prolonged periods of litigation expenses, additional burden on employees or other resources, distraction from Brocade’s business initiatives and operations, component supply stoppages and lost sales. In the event of an adverse determination, Brocade could incur substantial monetary liability and be prohibited from utilizing certain IP or technology, hiring certain people, selling, shipping, importing or servicing certain products or incorporating necessary components into Brocade’s products. Suppliers of components or OEM systems to Brocade may be unwilling to, or not be able to, defend or indemnify Brocade against third-party assertions directed at, or based in part on, the components or systems they supply to Brocade, and may be unwilling to take licenses that would assure Brocade’s supply of such components or OEM systems. Suppliers subject to third party IP claims also may choose to, or be forced by litigation to, discontinue or alter components or services supplied to Brocade, with little or no advance notice to Brocade. Customers may perceive such third-party IP claims as risks, and may, as a result, be less willing to do business with Brocade. Such claims or litigation could also negatively impact Brocade’s recruiting efforts or ability to retain its employees. Any of the above scenarios could have a material adverse effect on Brocade’s financial position, results of operations, cash flows, and future business prospects.

Brocade’s intellectual property rights may be infringed or misappropriated by others, and Brocade may not be able to protect or enforce its intellectual property rights.

Brocade’s IP rights may be infringed or misappropriated by others. In some cases, such infringement or misappropriation may be undetectable, or enforcement of Brocade’s rights may be impractical. From time to time, Brocade sends notice to third parties to assert its IP rights and to request that those third parties take steps to address Brocade’s concerns. In addition, Brocade has filed, and may in the future file, lawsuits against third parties in an effort to enforce its IP rights. For instance, in the fourth quarter of fiscal year 2010, Brocade filed a patent infringement, copyright infringement, trade secret misappropriation and unfair competition lawsuit against A10 Networks, Inc. and certain individuals. IP litigation is expensive and unpredictable. There can be no assurance that Brocade will prevail in such assertions or enforcement efforts, either on the merits, or with respect to particular relief sought, such as damages or an injunction. Further, the opposing party may attempt to prove that the asserted IP rights are invalid or unenforceable, and, if successful, may seek recompense for its attorney fees and costs. Further, the opposing party may counterclaim against Brocade, for example, for infringement of its own patents or other IP rights, or may assert other tort or contract claims, which could lead to further expense and potential exposure for Brocade.

Brocade relies on a combination of patent, copyright, trademark and trade secret laws, and measures such as physical and operational security and contractual restrictions, to protect its intellectual property rights in its proprietary technologies, but none of these methods of protection may be entirely appropriate to address the particular risk or reliable, due to, for instance, employee hiring and turnover, geographic dispersion of employees, technology disclosures with suppliers, customers, and partners, unpredictable events, misappropriation or negligence, operations in various countries that do not have well-established or reliable enforcement institutions or customs, and other aspects of doing business on the scale of Brocade’s operations. The measures Brocade has taken to protect its intellectual property rights in its proprietary technologies may prove inadequate, which could result in a loss of IP rights. Brocade attempts to identify its technological developments for assessment of whether to file patent applications, but there can be no

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assurance that all patentable technological developments will be captured in patent applications. Further, although Brocade has patent applications pending, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect its technology. Further, physical and operational security can be adversely affected, and associated policies and training rendered ineffective, by employee attitudes, carelessness or disregard for policies, malfeasors or changes in technology, such as the now-near-ubiquitous availability of portable memory devices. In addition, due to less developed IP regimes in certain jurisdictions, Brocade may not be able to protect fully its IP as Brocade expands its operations globally.

Brocade relies on licenses from third parties and the loss or inability to obtain any such license could harm its business.

Many of Brocade’s products are designed to include software or other IP licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products, Brocade believes that, based upon past experience and standard industry practice, such licenses generally can be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses will be available on acceptable terms, if at all. Brocade’s inability to obtain certain licenses or other rights on favorable terms could have an adverse effect on Brocade’s business, operating results and financial condition, including its ability to continue to distribute or support effected products. In addition, if Brocade has failed or in the future fails to carefully manage the use of “open source” software in Brocade’s products, or if companies acquired by Brocade such as Foundry or McDATA failed in such regard, Brocade may be required to license key portions of Brocade’s products on a royalty-free basis or expose key parts of source code, or to commence costly product redesigns, which could result in a loss of IP rights, product performance degradation or delay in shipping products to customers.

Brocade is dependent on sole source and limited source suppliers for certain key components, the loss of which may significantly impact results of operations.

Although Brocade uses standard parts and components for its products where possible, Brocade’s contract manufacturers currently purchase, on Brocade’s behalf, several key components used in the manufacture of its products from single or limited supplier sources. Brocade’s single source components include, but are not limited to, its application-specific integrated circuits (“ASICs”) and Brocade’s principal limited source components include memory, certain oscillators, microprocessors, certain connectors, certain logic chips, power supplies, programmable logic devices, printed circuit boards, certain optical components, packet processors and switching fabrics. Brocade generally acquires these components through purchase orders and has no long-term commitments regarding supply or pricing with such suppliers. If Brocade is unable to obtain these and other components when required, or if Brocade experiences component defects, Brocade may not be able to deliver Brocade’s products to Brocade’s customers in a timely manner and may be required to repair or retro-fit products previously delivered to customers at significant expense to Brocade. In addition, a challenging economic or industry environment could cause some of these sole source or limited source suppliers to delay or halt production or to go out of business or be acquired by third parties, which could result in a disruption in Brocade’s supply chain. Brocade’s supply chain could also be disrupted in a variety of other circumstances that may impact its suppliers and partners, including adverse results from intellectual property litigation or natural disasters. As a result, Brocade’s business and financial results could be harmed. For example, the recent earthquake, tsunami and subsequent nuclear reactor issues in Japan in March 2011 could negatively impact Brocade’s supply chain. Although Brocade does not anticipate any immediate supply chain impact and continues to monitor the potential longer-term impact, certain limited components supplied for Brocade products are manufactured in Japan, which could pose some risk to Brocade’s supply chain.

In addition, the loss of any of Brocade’s major third-party contract manufacturers, or portions of their capacity, could significantly impact Brocade’s ability to produce its products for an indefinite period of time. Qualifying a new contract manufacturer and commencing volume production is typically a lengthy and expensive process. If Brocade is required to change any of its contract manufacturers or if any of its contract manufacturers experience delays, disruptions, capacity constraints, component parts shortages or quality control problems in its manufacturing operations, shipment of Brocade’s products to Brocade’s customers could be delayed and result in loss of revenues and Brocade’s competitive position and relationship with customers could be harmed.

Undetected software or hardware errors could increase Brocade’s costs, reduce Brocade’s revenues and delay market acceptance of Brocade’s products.

Networking products frequently contain undetected software or hardware errors, or bugs, when first introduced or as new versions are released. Brocade’s products are becoming increasingly complex and particularly, as Brocade continues to expand its product portfolio to include software-centric products, including software licensed from third parties, errors may be found from time to time in Brocade’s products. In addition, through its acquisitions, Brocade has assumed, and may in the future assume, products previously developed by an acquired company that have not been through the same level of product development, testing and quality control

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processes used by Brocade, and may have known or undetected errors. Some types of errors also may not be detected until the product is installed in a heavy production or user environment. In addition, Brocade’s products are often combined with other products, including software, from other vendors, and these products often need to interface with existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause Brocade to incur significant warranty and repair costs, may divert the attention of engineering personnel from product development efforts, and may cause significant customer relations problems such as reputational problems with customers. Moreover, the occurrence of hardware and software errors, whether caused by another vendor’s storage, data management or Ethernet products or Brocade’s, could delay market acceptance of Brocade’s new products.

Brocade may not realize the anticipated benefits of past or future acquisitions, divestitures and strategic investments, and integration of acquired companies or technologies or divestiture of businesses may negatively impact Brocade’s overall business.

Brocade has in the past acquired, or made strategic investments in, other companies, products or technologies, and Brocade expects to make additional acquisitions and strategic investments in the future. One example was Brocade’s acquisition of Foundry in December 2008. Brocade may not realize the anticipated benefits of any of its acquisitions or strategic investments, which involve numerous risks, including:

• Difficulties in successfully integrating the acquired businesses;

• Inability to effectively coordinate sales and marketing efforts to communicate the capabilities of the combined company;

• Customer uncertainty that may cause delays or cancellations of customer purchases, as well as revenue attrition in excess of anticipated levels if existing customers alter or reduce their historical buying patterns;

• Unanticipated costs, litigation and other contingent liabilities;

• Diversion of management’s attention from Brocade’s daily operations and business;

• Adverse effects on existing business relationships with suppliers and customers;

• Risks associated with entering into markets in which Brocade has limited or no prior experience, including potentially less visibility into demand;

• Inability to attract and retain key employees;

• Inability to retain key customers, distributors, vendors and other business partners of the acquired business;

• Inability to successfully develop new products and services on a timely basis that address the market opportunities of the combined company;

• Inability to compete effectively against companies already serving the broader market opportunities expected to be available to the combined company;

• Inability to qualify the combined company’s products with OEM partners on a timely basis, or at all;

• Inability to successfully integrate and harmonize financial reporting and information technology systems;

• Failure to successfully manage additional remote locations, including the additional infrastructure and resources necessary to support and integrate such locations;

• Assumption or incurrence of debt and contingent liabilities and related obligations to service such liabilities and Brocade’s ability to satisfy financial and other negative operating covenants;

• Additional costs such as increased costs of manufacturing and service costs, costs associated with excess or obsolete inventory, costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes, advisor and professional fees, and termination of contracts that provide redundant or conflicting services;

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• Incurrence of significant exit charges if products acquired in business combinations are unsuccessful;

• Incurrence of significant charges if Brocade divests, disposes of or otherwise exits all or part of a business;

• Incurrence of acquisition and integration related costs, accounting charges, or amortization costs for acquired intangible assets, that could negatively impact Brocade’s operating results and financial condition; and

• Potential write-down of goodwill, acquired intangible assets and/or deferred tax assets, which are subject to impairment testing on an annual basis, and could significantly impact Brocade’s operating results.

Brocade may divest certain businesses from time to time. Such divestitures will likely involve risks, such as difficulty splitting up businesses, distracting employees, potential loss of revenue and negatively impacting margins, and potentially disrupting customer relationships.

If Brocade is not able to successfully integrate or divest businesses, products, technologies or personnel that Brocade acquires or divests, or to realize expected benefits of Brocade’s acquisitions, divestitures or strategic investments, Brocade’s business and financial results would be adversely affected.

Brocade’s business is subject to increasingly complex corporate governance, public disclosure, accounting and tax requirements, and environmental regulations that could adversely affect Brocade’s business and financial results.

Brocade is subject to changing rules and regulations of federal and state government as well as the stock exchange on which Brocade’s common stock is listed. These entities, including the Public Company Accounting Oversight Board, the FASB, the SEC, the IRS and NASDAQ, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. In addition, the Department of Treasury, the SEC and various Congressional representatives have recently proposed additional rules and regulations that may go into effect in the near future. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act was enacted. The Act included significant corporate governance and executive compensation-related provisions and also required the SEC to adopt additional rules and regulations in areas such as “say on pay” and proxy access. Brocade is also subject to various rules and regulations of certain foreign jurisdictions, including applicable tax regulations. Brocade’s efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. Similarly, any change in the tax law in the jurisdictions in which Brocade does business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in Brocade’s tax expense. For example, in the 2011 and 2012 budget proposals, the President of the United States and the U.S. Treasury Department have proposed changing certain of the U.S. tax rules for U.S. corporations doing business outside the United States. Other legislation has not yet been proposed or enacted, but it is possible that these or other changes in the federal or state tax laws could increase Brocade’s U.S. income tax liability in the future.

Brocade is subject to periodic audits or other reviews by such governmental agencies. For example, Brocade is under examination by the IRS for its domestic federal income tax return for the fiscal years 2004 through 2008. In addition, Foundry’s California income tax returns for calendar years 2006 and 2007 are currently being examined by the California Franchise Tax Board. All these examination cycles remain open as of July 30, 2011. Brocade resolved its California income tax audit for the years ended October 25, 2003 and October 30, 2004. To the extent carryforwards from these years are used in the future, the California Franchise Tax Board has the right to audit the carryforward amounts. The SEC also periodically reviews Brocade’s public company filings. Any such examination or review frequently requires management’s time and diversion of internal resources and, in the event of an unfavorable outcome, may result in additional liabilities or adjustments to Brocade’s historical financial results.

The IRS is contesting Brocade’s transfer pricing for the cost sharing and buy-in arrangements with its foreign subsidiaries. Brocade appealed the Revenue Agent’s Report to the Appeals Office of the IRS for the fiscal years under examination through 2008. The IRS may make similar claims against Brocade’s transfer pricing arrangements in future examinations. Audits by the IRS are subject to inherent uncertainties and an unfavorable outcome could occur, such as fines or penalties. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on Brocade’s results of operations for that period or future periods. The expense of defending and resolving such an audit may be significant. The amount of time to resolve an audit is unpredictable and defending Brocade may divert management’s attention from Brocade’s day-to-day business operations, which could adversely affect Brocade’s business.

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Brocade is subject to various environmental and other regulations governing product safety, materials usage, packaging and other environmental impacts in the various countries where Brocade’s products are sold. For example, many of Brocade’s products are subject to laws and regulations that restrict the use of lead, mercury, hexavalent chromium, cadmium and other substances, and require producers of electrical and electronic equipment to assume responsibility for collecting, treating, recycling and disposing of Brocade’s products when they have reached the end of their useful life. For example, in Europe, substance restrictions apply to products sold, and certain of Brocade’s partners require compliance with these or more stringent requirements. In addition, recycling, labeling, financing and related requirements apply to products Brocade sells in Europe. China has also enacted similar legislation with similar requirements for Brocade’s products or its partners. Despite Brocade’s efforts to ensure that its products comply with new and emerging requirements, Brocade cannot provide absolute assurance that its products will, in all cases, comply with such requirements. If Brocade’s products do not comply with the substance restrictions under local environmental laws, Brocade could become subject to fines, civil or criminal sanctions and contract damage claims. In addition, Brocade could be prohibited from shipping non-compliant products into one or more jurisdictions and required to recall and replace any non-compliant products already shipped, which would disrupt its ability to ship products and result in reduced revenue, increased obsolete or excess inventories, and harm to Brocade’s business and customer relationships. Brocade’s suppliers may also fail to provide it with compliant materials, parts and components despite Brocade’s requirement to do so, which could impact Brocade’s ability to timely produce compliant products and, accordingly, could disrupt its business.

Business interruptions could adversely affect Brocade’s business.

Brocade’s operations and the operations of its suppliers, contract manufacturers and customers are vulnerable to interruptions by fire, earthquake, tsunami, nuclear reactor leak, hurricane, power loss, telecommunications failure and other events beyond Brocade’s control. For example, a substantial portion of Brocade’s facilities, including its corporate headquarters, is located near major earthquake faults. Brocade does not have multiple site capacity for all of its services in the event of any such occurrence. In the event of a major earthquake, such as the recent events in Japan, Brocade could experience business interruption, destruction of facilities and loss of life. Brocade carries a limited amount of earthquake insurance, which may not be sufficient to cover earthquake-related losses, and has not set aside funds or reserves to cover other potential earthquake-related losses. Additionally, major public health issues such as an outbreak of a pandemic or epidemic may interrupt business operations in those geographic regions affected by that particular health issue. In addition, one of Brocade’s contract manufacturers has a major facility located in an area that is subject to hurricanes. In the event that a material business interruption occurs that affects Brocade, its suppliers, contract manufacturers or customers, shipments could be delayed and Brocade’s business and financial results could be harmed. Despite Brocade’s implementation of network security measures, its servers may be vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with its computer systems. Brocade may not carry sufficient insurance to compensate for losses that may occur as a result of any of these events.

Brocade is exposed to various risks related to legal proceedings or claims that could adversely affect its operating results.

Brocade is a party to lawsuits in the normal course of its business. Litigation in general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits brought against Brocade, or legal actions initiated by Brocade, can often be expensive and time-consuming. Unfavorable outcomes from these claims and/or lawsuits could adversely affect Brocade’s business, results of operations, or financial condition, and Brocade could incur substantial monetary liability and/or be required to change its business practices.

Brocade has incurred substantial indebtedness that decreases Brocade’s business flexibility and access to capital, and increases its borrowing costs, which may adversely affect Brocade’s operations and financial results.

As of July 30, 2011, Brocade owed $600 million of Senior Secured Notes and approximately $240 million under the Senior Secured Credit Facility (see Note 8, “Borrowings,” of the Notes to Condensed Consolidated Financial Statements). The financial and other covenants agreed to by Brocade in connection with such indebtedness and the increased indebtedness and higher debt-to-equity ratio of Brocade in comparison to that of Brocade on a recent historical basis will have the effect, among other things, of reducing Brocade’s flexibility to respond to changing business and economic conditions and increasing borrowing costs, and may adversely affect Brocade’s operations and financial results. This indebtedness may also adversely affect Brocade’s ability to access sources of capital or incur certain liens, including without limitation, funding acquisitions or repurchasing Brocade stock. In addition, Brocade’s failure to comply with these covenants could result in a default under the applicable debt financing agreements, which could permit

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the holders to accelerate such debt or demand payment in exchange for a waiver of such default. If any of Brocade’s debt is accelerated, Brocade may not have sufficient funds available to repay such debt. The current debt under the Senior Secured Credit Facility has a floating interest rate and an increase in interest rates may negatively impact Brocade’s financial results. The mandatory debt repayment schedule on the Senior Secured Credit Facility may negatively impact Brocade’s cash position and reduce Brocade’s financial flexibility. In addition, any negative changes by rating agencies to Brocade’s credit rating may negatively impact the value and liquidity of Brocade’s debt and equity securities and Brocade’s ability to access sources of capital.

Provisions in Brocade’s charter documents, customer agreements and Delaware law could prevent or delay a change in control of Brocade, which could hinder stockholders’ ability to receive a premium for Brocade’s stock.

Provisions of Brocade’s certificate of incorporation and bylaws may discourage, delay or prevent a merger or mergers that a stockholder may consider favorable. These provisions include:

• Authorizing the issuance of preferred stock without stockholder approval;

• Prohibiting cumulative voting in the election of directors;

• Limiting the persons who may call special meetings of stockholders; and

• Prohibiting stockholder actions by written consent.

Certain provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with Brocade, and Brocade’s agreements with certain of Brocade’s customers require that Brocade give prior notice of a change of control and grant certain manufacturing rights following a change of control. Brocade’s various change-of-control provisions could prevent or delay a change in control of Brocade, which could hinder stockholders’ ability to receive a premium for Brocade’s stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the nine months ended July 30, 2011.

Issuer Purchases of Equity Securities

The following table summarizes share repurchase activity for the three months ended July 30, 2011 (in thousands, except per share amounts):

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares  Purchased as Part of Publicly Announced Program (1)		Approximate Dollar Value  of Shares that May Yet Be Purchased Under the Program (1)
May 1, 2011 – May 28, 2011		—	$	—		—	$	389,140
May 29, 2011 – June 25, 2011		1,477	$	6.80		1,477	$	379,096
June 26, 2011 – July 30, 2011		—	$	—		—	$	379,096
Total		1,477	$	6.80		1,477	$	379,096

(1) As of November 29, 2007, the Company’s Board of Directors authorized a total of $800.0 million for the repurchase of the Company’s common stock. Purchases have been made, from time to time, in prior periods in the open market or by privately negotiated transactions and were funded from available working capital. The number of shares purchased and the timing of purchases were based on the level of the Company’s cash balances, general business and market conditions, and other factors, including alternative investment opportunities.

Item 5. Other Information

During the last quarter, on June 20, 2011, Daniel W. Fairfax was appointed to the position of the Company’s Chief Financial Officer. Previously, on December 23, 2010, Mr. Fairfax had entered into a written sales plan intended to comply with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. From time to time, it is possible that Mr. Fairfax may sell shares under his 10b5-1 plan. In addition, other executive officers and directors of the Company either have a 10b5-1 plan in place currently or might put one in place from time to time in the future.

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Under Rule 10b5-1, a company’s directors and executives officers and other persons who are not in possession of material nonpublic information regarding the company may adopt a prearranged plan or contract for the sale of company securities under specified conditions and at specified times. As sales are executed in the future under the 10b5-1 plans, they will be reported in accordance with federal securities laws. Using the 10b5-1 plan, insiders can gradually diversify their investment portfolios. Except as required by law, the Company does not undertake to report written trading plans established by other Company officers or directors nor to report modifications, terminations, transactions or other activities under the 10b5-1 plans.

Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description of Document
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 from Brocade’s quarterly report on Form 10-Q for the quarter ended July 28, 2007)
3.2	Certificates of Correction and Corrected Amended and Restated Certificate of Incorporation effective as of June 1, 2009 (incorporated by reference to Exhibit 3.5 from Brocade’s quarterly report on Form 10-Q for the quarter ended May 2, 2009)
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation effective as of April 13, 2010 (incorporated by reference to Exhibit 3.1 from Brocade’s Form 8-K filed on April 13, 2010)
3.4	Amended and Restated Bylaws of the Registrant effective as of April 13, 2010 (incorporated by reference to Exhibit 3.2 from Brocade’s Form 8-K filed on April 13, 2010)
3.5	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Brocade Communications Systems, Inc. (incorporated by reference to Exhibit 4.1 from Brocade’s Registration Statement on Form 8-A filed on February 11, 2002)
3.6	Certificate of Elimination of Series A Participating Preferred Stock of Brocade (incorporated by reference to Exhibit 3.1 from Brocade’s Form 8-K filed on February 16, 2007)
4.1	Form of Registrant’s Common Stock certificate (incorporated by reference to Exhibit 4.1 from Brocade’s Registration Statement on Form S-1 (Reg. No. 333-74711), as amended)
4.2	Indenture, dated as of January 20, 2010, by and among Brocade, the Subsidiary Guarantors named therein and Wells Fargo Bank, National Association, as Trustee, governing the 2018 Notes (incorporated by reference to Exhibit 4.1 from Brocade’s Form 8-K filed on January 26, 2010)
4.3	Indenture, dated as of January 20, 2010, by and among Brocade, the Subsidiary Guarantors named therein and Wells Fargo Bank, National Association, as Trustee, governing the 2020 Notes (incorporated by reference to Exhibit 4.2 from Brocade’s Form 8-K filed on January 26, 2010)
10.1	Amendment No. 2, dated as of June 10, 2011, by and among Brocade Communications Systems, Inc., the lenders party thereto, and Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, to the Credit Agreement, dated as of October 7, 2008 (as amended), by and among Brocade Communications Systems, Inc., the lenders party thereto, and Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer (incorporated by reference to Exhibit 10.1 from Brocade’s Form 8-K filed on June 10, 2011)
10.2*	Amendment Number 42 dated June 30, 2011 to Statement of Work Number 1 of the Goods Agreement between IBM and Brocade
10.3*	Amendment Number 7 dated July 20, 2011 to Statement of Work Number 7 of the Goods Agreement between IBM and Brocade

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31.1*	Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer
31.2*	Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
32.1*	Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*       Filed herewith

**     XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

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.

	Brocade Communications Systems, Inc.
Date: September 1, 2011	By:	/s/ Daniel W. Fairfax
		Daniel W. Fairfax
		Chief Financial Officer

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