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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A

AMENDMENT NO. 1

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999

[ ] 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

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BROCADE COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 77-0409517
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)

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1901 GUADALUPE PARKWAY
SAN JOSE, CA 95131
(408) 542-1500
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND
TELEPHONE NUMBER, INCLUDING AREA CODE)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $7,623,743,904 as of December 30, 1999, based upon
the closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose.

The number of shares outstanding of the Registrant's Common Stock on
December 30, 1999 was 53,854,691 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders (the "Proxy Statement"), to be filed with the Securities and
Exchange Commission, are incorporated by reference to Part III of this Form 10-K
Report.

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2

BROCADE COMMUNICATIONS SYSTEMS, INC.
FORM 10-K

INDEX

PART I
PAGE
--

Item 1. Business.................................................... 2
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 48
SIGNATURES............................................................ 53

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PART I

ITEM 1. BUSINESS

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements that relate to
future events or future financial performance. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although Brocade
believes that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
the risks outlined under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors" and elsewhere in this
Annual Report. All forward-looking statements included in this document are
based on information available to Brocade on the date hereof. Brocade assumes no
obligation to update any such forward-looking statements.

OVERVIEW

Brocade is the leading provider, based on revenue and the number of ports
shipped, of Fibre Channel switching solutions for Storage Area Networks
("SANs"), which apply the benefits of a networked approach to the connection of
computer storage systems and servers. Our family of SilkWorm switches enables
companies to cost-effectively manage growth in their storage capacity
requirements, improve the performance between their servers and storage systems
and increase the size and scope of their SAN, while allowing them to operate
data-intensive applications, such as data backup and restore, and disaster
recovery, on the SAN. We sell our SAN switching solutions through leading
storage systems and server original equipment manufacturers, including Amdhal,
Compaq Computer, CNT, Data General (a division of EMC Corporation), Dell
Computer, IBM, Groupe Bull, McDATA Corporation (a division of EMC Corporation),
NEC, Network Appliance, Sequent Computer Systems, SGI, Fujitsu/Siemens Computer
Systems and StorageTek and through system integrators. These original equipment
manufacturers and system integrators combine our switching solutions with other
system elements and services for companies' data processing centers.

INDUSTRY BACKGROUND

Business-Critical Data Storage Requirements

The last decade has seen an explosion in the volume of business-critical
data that is being captured, processed, stored and manipulated in business
environments. This has fueled an increase in demand for data storage capacity.
Efficient data storage and management is becoming one of the most important
aspects of business-critical decision making. Increased reliance on applications
ranging from business intelligence and decision support, data warehousing and
data mining of large databases, disaster tolerance and recovery, enterprise
software, and imaging and graphics have all contributed to this trend. In
addition, the development of Web-based business operations and e-commerce in
particular, has intensified the demand placed on data centers. Customer
interactions over the Web have increased operational focus on the performance,
scalability, management and flexibility of systems that use business-critical
data. This dependence on data for fundamental business processes by employees,
customers and suppliers has greatly increased the number of input and output
transactions, or I/Os, required of computer storage systems and servers. In
addition, the complexity of enterprise computing and storage is further
compounded by the use of multiple incompatible server operating systems, such as
the proliferation of Windows NT in traditional UNIX environments. As a result,
organizations are being forced to dedicate substantial financial and personnel
resources to manage and maintain the distributed storage capabilities of their
networks.

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Bottleneck In Storage and Server Connections

Despite the increased attention and resources which have been devoted to
data storage requirements, the technical capabilities of data storage systems
have not kept pace with increasing data management demands and with the
advancements in other networking technologies. In the 1980s, the near ubiquity
of PCs, workstations and servers required broader connectivity, resulting in the
development of local and wide area networks to support messaging between
computer systems. The data used by computers and servers connected to local and
wide area networks are typically located on computer storage systems and
servers, which store, process and manipulate data. The adoption of high speed
messaging technologies such as gigabit Ethernet and asynchronous transfer mode,
or ATM, increased local and wide area network transmission speeds by more than
1,000 times during the 1990s. However, storage-to-server data transmission
speeds increased by less than ten times during this period, creating a
bottleneck between the local or wide area network and business-critical storage
systems and servers.

Traditionally, distributed systems have linked a single server with a
limited number of storage systems in close proximity. The Small Computer Systems
Interface, or SCSI, standard was adopted as the I/O interface standard for
storage-to-server and server-to-server connections in the 1980s. SCSI is a
parallel interface that permits throughput of 20 to 40 megabytes per second.
SCSI's throughput limitations have become much more pronounced as local and wide
area network transmission technologies have migrated from Ethernet, which
transfers data at 10 megabits per second, to gigabit Ethernet, which transfers
data at 1,000 megabits per second. In addition, SCSI allows a maximum
transmission distance of only 12 meters and supports just 32 devices on a single
bus. As a result, SCSI does not adequately support the increasing requirements
for speed, scalability and flexibility of today's data-intensive enterprises.

Introduction and Standardization of Fibre Channel

In response to the demand for high-speed and high-performance
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect protocol, an industry networking standard, was developed in the
early 1990s. The Fibre Channel interconnect standard received American National
Standards Institute, or ANSI, approval in 1994 and has subsequently earned broad
support from industry and independent testing laboratories. Fibre Channel
supports large data block transfers at gigabit speeds and is therefore well
suited for data transfers between storage systems and servers. It also supports
multiple protocols such as SCSI and Internet Protocol, or IP. Furthermore, it
provides transmission reliability with guaranteed delivery and transmission
distances of up to 10 kilometers. Fibre Channel complements and supports
advancements in local and wide area network technologies, such as gigabit
Ethernet and ATM, which are not effective for large block data-intensive
transfers.

Advent of the Storage Area Network

Fibre Channel has enabled the development of a storage area network, or
SAN, to meet the requirements of data centers and other data-intensive,
distributed computing environments. Similar to local and wide area networks, the
SAN applies the distributed computing model to computer storage systems and
servers and takes advantage of the inherent benefits of a networked approach.
These benefits include the decoupling of computer storage systems and servers,
increasing scalability and a higher level of connectivity than currently exists
in the SCSI environment. Additionally, the SAN provides high-speed connectivity
for data-intensive applications across multiple operating systems, including
UNIX and Windows NT. By bringing networking technology into the data processing
center, a SAN also provides increased flexibility, fault tolerance, ease of
management and lower total cost of ownership. The SAN market is expected to grow
substantially as organizations embrace this emerging solution. According to the
Gartner Group, an independent industry research company, more than 70% of shared
storage in networked environments is projected to be reorganized into SANs by
the year 2002. According to Dataquest, an independent research company, the SAN
market is currently growing at a compound annual growth rate of 200%.

The simplest SAN configuration is a loop topology, which is similar to
traditional SCSI-based distributed systems and interconnects multiple nodes over
a shared Fibre Channel networking device, such as a hub. A

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Fibre Channel hub can support up to 126 devices, but the available bandwidth is
shared among all the devices, resulting in signal and performance degradation as
the number of devices in the loop increases. In addition, loop topologies suffer
from limited network management and fault isolation capabilities. For example,
when a single device is added to the loop, it will cause the loop to reset,
resulting in application disruption. The limitations of shared networks have
been addressed in local and wide area network environments by the development of
switching technologies that have yielded advancements in performance,
scalability, flexibility and management at competitive costs. In order for the
SAN model to become more widely adopted in data centers, today's enterprises
must be able to connect any device on the network to any other device on the
network, or any-to-any connectivity, without performance degradation in order to
effectively leverage distributed computer storage systems, servers, workstations
and other resources. Guaranteed reliability and availability are vital to the
storage, processing and manipulation of business-critical data. Networks require
dedicated connections operating at high performance levels to support large data
transfer demands. Finally, data processing centers are characterized by a high
degree of change that must be supported by a flexible network infrastructure.

THE BROCADE SOLUTION

Brocade is the leading provider of Fibre Channel SAN switching solutions.
We combine advanced switching technologies with our Fibre Channel technology
leadership and systems expertise to provide the Brocade Fabric, comprised of
Fibre Channel switches, a proprietary switch operating system, management tools,
management services and ready-to-deploy configurations. Our products provide an
infrastructure backbone that allows our customers to concurrently run multiple
applications across the SAN, reducing congestion of local and wide area
networks. Our Brocade Fabric helps enterprises cost-effectively manage the
growth in storage capacity, improve server-to-storage and server-to-server
performance, and increase the size and scope of their SANs, while enabling
data-intensive applications, such as reliable backup and restore and disaster
recovery. Our solutions have the following key benefits:

Address the input/output bottleneck. Deployment of SANs based on our
Brocade Fabric not only enhances point-to-point bandwidth with Fibre Channel
connections, but helps solve the I/O bottleneck between data storage systems and
servers. Our SilkWorm family of Fibre Channel switches delivers full-duplex 1
gigabit per second performance at every port. In addition, unlike hubs or other
shared devices, our switches are designed to provide any-to-any connectivity and
to maintain 1 gigabit per second performance per port as additional devices are
added to the SAN. Our superior frame-forwarding capability provides end-users
with rapid data retrieval and allows a greater number of user transactions.

Provide SAN scalability. Our modular Fibre Channel switches, supporting
from two to 16 ports per switch, enable incremental growth by interconnecting or
cascading multiple switches for hundreds of connections in a fully meshed
configuration. Our Brocade Fabric enables companies to grow clusters of high
performance servers or provide multiple servers with high bandwidth connections
to multiple storage systems. Additionally, Fibre Channel allows connections up
to 10 kilometers, enabling companies to interconnect separate SAN clusters or
islands into a single SAN.

Enable SAN applications. The Brocade Fabric creates a SAN backbone for
data-intensive applications, enabling organizations to solve complex problems in
data processing centers. Our products allow all departments within an
organization to share data storage resources despite operating within a
computing environment that includes incompatible operating systems sharing
storage resources. The Brocade Fabric allows highly flexible configurations and
supports a wide range of data traffic, including high throughput and low latency
processing. For example, high throughput applications, such as data backup and
restore, and disaster recovery can be performed on the SAN, freeing up valuable
bandwidth on the local and wide area network and eliminating the need for
expensive backup servers. Additionally, companies utilizing the Brocade Fabric
for their e-commerce and other low latency transaction processing applications
can leverage hundreds of computer storage devices and servers.

Support a mission-critical data processing center. We have designed our
solutions to provide high levels of resiliency and availability with maximum up
time for business-critical, data-intensive applications. Our

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switches have auto-configuration and reconfiguration capabilities that
incorporate redundant and alternate data paths for frame forwarding, which
enable our Brocade Fabric to be self-healing. They also support up to eight
parallel links to other switches. As a result, any cable, port, switch or link
failure can be isolated, providing a resilient solution. This increases the
availability and up time of the data processing center.

Enhance SAN management. Our Brocade Fabric Operating System and our
network management tools enable our customers to centrally manage storage
systems and servers handling business-critical data. Our products deliver a rich
set of SAN management information that can be accessed both locally and
remotely. Data-intensive connections in the organization can be centrally
managed to share resources with other points on the network. All of these
factors combine to help organizations reduce the overall costs and increase the
efficiency of their data network.

THE BROCADE STRATEGY

Our objective is to maintain our position as the leading provider of SAN
switching solutions. The key elements of our strategy include the following:

Leverage our SAN switching market leadership. We believe we were the first
company to provide a comprehensive Fibre Channel fabric solution and that we are
the market leader based upon the number of switch ports shipped. We intend to
capitalize on our first mover advantage and in-depth customer and product
knowledge. We believe we are well positioned to anticipate the future
requirements of the SAN marketplace.

Capitalize on leadership in Fibre Channel technologies and standards. We
have been a leader in the development of Fibre Channel technologies and the
implementation of ANSI Fibre Channel standards. Our technology efforts are led
by some of the most widely recognized members of the Fibre Channel industry. In
addition, our technical personnel have substantial expertise in storage, file
system, routing algorithms and network management technologies. We have also
provided major contributions to many of the ANSI Fibre Channel standards that
have been developed to date. We believe that taking a continued proactive role
in this expanding market will enable us to extend our leading market position.

Leverage core architecture. We are leveraging our core switching
expertise, ASIC architectures, Brocade Fabric Operating System and Fibre Channel
technology to expand our family of SilkWorm products to address the expanding
SAN market. We have been focusing on the workgroup, midrange, and enterprise
segments of the SAN market, and intend to leverage our leadership position in
these segments to broaden our reach into other segments of the SAN switch market
as they emerge. We expect that the demand for SAN switching solutions in entry
level applications will increase, particularly as Windows NT-based servers are
increasingly used in data processing centers. We have recently introduced
products designed to address the specific needs of organizations that use
Windows NT-based servers in anticipation of this growth.

Continue to expand network of original equipment manufacturers and system
integrators. We intend to continue to expand our relationships with key
computer storage system and server original equipment manufacturers and system
integrators, both domestically and abroad. Currently, our major original
equipment manufacturer customers include Amdhal, Compaq Computer, CNT, Data
General (a division of EMC Corporation), Dell Computer, IBM, Groupe Bull, McDATA
Corporation (a division of EMC Corporation), NEC, Network Appliance, Sequent
Computer Systems, SGI, Fujitsu/Siemens Computer Systems and StorageTek. These
relationships allow us to leverage the systems and services capabilities of
these industry-leading original equipment manufacturers. We have also recently
entered into relationships with system integrators including Advanced Systems
Group, Inc., Berkshire Computer Products, Inc., Ciprico, Compsat Technology,
Inc., Cranel, dcVAST, DataDirect Networks, Hitachi Data Systems Canada,
Integrated Systems Technologies, Inc., Kanatek Technologies Inc., Kingswell
Computer Company, LSI Logic's MetaStor(R) Storage Solutions, Leitch Technology,
Midrange Computer Solutions, Open Systems Solutions, Inc., PCC, RAID Power,
Rorke, Stonebridge Technologies, StorNet Inc, Sysix Technologies, Tokyo Electron
Ltd., Unique Digital, and XIOtech. We expect that our relationships with leading
system integrators will allow us to penetrate the market opportunities by
leveraging the reach of these distribution channels.

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Develop strategic partnerships. We are building strategic relationships
with Fibre Channel component and device vendors and storage management software
companies. For example, in November 1999, we entered into a strategic
relationship with Veritas Software Corporation to jointly develop technology for
centralized management of SANs. By partnering with these organizations, we
believe we can enhance SAN applications and interoperability, thereby
accelerating the time to market and overall deployment and functionality of our
products.

PRODUCTS

Brocade provides the SilkWorm family of Fibre Channel switches, which
creates a switch interconnect, enabling any-to-any connectivity between storage
devices and servers. SilkWorm switches can be used individually for server
clustering or storage consolidation, or cascaded with other switches to form a
powerful networking infrastructure, the Brocade Fabric. Brocade's software
solutions provide network administrators with tools to manage the switches and
the SAN. Brocade also provides extensive Fabric services, in order to optimize
the Brocade Fabric for an enterprise's particular needs. Moreover, Brocade
SOLUTIONware provides instructions to enterprises on implementing SANs.

SilkWorm Family of Switches

In March 1997, Brocade introduced the Silkworm 1000 family of products,
beginning with a configurable 16-port switch, used to connect servers to storage
devices to create a SAN. In April 1998, Brocade introduced SilkWorm Express, an
eight-port Fibre Channel switch.

In June 1999, Brocade introduced the SilkWorm 2000 product line that
delivers improved reliability, availability, and serviceability. The three
products introduced were the SilkWorm 2800, a 16-port fabric switch, the
SilkWorm 2400, an 8-port fabric switch, and the SilkWorm 2100, an 8-port loop
switch.

In November 1999, we announced the SilkWorm 2000 entry-level product line.
This product line includes the SilkWorm 2010, a managed hub alternative and the
SilkWorm 2040 and 2050.

The SilkWorm family of switches share a common platform designed to provide
the following features and benefits:

- High throughput. Each port delivers a 1-gigabit per second, full-duplex
data rate regardless of network connectivity.

- Hardware-based data path. SilkWorm reduces latency by eliminating
software processing from the path of data frames.

- Management. SilkWorm supports customers' existing management solutions,
such as local and wide area networks, SCSI tools and web tools.

- In-order delivery of data frames. SilkWorm guarantees that frames are
delivered to a destination in the same order as received by the switch
from the originator.

- Cut-through frame routing. Frames are sent without waiting for the
entire frame or for a response back from its destination, thereby
improving bandwidth utilization and minimizing transmission delays.

- Cascading. SilkWorm may be connected to as many other SilkWorm switches
as there are available ports creating in a meshed topology, enabling
hundreds of connections and large SANs.

- Flexible switch buffering. If the destination is busy, data frames are
stored by a SilkWorm switch for only as long as is necessary, thereby
moving data faster through the switch.

- Path selection. SilkWorm identifies failures automatically and
immediately, and reroutes data to alternate paths, creating a highly
resilient network.

- Registered state change notification. SilkWorm automatically detects
changes in configuration and port status to enable quick corrective
action.

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- Quickloop software. Software that emulates a loop environment with the
benefits of switching.

- Translative mode. Software that allows the intermixing of loop and
fabric devices on the same SAN.

- Media independent. SilkWorm enables the SAN to support diverse media,
including fiber optic connections up to 10 kilometers and copper
connections.

- Auto-configuration. SilkWorm enhances scalability by automatically
expanding the SAN as new devices are added or removed without
interrupting the operation of the rest of the network. SilkWorm
seamlessly incorporates more Brocade switches into the network, thereby
increasing aggregate bandwidth as connectivity increases; network
services automatically expand without additional system resources.

Brocade Fabric Operating System

The SilkWorm family of switches is supported by the Brocade Fabric
Operating System. The Brocade Fabric Operating System provides the intelligence
for the Brocade Fabric, provides services for the switch hardware, runs the
value-added Brocade Fabric services such as name service, which is used to
assist discovery of connected devices, monitors the status of the hardware and
fabric and notifies the host operating system as devices are added to or removed
from the Brocade Fabric.

The Brocade Fabric Operating System provides a common platform upon which
system services can be built. The Brocade Fabric Operating System is layered
with well-defined application interfaces, or APIs, that allow third parties,
such as data storage and data backup software vendors, to write applications
that leverage Brocade's Fabric Operating System. By incorporating API
technology, these third party vendors can develop applications, thereby
increasing the capabilities of the overall switch fabric solution.

Fabric Services

Fabric services are product features that increase the functionality of the
SAN. Our current Brocade Fabric Services include zoning and multicasting.

Brocade Zoning is an add-on software product that allows the creation of
multiple logical connectivity groups within a single SAN. By creating a zone,
the SAN provides the network with benefits that would otherwise only be possible
using multiple SANs. Through zoning, systems that have different operating
environments, such as UNIX and Window NT, can be isolated from each other
allowing both operating systems to co-exist on a single SAN. Zoning can be used
to create functional areas in the fabric and designate closed user groups for
greater security and control. Also, zoning facilitates time-sensitive functions,
such as creating a temporary zone used to backup storage devices that are
members of other zones. Brocade Zoning offers dynamic configuration and an
unlimited number of zones. Finally, Brocade Zoning allows devices to be a member
of more than one zone thereby increasing flexibility.

Brocade Multicasting enables up to 32 groups of devices to replicate data
in a one-to-one method or in a one-to-many method. By accomplishing this
replication through hardware, Brocade is able to maintain high throughput.

SOLUTIONware

Brocade's SOLUTIONware is a set of application notes that facilitates the
implementation of SAN solutions incorporating products and applications from
multiple vendors, including Brocade. These applications notes include specific
details including equipment requirements, software specifics, detailed
installation instructions and tested application software. This enables original
equipment manufacturers and system integrators to replicate high performance
solutions. We have delivered over 15 SOLUTIONware application notes covering
Brocade Tape Backup and Restore, storage consolidation and business continuance
applications for heterogeneous environments.

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Management Tools

Brocade Web Tools is an add-on software product that helps to remotely
manage a SAN of our SilkWorm family of switches via the Internet or intranet.
The information technology administrator can log onto a switch from a host with
a java-based Web browser. From that switch, the administrator can monitor the
status and performance of any switch in the SAN.

SALES AND MARKETING

Our sales and marketing strategy is focused on an indirect sales model
executed through original equipment manufacturers and system integrators. Our
distribution channels are supported by a sales and marketing organization
comprised of managers, sales representatives and technical and administrative
support personnel. Our marketing effort is focused on developing strategic
partnerships and relationships with industry analysts, providing customer sales
support, managing new product planning and supporting industry standard
initiatives.

Original equipment manufacturers. We have established key relationships
with storage systems and server original equipment manufacturers. Each original
equipment manufacturer provides installation, service and technical support to
its customers while we focus on high-level back-up support. In addition to
maintaining and enhancing our relationships with our existing original equipment
manufacturer customers, we intend to pursue relationships with additional
original equipment manufacturers that may offer products or distribution
channels that complement ours. We believe that these relationships allow us to
leverage the systems and services capabilities of our original equipment
manufacturers.

System integrators. We continue to develop our system integrator program
and have established several relationships within this channel. Revenues from
this channel have grown in excess of 10% in the fourth quarter of fiscal 1999
and we believe revenues from this channel may continue to increase significantly
in the future. Each system integrator provides installation, service and
technical support to its customers, while we focus on integration and technical
back-up support. We intend to continue to develop relationships with system
integrators who may offer products or distribution channels that complement
ours.

We have entered into relationships with international distributors and
integrators and plan to expand our international sales activities significantly.
In fiscal 2000, we intend to focus on expanding our international sales
activities in Western Europe and Japan.

CUSTOMERS

Our primary customers are original equipment manufacturers and system
integrators. Currently, our major original equipment manufacturer customers
include Amdhal, Compaq Computer, CNT, Data General (a division of EMC
Corporation), Dell Computer, IBM, Groupe Bull, McDATA Corporation (a division of
EMC Corporation), NEC, Network Appliance, Sequent Computer Systems, SGI,
Fujitsu/Siemens Computer Systems and StorageTek. Our major system integrators
including Advanced Systems Group, Inc., Berkshire Computer Products, Inc.,
Ciprico, Compsat Technology, Inc., Cranel, dcVAST, DataDirect Networks, Hitachi
Data Systems Canada, Integrated Systems Technologies, Inc., Kanatek Technologies
Inc., Kingswell Computer Company, LSI Logic's MetaStor(R) Storage Solutions,
Leitch Technology, Midrange Computer Solutions, Open Systems Solutions, Inc.,
PCC, RAID Power, Rorke, Stonebridge Technologies, StorNet Inc, Sysix
Technologies, Tokyo Electron Ltd., Unique Digital, and XIOtech.

Our revenue is derived primarily from sales of our SilkWorm family of
products. In fiscal 1997, McData and Sequent each contributed over 10% of our
total revenues for a combined total of 94% of total revenues. In fiscal 1998,
these same two customers each contributed over 10% of total revenues for a
combined total of 83% of total revenues. In fiscal 1999, Compaq, Data General,
McData, and Sequent each accounted for 10% or more of total revenues for a
combined total of 70%. The level of sales to any customer may vary from quarter
to quarter. However, we expect that significant customer concentration will
continue for the foreseeable future. The loss of any one of these customers, or
a decrease in the level of sales to any one of these customers, could have a
material adverse impact on Brocade's financial condition or results of
operations.

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CUSTOMER SERVICE AND SUPPORT

Our customer service and support organization provides technical support to
our original equipment manufacturers and system integrators, enabling them to
provide technical support to their end-users. We prepare our original equipment
manufacturer and system integrator customers for product launch through a
comprehensive training program. In addition, we employ systems engineers for
pre- and post-sales support and technical support engineers for field support.
Our original equipment manufacturers and system integrator customers provide
primary technical support.

We have developed an extensive training course for our original equipment
manufacturer and system integrator customers. The curriculum includes Fibre
Channel architecture, SAN implementation and Brocade product training.

MANUFACTURING

We currently use a third-party contract manufacturer, Solectron, to
manufacture our products. Solectron invoices Brocade based on prices and payment
terms agreed to by both parties and set forth in purchase orders issued by
Brocade. The pricing takes into account component costs, Solectron's
manufacturing costs and margin requirements. Although we use Solectron for final
turnkey product assembly, we maintain key component expertise internally. We
design and develop the key components of our products, including ASICs and
software, as well as certain details in the fabrication and enclosure of our
products. In addition, we determine the components that are incorporated in our
products and select the appropriate suppliers of the components.

Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single source
components include ASICs, power supplies and chassis, and our principal limited
source components include printed circuit boards and GBICs. In addition, we
license certain software from Wind River Systems, Inc. that is incorporated into
our Brocade Fabric Operating System.

TECHNOLOGY

Fibre Channel

Fibre Channel is an industry-standard, open protocol for server-to-storage
and server-to-server connectivity and data-intensive transfers. Fibre Channel
combines the high-speed I/O capabilities of a channel technology with the
increased functionality of a networking technology to seamlessly connect and
transfer data from one device to another.

Fibre Channel was designed for storage systems and is well suited for SANs.
It offers a single network for both server clustering and shared storage. It
accommodates both high throughput and low latency dependent traffic required for
large block data transfers and inter-processor communication messages. We
believe the following characteristics of Fibre Channel make it more suitable for
data-intensive and storage related applications than either gigabit Ethernet or
ATM, two widely used networking protocols:

- Fibre Channel has an industry standard interconnect rate of 1 gigabit per
second per port that is expected to increase to 2 gigabits per second in
2000 as compared to gigabit Ethernet's, 1 gigabit per second and ATM's
622 megabits per second speeds;

- Fibre Channel is designed to transmit large packets of information and is
therefore well-suited for data-intensive applications as compared to
gigabit Ethernet and ATM, which use smaller packets and are designed for
smaller but more frequent data transfers;

- Fibre Channel relies more on hardware than software during data transfers
and therefore, is better suited to handle the higher speeds and low
latency required during data transfers;

- In addition to supporting networking protocols including IP, Fibre
Channel also supports I/O storage protocols like SCSI;

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- Unlike gigabit Ethernet and ATM, which can lose or drop packets due to
congestion, Fibre Channel manages packet flow to ensure delivery; and

- Fibre Channel relieves each port from the responsibility of station
management and instead delegates that responsibility to the interconnect
device. Therefore, each Fibre Channel port only has to manage a single
point-to-point connection between itself and an interconnect device.

SilkWorm Architecture

Brocade is focused on implementing Fibre Channel standards in the Brocade
Fabric. We utilize a layered architecture to provide a high performance,
flexible, and extensible solution. This architecture is comprised of media
interfaces, a switching platform, the Brocade Fabric Operating System and
value-added services.

- Media interfaces. Media interfaces comprise the lowest layer of our
architecture. Fibre Channel standards specify numerous media interfaces.
The SilkWorm architecture supports removable gigabit copper interfaces up
to 13 meters, short wavelength laser interfaces up to 500 meters and long
wavelength laser interfaces up to 10 kilometers. Removable media
interfaces provide flexible product configurations and simple product
maintenance.

- Switching platform. Our SilkWorm products are based on a central memory
time multiplexed switching architecture. The architecture is implemented
through the use of highly integrated ASICs. The use of ASIC technology is
required to provide the high bandwidth and low latency necessary for
Fibre Channel switching to cater to both high throughput and low latency
data transfer. The switching architecture is non-blocking and utilizes
cut through routing techniques to achieve low latency. The data path of
the architecture is completely implemented in hardware and the CPU and
operating system are not in the data path.

- Brocade Fabric Operating System. The architecture of the Brocade Fabric
Operating System is highly structured, modular, hardware independent and
layered with well-defined interfaces. This extensible architecture is
easy to maintain and upgrade with new features. The base operating system
is a UNIX-like realtime operating system with extensive libraries and
services. The layers of the Brocade Fabric Operating System include
hardware drivers, a board level support package, a Fibre Channel layer,
services and application program interfaces.

- Value added services. Value-added services comprise the top layer of our
architecture. Brocade value-added services include Brocade Zoning, and
multicasting. The Brocade value-added services run on top of the Brocade
Fabric Operating System through well-defined application program
interfaces.

RESEARCH AND DEVELOPMENT

We believe that our future success depends on our ability to continue to
enhance our existing products and to develop new products that maintain
technological competitiveness. We focus our product development activities on
solving the needs of SAN users. We work closely with our original equipment
manufacturers and system integrators to monitor changes in the market place. We
design our products around current industry standards and will continue to
support emerging standards that are consistent with our product strategy. During
fiscal 1997, 1998 and 1999 our research and development expenses were $7.7
million, $14.7 million and $15.3 million, respectively.

Our products have been designed around a core system architecture, which
facilitates a relatively short product design and development cycle and reduces
the time to market for new products and features. We intend to continue to
leverage our architecture to develop and introduce additional products and
enhancements in the future.

COMPETITION

Although the competitive environment in the Fibre Channel switching market
has yet to develop fully, we anticipate that the current and potential market
for our products will be highly competitive, continually

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evolving and subject to rapid technological change. New SAN products are being
introduced by major server and storage providers, and existing products will be
continually enhanced. We currently face competition from other manufacturers of
SAN switches, including Ancor Communications, Inc. We also face competition from
manufacturers of hubs, including Gadzoox Networks, Inc. and Vixel Corporation.
In addition, as the market for SAN products grows, we may face competition from
traditional networking companies and other manufacturers of networking equipment
who may enter the SAN market with their own switching products. It is also
possible that customers could develop and introduce products competitive with
our product offerings. We believe the competitive factors in this market segment
include product performance and features, product reliability, price, ability to
meet delivery schedules, customer service and technical support.

Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition, and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with divisions of our current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage these customers from purchasing additional Brocade products or
persuade them to replace our products with their products. Such increased
competition may result in price reductions, lower gross margins and loss of our
market share. There can be no assurance that we will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully in the future. There can also be no
assurance that we will be able to compete successfully against current or future
competitors or that competitive pressures will not materially harm our business.

INTELLECTUAL PROPERTY

We rely on a combination of patents, copyrights, trademarks, and trade
secrets, as well as confidentiality agreements and other contractual
restrictions with employees and third parties, to establish and protect our
proprietary rights. Despite these precautions, there can be no assurance that
the measures we undertake will be adequate to protect our proprietary
technology, or that they will preclude competitors from independently developing
products with functionality or features similar to our products. There can be no
assurance that the precautions we take will prevent misappropriation or
infringement of our technology. We currently have 2 design patents and 8 pending
patent applications in the United States, 5 utility applications and 3
provisional applications, with respect to our technology. However, it is
possible that patents may not be issued for these applications. Our issued
patents may not adequately protect our technology from infringement or prevent
others from claiming that our technology infringes that of third parties.
Failure to protect our intellectual property could materially harm our business.
In addition, our competitors may independently develop similar or superior
technology. It is possible that litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Litigation
could result in substantial costs and diversion of our resources and could
materially harm our business.

We have received, and may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Infringement or other claims
could be asserted or prosecuted against us in the future, and it is possible
that past or future assertions or prosecutions could harm our business. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause delays in
the development and release of our products, or require us to develop
non-infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
materially harm our business.

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BACKLOG

Brocade's order backlog as of October 31, 1999 was approximately $44
million. Sales of Brocade's products are generally made pursuant to standard
purchase orders that are cancelable without significant penalties. In addition,
purchase orders are subject to price renegotiations and to changes in quantities
of products and delivery schedules in order to reflect changes in customers'
requirements and manufacturing availability. As a result, a portion of backlog
at any given time may never be realized by Brocade. Brocade's business is
characterized by short lead time orders and quick delivery schedules. In
addition, Brocade's actual shipments depend on the manufacturing capacity of
Brocade's suppliers and the availability of products from such suppliers. As a
result of the foregoing factors, Brocade does not believe that backlog at any
given time is a meaningful indicator of future sales.

EMPLOYEES

As of October 31, 1999, we had 182 full-time employees. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.

ITEM 2. PROPERTIES

Our principal administrative, sales and marketing, education, customer
support and research and development facilities are located in a single office
building in San Jose, California. We currently occupy approximately 35,000
square feet of office space in the San Jose facility under the terms of a lease
that expires in November 2000. We also lease office space for sales and
marketing in Nashua, New Hampshire.

In December 1999, Brocade entered into an agreement to lease approximately
210,000 square feet of office, laboratory, and administrative space in San Jose,
California for its corporate headquarters. The term of the lease agreement is
September 1, 2000 through August 31, 2010, and represents a lease commitment of
$6.2 million per year to Brocade. Brocade intends to occupy the space in
September 2000 and sub-lease any excess space.

ITEM 3. LEGAL PROCEEDINGS

Brocade's former contract manufacturer filed a suit against Brocade,
alleging that Brocade is liable for breaching certain contracts with the
contract manufacturer. The suit claimed damages in excess of $3.0 million plus
interest, an unspecified amount of consequential and incidental damages, costs
and attorneys' fees. Brocade filed a cross complaint against the contract
manufacturer for various credits Brocade claimed on its account with the
contract manufacturer. The suit was settled in December 1999. The settlement of
this litigation did not have a material impact on Brocade's financial
statements.

Brocade is subject to various claims that arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position of Brocade.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Brocade's common stock has been quoted on the Nasdaq National Market under
the symbol "BRCD" since our initial public offering on May 24, 1999. Prior to
this time, there was no public market for our stock.

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See "Item 6. -- Selected Financial Data" for the high and low closing sales
prices per share of our common stock as reported on the Nasdaq National Market,
for the periods indicated.

We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. At October 31, 1999, there were
approximately 292 stockholders of record of Brocade's common stock.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and other financial
information appearing elsewhere in this Annual Report. The statement of
operations data set forth below for each of the years in the three-year period
ended October 31, 1999 and the balance sheet data as of October 31, 1998 and
1999 are derived from, and qualified by reference to, our audited financial
statements appearing elsewhere in this Annual Report. The statement of
operations data for the period from inception on August 24, 1995 to October 31,
1995 and for the year ended October 31, 1996 and the balance sheet data as of
October 31, 1995, 1996 and 1997 are derived from audited financial statements
not included herein.

YEAR ENDED OCTOBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
----- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $ -- $ -- $ 8,482 $ 24,246 $68,692
Cost of revenues....................................... -- -- 6,682 15,759 33,497
----- ------- ------- -------- -------
Gross margin......................................... -- -- 1,800 8,487 35,195
----- ------- ------- -------- -------
Operating expenses:
Research and development............................. 124 3,091 7,666 14,744 15,267
Sales and marketing.................................. -- 152 2,112 5,154 13,288
General and administrative........................... 52 575 1,464 3,813 3,849
Amortization of deferred compensation................ -- -- -- 7 1,937
----- ------- ------- -------- -------
Total operating expenses........................... 176 3,818 11,242 23,718 34,341
Income (loss) from operations.......................... (176) (3,818) (9,442) (15,231) 854
Interest income (expense), net......................... 10 (116) (177) 120 1,737
----- ------- ------- -------- -------
Income (loss) before provision for income taxes........ (166) (3,934) (9,619) (15,111) 2,591
Provision for income taxes............................. -- -- -- -- 106
----- ------- ------- -------- -------
Net income (loss)...................................... $(166) $(3,934) $(9,619) $(15,111) $ 2,485
===== ======= ======= ======== =======
Basic net income (loss) per share...................... $ -- $ (4.75) $ (2.41) $ (2.22) $ 0.10
===== ======= ======= ======== =======
Diluted net income (loss) per share.................... $ -- $ (4.75) $ (2.41) $ (2.22) $ 0.05
===== ======= ======= ======== =======
Shares used in computing basic net income (loss) per
share................................................ -- 828 3,994 6,800 26,094
===== ======= ======= ======== =======
Shares used in computing diluted net income (loss) per
share................................................ -- 828 3,994 6,800 51,146
===== ======= ======= ======== =======
Pro forma basic net income (loss) per share
(unaudited).......................................... $ (0.42) $ 0.06
======== =======
Pro forma diluted net income (loss) per share
(unaudited).......................................... $ (0.42) $ 0.05
======== =======
Shares used in computing pro forma basic net income
(loss) per share (unaudited)......................... 35,830 43,074
======== =======
Shares used in computing pro forma diluted net income
(loss) per share (unaudited)......................... 35,830 51,146
======== =======

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AS OF OCTOBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------ ------- -------- -------- --------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $1,168 $ 700 $ 18,472 $ 10,420 $ 89,305
Working capital............................. 922 104 15,334 5,276 79,295
Total assets................................ 1,549 2,605 26,100 21,301 117,280
Long-term portion of debt and capital lease
obligations............................... -- 874 1,954 2,209 42
Redeemable convertible preferred stock...... 1,411 4,613 30,359 35,261 --
Total stockholders' equity (deficit)........ (166) (3,957) (13,458) (27,355) 84,206

Note: all references to earnings per share and the number of common shares have
been retroactively restated to reflect a two-for-one stock split, effected on
December 3, 1999.

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

QUARTERLY DATA:
YEAR ENDED OCTOBER 31, 1998
Net revenues........................................ $ 7,850 $ 6,420 $ 4,569 $ 5,407
Gross margin........................................ 3,153 2,748 218 2,368
Loss from operations................................ (1,398) (2,635) (8,221) (2,977)
Net loss............................................ $(1,355) $(2,515) $(8,107) $(3,134)
Per share amounts:
Basic............................................. $ (0.26) $ (0.40) $ (1.23) $ (0.43)
Diluted........................................... $ (0.26) $ (0.40) $ (1.23) $ (0.43)
Shares used in computing per share amounts:
Basic............................................. 5,140 6,284 6,616 7,284
Diluted........................................... 5,140 6,284 6,616 7,284
Stock prices:
High.............................................. N/A N/A N/A N/A
Low............................................... N/A N/A N/A N/A

YEAR ENDED OCTOBER 31, 1999
Net revenues........................................ $ 8,007 $10,540 $20,051 $30,094
Gross margin........................................ 4,686 5,103 10,130 15,276
Income (loss) from operations....................... (1,846) (877) 1,011 2,566
Net income (loss)................................... (1,839) (848) 1,611 3,561
Per share amounts:
Basic............................................. $ (0.21) $ (0.08) $ 0.05 $ 0.07
Diluted........................................... $ (0.21) $ (0.08) $ 0.03 $ 0.06
Shares used in computing per share amounts:
Basic............................................. 8,698 10,330 35,672 49,672
Diluted........................................... 8,698 10,330 55,014 58,282
Stock prices:
High.............................................. N/A N/A $ 64.50 $142.50
Low............................................... N/A N/A $ 22.63 49.09

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the selected
financial data in Item 6 of this Annual Report and Brocade's financial
statements and notes thereto in Item 8 of this annual report.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This discussion contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks outlined under "Risk Factors" and elsewhere in this annual
report. All forward-looking statements included in this document are based on
information available to Brocade on the date hereof. Brocade assumes no
obligation to update any such forward-looking statements.

OVERVIEW

Brocade is a leading provider of switching solutions for Storage Area
Networks ("SANs"). We sell our SAN switching solutions through leading storage
systems and server original equipment manufacturers, including Amdhal, Compaq
Computer, CNT, Data General (a division of EMC Corporation), Dell Computer, IBM,
Groupe Bull, McDATA Corporation (a division of EMC Corporation), NEC, Network
Appliance, Sequent Computer Systems, SGI, Fujitsu/Siemens Computer Systems and
StorageTek and through system integrators. These original equipment
manufacturers and our system integrator customers combine our switching
solutions with other system elements and services for enterprise data centers.

As noted above, we currently sell a large percentage of our products
through several major original equipment manufacturers. The initial evaluation
and product qualification cycle with original equipment manufacturers typically
takes six to twelve months and includes technical evaluation, integration,
testing, product launch planning and execution. Our sales strategy also includes
recruiting system integrators with a Fortune 500 data center presence and the
technical resources to design, implement and support SANs. To date,
substantially all of our sales have been in the United States. However, we have
launched sales and marketing efforts in Western Europe and Japan.

Revenue is recognized when products are shipped to customers, unless at the
time of shipment product returns cannot be estimated or significant support
services are required to successfully launch the customer's products. As of
October 31, 1999, several of our customers were implementing SAN solutions,
including our product, for their end-users for the first time. In addition,
several customers were implementing our new SilkWorm 2000 family of products for
the first time. Given the recent adoption of the SAN model and Brocade's
solution and because substantial Brocade services are required to support the
customer's product launches, the revenue related to shipments to these customers
has been deferred pending successful customer product launches. The deferred
revenue will be recognized on a customer-by-customer basis as each customer
successfully completes its product launch. Similarly, revenue is deferred for
new products that have not
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completed the beta test phase. As of October 31, 1999, $7.7 million of revenue
was deferred and consisted principally of revenue associated with shipments of
our new SilkWorm 2000 family of products made in the fourth quarter of fiscal
1999. It is expected that this deferred revenue will be recognized in the first
and second quarters of fiscal year 2000 as customers begin volume shipments of
these solutions that incorporate the Brocade SilkWorm 2000 family of products.
We believe that, as the SAN market matures, this revenue deferral method for new
customers may not be necessary.

Between fiscal 1998 and fiscal 1999 our average unit-selling price
decreased. We expect continued declines in our average unit selling price due to
anticipated increases in per customer sales volume, the impact of competitive
pricing pressures and new product introductions. However, in the near future, we
do not anticipate that our gross margins will be affected by declines in average
unit selling prices due to anticipated product cost reductions.

In July 1998, we outsourced our manufacturing and the majority of our
supply chain management operations. Accordingly, a significant portion of our
cost of revenues consists of payments to our contract manufacturer, Solectron
Corporation. We conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in San Jose, California.

Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
prototyping expenses related to the design, development, testing and
enhancements of our ASICs and software and the costs of computer support
services. We believe that continued investment in research and development is
critical to our strategic product and cost-reduction objectives. As a result, we
expect these expenses to increase in absolute dollars in the future.

Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
travel expenses. We believe that continued investment in sales and marketing is
critical to the success of our strategy to expand our relationships with leading
original equipment manufacturers, to expand our presence in the system
integration channel, and to maintaining our leadership position in the SAN
market. As a result, we expect these expenses to increase in absolute dollars in
the future.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and human resources personnel,
recruiting expenses, professional fees and other corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business.

In connection with the grant of certain stock options to employees, we
recorded deferred compensation of $307,000 and $5.1 million during fiscal 1998
and 1999, respectively, representing the difference between the deemed value of
our common stock for accounting purposes and the option exercise price of these
options at the date of grant. Deferred compensation is presented as a reduction
of stockholders' equity and amortized ratably over the vesting period of the
applicable options. We amortized $1.9 million of deferred compensation during
the year ended October 31, 1999. We will expense the balance ratably over the
remainder of the vesting period of the options. See note 7 to our financial
statements.

As of October 31, 1999, we had operating loss carryforwards of
approximately $44.0 million for federal income tax purposes and $14.7 million
for state tax purposes. The federal net operating loss carryforwards expire on
various dates between 2010 and 2019, and the state net operating loss
carryforwards will begin to expire in 2003. We have provided a full valuation
allowance against our deferred tax assets, consisting primarily of net operating
loss carryforwards, because of the uncertainty regarding their realization.

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RESULTS OF OPERATIONS

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

YEAR ENDED OCTOBER 31,
-----------------------
1997 1998 1999
----- ----- -----

Net revenues................................................ 100% 100% 100%
Cost of revenues............................................ 79 65 49
---- --- ---
Gross margin.............................................. 21 35 51
---- --- ---
Operating expenses:
Research and development.................................. 90 61 22
Sales and marketing....................................... 25 21 19
General and administrative................................ 17 16 6
Amortization of deferred compensation..................... -- -- 3
---- --- ---
Total operating expenses............................... 132 98 50
---- --- ---
Income (loss) from operations............................... (111) (63) 1
Interest income (expense), net.............................. (2) 1 3
---- --- ---
Income (loss) before provision for income taxes............. (113) (62) 4
---- --- ---
Provision for income taxes.................................. -- -- --
---- --- ---
Net income (loss)........................................... (113)% (62)% 4%
==== === ===

Revenues. We shipped our first commercial product in the second quarter of
fiscal 1997, generating revenues of $8.5 million for the year ended October 31,
1997. Net revenues increased by 185% to $24.2 million in fiscal 1998 and by 183%
to $68.7 million in fiscal 1999. The increase in net revenues from fiscal 1997
to fiscal 1998 reflects an increase in sales to a significant original equipment
manufacturer customer and the introduction of the SilkWorm Express product. The
increase in net revenues from fiscal 1998 to fiscal 1999 was due to increased
unit shipments of our SilkWorm 1000 family of products to an increasing customer
base, an increase in sales to several significant original equipment
manufacturer customers and increased sales in the system integrator channel. Net
revenues for the year ended October 31, 1999 exclude $7.7 million in deferred
revenue associated with shipments to new customers and shipments of our new
SilkWorm 2000 family of products. In fiscal 1999, revenues from four customers
accounted for 70% of total net revenues. The level of sales to any customer may
vary from quarter to quarter; however, we expect that significant customer
concentration will continue for the foreseeable future.

Gross margin. Gross margin increased from $1.8 million or 21.3% of net
revenues in fiscal 1997, to $8.5 million or 35.0% in fiscal 1998, and to $35.2
million or 51.2% in fiscal 1999. The increase from fiscal 1997 to fiscal 1998
was due to lower component and manufacturing costs, and the allocation of fixed
manufacturing costs over a greater revenue base. In addition, beginning in
fiscal 1998, gross margins increased as a result of the decision to outsource
all manufacturing activities during the year. The increase in gross margin from
fiscal 1998 to fiscal 1999 was due to lower component and manufacturing costs
and the allocation of fixed manufacturing costs over a greater revenue base. In
addition, for fiscal 1998, gross margin was adversely affected by the write-off
of obsolete inventory and the write-off of certain inventory and equipment
related to a change in contract manufacturers.

Research and development expenses. Research and development expenses
increased from $7.7 million in fiscal 1997, to $14.7 million in fiscal 1998 and
to $15.3 million in fiscal 1999. These increases reflect significant research
and development efforts required to bring the SilkWorm family of products to the
marketplace. The increase in fiscal 1998 expenses also reflects restructuring
costs associated with the cancellation of new product development and simulation
projects.

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Sales and marketing expenses. Sales and marketing expenses increased from
$2.1 million in fiscal 1997, to $5.2 million in fiscal 1998, and to $13.3
million in fiscal 1999. The increases reflect the hiring of additional sales and
marketing personnel and increased direct selling expenses associated with
increased revenues.

General and administrative expenses. General and administrative expenses
increased from $1.5 million for fiscal 1997, to $3.8 million for fiscal 1998 and
fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was primarily due to
increased staffing and associated expenses necessary to manage and support our
increased scale of operations. Fiscal 1998 expenses were also affected by costs
related to a business restructuring which totaled $1.2 million, primarily
related to the termination of employees. Fiscal 1999 expenses reflect costs
associated with increased staffing and other expenses necessary to manage and
support our increased scale of operations.

Amortization of deferred compensation. During fiscal 1998 and 1999 we
recorded deferred compensation of $307,000 and $5.1 million, respectively, in
connection with stock option grants. Deferred compensation is amortized over
vesting periods of the applicable options, resulting in amortization expense of
$7,000 and $1.9 million in fiscal 1998 and 1999, respectively.

Interest income, net. Net interest income increased from $120,000 in
fiscal year 1998 to $1.7 million in fiscal 1999 due to interest earned on the
funds associated with the closing of our initial public offering in May 1999.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations to date primarily through the sale of
preferred stock, capital equipment lease lines, bank debt and, in May 1999, we
raised $66.0 million in our initial public offering. Our principal sources of
liquidity as of October 31, 1999 consisted of $89.3 million in cash, cash
equivalents and short-term investments.

During fiscal 1997, cash used in operating activities was $7.3 million
compared to $11.6 million in fiscal 1998. In fiscal 1999, we generated $16.5
million in cash from operations. The increase in cash used in operations in
fiscal 1998 reflects the increased working capital required to fund expanding
operations and increases in inventories and accounts receivable. The cash
provided by operating activities in fiscal 1999 reflects net income of $2.5
million in fiscal 1999 compared to a net loss of $15.1 million in fiscal 1998,
plus favorable changes in the balances of operating assets and liabilities.

Net cash provided by investing activities for fiscal 1998 was $12.1 million
compared to net cash used in investing activities of $19.3 million for fiscal
1997. The period to period change was due mainly to sales of short-term
investments during fiscal 1998. Net cash used in investing activities for fiscal
1999 was $67.1 million compared to net cash provided by investing activities of
$12.1 million for fiscal 1998. The period to period change was due mainly to the
purchases of short-term investments during fiscal 1999.

Net cash provided by financing activities was $28.5 million, $7.3 million
and $65.7 million for fiscal 1997, 1998 and 1999, respectively. The primary
source of cash generated from financing for fiscal 1997 related to the issuance
of redeemable convertible preferred stock and warrants. For fiscal 1998, the
primary source of cash generation from financing related to the issuance of
redeemable convertible preferred stock and warrants, proceeds from the issuance
of notes payable, and borrowings under a credit facility. During fiscal 1999,
the primary source of cash generation from financing activities was the sale of
common stock in our initial public offering.

We believe that our existing cash, cash equivalents and short-term
investment balances and cash flow expected to be generated from future
operations, will be sufficient to meet our capital requirements at least through
the next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. Our future capital requirements will
depend on many factors, including the rate of revenue growth, the timing and
extent of spending to support product development efforts and expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of our products. There can be no
assurances that additional equity or debt financing, if required, will be
available on acceptable terms or at all.
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In December 1999, Brocade entered into an agreement to lease approximately
210,000 square feet of office, laboratory, and administrative space in San Jose,
California. The term of the lease agreement is September 1, 2000 through August
31, 2010, and represents a lease commitment of $6.2 million per year to Brocade.
Brocade intends to occupy the space in September 2000 and sub-lease any excess
space. In conjunction with entering into the lease agreement, Brocade signed an
unconditional, irrevocable letter of credit for $6.2 million as security for the
lease. In connection with our occupation of this building, Brocade intends to
make significant tenant improvement. Brocade intends to finance these tenant
improvements and the lease commitment with internally generated funds.

YEAR 2000 COMPLIANCE

Impact of the year 2000 computer problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.

To date, we have not experienced any year 2000 issues with any of our
internal systems or our products, and we do not expect to experience any in the
future. To date, we have not experienced any year 2000 issues related to any of
our key third party suppliers and customers nor do we expect to experience any
in the future. Costs associated with remediating our internal systems were not
material.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," ("SOP 98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending
the deferral of the application of certain provisions of SOP 97-2 amended by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. Brocade has not had significant software
sales to date and management does not expect the adoption of SOP 98-9 to have a
significant effect on the financial condition or results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and hedging Activities" ("SFAS 133")
which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement is effective
for fiscal years commencing after June 15, 2000. Brocade does not believe that
SFAS 133 will have a material impact on earnings or financial condition.

RISK FACTORS

WE HAVE AN ACCUMULATED DEFICIT OF $26.3 MILLION AND MAY NOT MAINTAIN
PROFITABILITY

We have incurred significant losses since our inception. As a result, as of
October 31, 1999, we had an accumulated deficit of $26.3 million. Although our
revenues have grown in recent quarters, and we achieved profitability in our
third and fourth quarters of fiscal 1999, we cannot be certain that we will be
able to sustain these growth rates or that we will realize sufficient revenues
to maintain profitability. We expect to incur significant product development,
sales and marketing and administrative expenses and, as a result, we will need
to generate significant revenues to achieve and maintain profitability.

In addition, we have a limited operating history. Therefore, we cannot
forecast future operating results based on our historical results. We plan our
operating expenses based in part on future revenue projections. Our ability to
accurately forecast our quarterly revenue is limited for the reasons discussed
below in "-- We Expect Our Quarterly Revenues and Operating Results to Fluctuate
for a Number of Reasons Which Could Cause Our Stock Price to Fluctuate."
Moreover, most of our expenses are fixed in the short-term or incurred in
advance of receipt of corresponding revenue. As a result, we may not be able to
decrease our spending to

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offset any unexpected shortfall in our revenues. If this were to occur, we would
expect to incur significant losses.

WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE

Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:

- fluctuations in demand for our SilkWorm family of products and services;

- the timing of customer orders and product implementations, particularly
large orders from and product implementations of our original equipment
manufacturer customers;

- our ability to develop, introduce, ship and support new products and
product enhancements;

- announcements and new product introductions by our competitors;

- the expected decline in the prices at which we can sell our SilkWorm
family of products to our customers;

- our ability to obtain sufficient supplies of sole or limited sourced
components, including application specific integrated circuits, or ASICs,
gigabit interface converters, or GBICs, and power supplies, for our
SilkWorm family of products;

- increases in the prices of the components we purchase;

- our ability to attain and maintain production volumes and quality levels
for our SilkWorm family of products;

- the mix of our SilkWorm and SilkWorm Express switches sold and the mix of
distribution channels through which they are sold;

- increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key original equipment
manufacturers and system integrators;

- widespread adoption of SANs as an alternative to existing data storage
and management systems;

- decisions by end-users to reallocate their information resources to other
purposes, including year 2000 preparedness; and

- deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors.

Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.

OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS
AND SAN SWITCHING PRODUCTS

Our SilkWorm family of Fibre Channel switching products is used exclusively
in storage area networks, or SANs. Accordingly, widespread adoption of SANs as
an integral part of data-intensive enterprise computing environments is critical
to our future success. In addition, our success depends upon market acceptance
of our SAN switching solutions as an alternative to the use of hubs or other
interconnect devices in SANs. The markets for SANs and SAN switching products
have only recently begun to develop and are rapidly evolving. Because these
markets are new, it is difficult to predict their potential size or future
growth rate. In addition, SANs are often implemented in connection with
deployment of new storage systems and servers and we are therefore dependent to
some extent on this market. Potential end-user customers who have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow
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to adopt a new approach, like SANs. Our success in generating revenue in these
emerging markets will depend, among other things, on our ability to educate
potential original equipment manufacturers and system integrator customers, as
well as potential end-users, about the benefits of SANs and SAN switching
technology and our ability to maintain and enhance our relationships with
leading original equipment manufacturers and system integrators. In addition,
our products are designed to conform to the Fibre Channel interconnect protocol
and certain other industry standards. Some of these standards may not be widely
adopted, and competing standards may emerge that will be preferred by original
equipment manufacturers or end-users.

WE CURRENTLY ONLY OFFER OUR SILKWORM PRODUCT FAMILY AND MUST DEVELOP NEW AND
ENHANCED PRODUCTS THAT ACHIEVE WIDESPREAD MARKET ACCEPTANCE

We currently derive substantially all of our revenues from sales of our
SilkWorm family of products. We expect that revenue from this product family
will continue to account for a substantial portion of our revenues for the
foreseeable future. Therefore, widespread market acceptance of these products is
critical to our future success. Some of our products have been only recently
introduced and therefore, the demand and market acceptance of our products is
uncertain. Factors that may affect the market acceptance of our products include
market acceptance of SAN switching products, the performance, price and total
cost of ownership of our products, the availability and price of competing
products and technologies, and the success and development of our original
equipment manufacturers and system integrators. Many of these factors are beyond
our control.

Our future success depends upon our ability to address the rapidly changing
needs of our customers by developing and introducing high-quality,
cost-effective products, product enhancements and services on a timely basis and
by keeping pace with technological developments and emerging industry standards.
We have new product launches and upgrades to our existing products planned for
fiscal year 2000. Our future revenue growth will be dependent on the success of
these new product launches. We have in the past experienced delays in product
development and such delays may occur in the future. In addition, as we
introduce new or enhanced products, we will have to manage successfully the
transition from older products in order to minimize disruption in our customers'
ordering patterns, avoid excessive levels of older product inventories and
ensure that enough supplies of new products can be delivered to meet our
customers' demands. Our failure to develop and introduce successfully new
products and product enhancements, which are not broadly accepted, would reduce
our revenues.

WE DEPEND ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND THE LOSS OF
ANY OF THEM COULD SIGNIFICANTLY REDUCE OUR REVENUES

We depend on a few key original equipment manufacturer customers. For
example, in the year ended October 31, 1999, sales to four customers accounted
for 70% of our total revenues. We anticipate that our operating results will
continue to depend on sales to a relatively small number of original equipment
manufacturers. Therefore, the loss of any of our key original equipment
manufacturers, or a significant reduction in sales to these original equipment
manufacturers could significantly reduce our revenues.

FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES

Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers and system
integrators, as well as on the sales efforts and success of these customers. Our
customers may evaluate our products for up to a year before they begin to market
and sell them and assisting these customers through the evaluation process may
require significant sales and marketing and management efforts on our part,
particularly if we have to qualify our products with multiple customers at the
same time. In addition, once our products have been qualified, our agreements
with our customers have no minimum purchase commitments. We cannot assure you
that we will be able to expand our distribution channels, manage our
distribution relationships successfully or that our customers will market our
products effectively. Our failure to manage successfully our distribution
relationships or the failure of our customers to sell our products could reduce
our revenues.
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THE LOSS OF SOLECTRON CORPORATION, OUR SOLE MANUFACTURER, OR THE FAILURE TO
FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR MANAGE SUCCESSFULLY OUR
RELATIONSHIP WITH SOLECTRON, WOULD NEGATIVELY IMPACT OUR ABILITY TO MANUFACTURE
AND SELL OUR PRODUCTS

Solectron, a third party manufacturer for numerous companies, manufactures
all of our products at its Milpitas, California facility on a purchase order
basis. We have entered into a three-year manufacturing agreement with Solectron
under which we provide to Solectron a twelve-month product forecast and place
purchase orders with Solectron sixty calendar days in advance of the scheduled
delivery of products to our customers. Accordingly, if we inaccurately forecast
demand for our products, we may be unable to obtain adequate manufacturing
capacity from Solectron to meet our customers' delivery requirements or we may
accumulate excess inventories.

We plan to regularly introduce new products and product enhancements, which
will require that we coordinate our efforts with those of our suppliers and
Solectron to rapidly achieve volume production. While we have not, to date,
experienced supply problems with Solectron, we have experienced delays in
product deliveries from one of our former contract manufacturers. If we should
fail to effectively manage our relationships with our suppliers and Solectron,
or if Solectron experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, our ability to ship products
to our customers could be delayed and our competitive position and reputation
could be harmed. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required or choose to
change contract manufacturers, we may lose revenue and damage our customer
relationships.

WE ARE DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS INCLUDING ASICS AND POWER SUPPLIES

We currently purchase several key components from single or limited
sources. We purchase ASICs and power supplies from single sources, and printed
circuit boards and GBICs from limited sources. In addition, we license certain
software that is incorporated into our Brocade Fabric Operating System from Wind
River Systems, Inc. If we are unable to buy these components on a timely basis,
we will not be able to manufacture our products. We use a rolling six-month
forecast based on anticipated product orders to determine our component
requirements. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing. In addition, lead times for materials and components we order
vary significantly and depend on factors such as the specific supplier, contract
terms and demand for a component at a given time. We also may experience
shortages of certain components from time to time, which also could delay our
manufacturing.

THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE

The markets for our SAN switching products are competitive, and are likely
to become even more competitive. Increased competition could result in pricing
pressures, reduced sales, reduced margins, reduced profits, reduced market share
or the failure of our products to achieve or maintain market acceptance. Our
products face competition from multiple sources. Some of our competitors and
potential competitors have longer operating histories, greater name recognition,
access to larger customer bases, or substantially greater resources than we
have. As a result, they may be able to respond more quickly than we can to new
or changing opportunities, technologies, standards or customer requirements. For
all of the foregoing reasons, we may not be able to compete successfully against
our current and future competitors.

THE PRICES OF OUR PRODUCTS ARE DECLINING WHICH COULD REDUCE OUR REVENUES AND
GROSS MARGINS

The average unit price of our products continued to decrease in fiscal
1999. We anticipate that the average unit price of our products may continue to
decrease in the future in response to changes in product mix, competitive
pricing pressures, increased sales discounts, new product introductions by us or
our

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competitors or other factors. If we are unable to offset these factors by
increasing our sales volumes, our revenues will decline. In addition, to
maintain our gross margins, we must develop and introduce new products and
product enhancements, and we must continue to reduce the manufacturing cost of
our products.

UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUES

Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our new or enhanced
products. In addition, our products are combined with 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 us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
Moreover, the occurrence of hardware and software errors, whether caused by our
or another vendor's SAN products, could delay or prevent the development of the
SAN market.

IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
WE MAY NOT BE SUCCESSFUL

Our success depends to a significant degree upon the continued
contributions of our key management, engineering and sales and marketing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on Gregory L. Reyes, our President
and Chief Executive Officer, Kumar Malavalli, our Vice President, Technology and
Paul R. Bonderson, Jr., our Vice President, Engineering. We do not have
employment contracts with, or key person life insurance on, any of our key
personnel. We also believe that our success depends to a significant extent on
the ability of our management to operate effectively, both individually and as a
group. In April 1999, we hired a new Chief Financial Officer, and certain other
members of our management team, including Mr. Reyes, have only recently joined
us.

We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, and finance and operations personnel. Competition for these personnel
is intense, especially in the San Francisco Bay Area. In particular, we have
experienced difficulty in hiring qualified ASIC, software, system and test, and
customer support engineers and there can be no assurance that we will be
successful in attracting and retaining these individuals. The loss of the
services of any of our key employees, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers and sales personnel, could delay the development and
introduction of and negatively impact our ability to sell our products. In
addition, companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive such claims in
the future as we seek to hire qualified personnel or that such claims will not
result in material litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits.

WE MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH

We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth places a significant
demand on our management and our operational resources. In order to manage
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis.

WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS

We plan to expand our international sales activities significantly. In
fiscal 2000, we intend to focus on expanding our international sales activities
in Western Europe and Japan. Our international sales growth in these countries
will be limited if we are unable to establish relationships with international
distributors, establish additional foreign operations, expand international
sales channel management, hire additional personnel and develop relationships
with international service providers. Even if we are able to successfully

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expand international operations, we cannot be certain that we will be able to
maintain or increase international market demand for our products. Our
international operations, including our sales activities in Western Europe and
Japan, are subject to a number of risks, including:

- supporting multiple languages;

- recruiting sales and technical support personnel with the skills to
support our products;

- increased complexity and costs of managing international operations;

- protectionist laws and business practices that favor local competition;

- dependence on local vendors;

- multiple, conflicting and changing governmental laws and regulations;

- longer sales cycles;

- difficulties in collecting accounts receivable;

- reduced or limited protections of intellectual property rights; and

- political and economic instability.

To date, none of our international revenues and costs have been denominated
in foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and thus
less competitive in foreign markets. A portion of our international revenues may
be denominated in foreign currencies in the future, including the Euro, which
will subject us to risks associated with fluctuations in those foreign
currencies.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE

We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. See "Business -- Intellectual
Property."

OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We were previously the
subject of a lawsuit alleging infringement of intellectual property rights.
Although this dispute was resolved and the lawsuit dismissed, and we are not
currently involved in any other intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of others' intellectual property. These claims
and any resulting lawsuit could subject us to significant liability for damages
and invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:

- stop selling, incorporating or using our products or services that use
the challenged intellectual property;

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- obtain from the owner of the infringed intellectual property right a
license to make, use, sell, import and/or export the relevant technology,
which license may not be available on reasonable terms, or at all; and

- redesign those products or services that use such technology.

If we are forced to take any of the foregoing actions, we may be unable to
manufacture, use, sell, import and/or export our products, which would reduce
our revenues.

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES

As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our markets or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or technologies in the
future. In the event of any future purchases, we could:

- issue stock that would dilute our current stockholders' percentage
ownership;

- incur debt; or

- assume liabilities.

These purchases also involve numerous risks, including:

- problems combining the purchased operations, technologies or products;

- unanticipated costs;

- diversion of management's attention from our core business;

- adverse effects on existing business relationships with suppliers and
customers;

- risks associated with entering markets in which we have no or limited
prior experience; and

- potential loss of key employees of purchased organizations.

We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.

YEAR 2000 COMPLIANCE

OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS

The market for SAN products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. All components of the SAN must utilize the
same standards in order to operate together. Our products comprise only a part
of the entire SAN and we depend on

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the companies that provide other components of the SAN, many of whom are
significantly larger than we are, to support the industry standards as they
evolve. The failure of these providers to support these industry standards could
adversely affect the market acceptance of our products. In addition, in the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission and Underwriters Laboratories.
Internationally, products that we develop will also be required to comply with
standards established by authorities in various countries. Failure to comply
with existing or evolving industry standards or to obtain timely domestic or
foreign regulatory approvals or certificates could materially harm our business.

PROVISIONS IN OUR CHARTER DOCUMENTS, CUSTOMER AGREEMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF BROCADE AND MAY REDUCE THE MARKET PRICE
OF OUR COMMON STOCK

Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:

- authorizing the issuance of preferred stock without stockholder approval;

- providing for a classified board of directors with staggered, three-year
terms;

- prohibiting cumulative voting in the election of directors;

- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;

- 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 us. Further, our agreements with certain
of our customers require us to give prior notice of a change of control of
Brocade and grant certain manufacturing rights following the change of control.

WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT

The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:

- actual or anticipated fluctuations in our operating results;

- changes in financial estimates by securities analysts;

- changes in market valuations of other technology companies;

- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;

- losses of major original equipment manufacturer customers;

- additions or departures of key personnel; and

- sales of common stock in the future.

In addition, the stock market has experienced extreme volatility that often
has been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance.

OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY

In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.

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WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW

We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need, or could elect, to seek
additional funding prior to that time. In the event we need to raise additional
funds we may not be able to do so on favorable terms, if at all. Further, if we
issue equity securities, stockholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BROCADE COMMUNICATIONS SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Report of Independent Public Accountants.................... 28
Balance Sheets.............................................. 29
Statements of Operations.................................... 30
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)............................ 31
Statements of Cash Flows.................................... 32
Notes to Financial Statements............................... 33

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of Brocade Communications Systems, Inc.:

We have audited the accompanying balance sheets of Brocade Communications
Systems, Inc. (a Delaware corporation) as of October 31, 1999 and 1998 and the
related statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brocade Communications
Systems, Inc. as of October 31, 1999 and 1998 and the results of its operations
and its cash flows for each of the three years in the period ended October 31,
1999 in conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange Commissions
rules and are not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Jose, California
November 24, 1999

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BROCADE COMMUNICATIONS SYSTEMS, INC.

BALANCE SHEETS

OCTOBER 31,
----------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,420 $ 25,536
Short-term investments.................................... -- 63,769
-------- --------
Total cash, cash equivalents and short-term
investments...................................... 10,420 89,305
Accounts receivable, net of allowance for doubtful
accounts of $285 and $2,447, respectively............... 3,430 17,139
Inventories............................................... 1,744 3,686
Prepaid expenses and other current assets................. 220 2,197
-------- --------
Total current assets............................... 15,814 112,327
Property and equipment, net................................. 5,323 4,947
Other assets................................................ 164 6
-------- --------
Total assets....................................... $ 21,301 $117,280
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 3,247 $ 10,664
Accrued employee compensation............................. 628 4,414
Other accrued liabilities................................. 2,433 9,830
Deferred revenue.......................................... 543 7,688
Current portion of capital lease obligations.............. 784 436
Current portion of debt................................... 1,231 --
Borrowings under line of credit........................... 1,672 --
-------- --------
Total current liabilities.......................... 10,538 33,032
-------- --------
Long-term liabilities:
Long-term portion of capital lease obligations............ 478 42
Long-term portion of debt................................. 1,731 --
Commitments and contingencies (Note 4)
Redeemable convertible preferred stock, no par value:
Authorized -- 9,791,280 and no shares at October 31,
1998 and 1999, respectively.
Issued and outstanding (Series A, B, C and
D) -- 9,235,483 shares at October 31, 1998; no shares
at October 31, 1999.................................... 35,261 --
Warrants to purchase redeemable convertible preferred
stock................................................... 648 --
-------- --------
Total long-term liabilities........................ 38,118 42
-------- --------
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized -- 200,000,000 shares at October 31, 1999
Issued and outstanding -- 10,389,530 shares at October
31, 1998 and 53,520,040 shares at October 31, 1999..... 10 53
Additional paid-in capital.................................. 2,215 119,598
Deferred stock compensation................................. (300) (3,440)
Notes receivable from stockholders.......................... (450) (5,660)
Accumulated deficit......................................... (28,830) (26,345)
-------- --------
Total stockholders' equity (deficit)............... (27,355) 84,206
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $ 21,301 $117,280
======== ========

See accompanying notes to financial statements.
29
31

BROCADE COMMUNICATIONS SYSTEMS, INC.

STATEMENTS OF OPERATIONS

YEAR ENDED OCTOBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net revenues................................................ $ 8,482 $ 24,246 $68,692
Cost of revenues............................................ 6,682 15,759 33,497
------- -------- -------
Gross margin........................................... 1,800 8,487 35,195
------- -------- -------
Operating expenses:
Research and development.................................. 7,666 14,744 15,267
Sales and marketing....................................... 2,112 5,154 13,288
General and administrative................................ 1,464 3,813 3,849
Amortization of deferred compensation..................... -- 7 1,937
------- -------- -------
Total operating expenses............................... 11,242 23,718 34,341
------- -------- -------
Income (loss) from operations............................... (9,442) (15,231) 854
Interest income (expense), net.............................. (177) 120 1,737
------- -------- -------
Income (loss) before provision for income taxes............. (9,619) (15,111) 2,591
Provision for income taxes.................................. -- -- 106
------- -------- -------
Net income (loss)........................................... $(9,619) $(15,111) $ 2,485
======= ======== =======
Basic net income (loss) per share........................... $ (2.41) $ (2.22) $ 0.10
======= ======== =======
Diluted net income (loss) per share......................... $ (2.41) $ (2.22) $ 0.05
======= ======== =======
Shares used in computing basic net income (loss) per
share..................................................... 3,994 6,800 26,094
======= ======== =======
Shares used in computing diluted net income (loss) per
share..................................................... 3,994 6,800 51,146
======= ======== =======
Pro forma basic net income (loss) per share (unaudited)..... $ (0.42) $ 0.06
======== =======
Pro forma diluted net income (loss) per share (unaudited)... $ (0.42) $ 0.05
======== =======
Shares used in computing pro forma basic net income (loss)
per share (unaudited)..................................... 35,830 43,074
======== =======
Shares used in computing pro forma diluted net income (loss)
per share (unaudited)..................................... 35,830 51,146
======== =======

See accompanying notes to financial statements.
30
32

BROCADE COMMUNICATIONS SYSTEMS, INC.

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)

REDEEMABLE CONVERTIBLE COMMON
PREFERRED STOCK STOCK ADDITIONAL WARRANTS DEFERRED
---------------------------- --------------- PAID-IN FOR COMMON STOCK
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL STOCK COMPENSATION
------ -------- -------- ------ ------ ---------- ---------- ------------
(IN THOUSANDS)

Balances at October 31, 1996...... 2,241 $ 4,613 $ 188 8,988 $ 9 $ 255 $ -- $ (121)
Exercise of options............... -- -- -- 768 1 89 -- --
Issuance of stock for notes
receivable from stockholders.... -- -- -- 500 -- 75 -- --
Repurchase of common stock........ -- -- -- (430) -- (5) -- --
Issuance of Series C Redeemable
Convertible Preferred Stock, net
of issuance costs of $49........ 3,333 9,952 -- -- -- -- -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $42........ 2,796 15,794 -- -- -- -- -- --
Issuance of warrants related to
leases and notes payable........ -- -- 135 -- -- -- -- --
Issuance of warrants.............. -- -- 325 -- -- -- -- --
Deferred compensation............. -- -- -- -- -- -- -- 33
Net loss.......................... -- -- -- -- -- -- -- --
------ -------- ----- ------ --- -------- ----- -------
Balances at October 31, 1997...... 8,370 30,359 648 9,826 10 414 -- (88)
Exercise of options............... -- -- -- 402 -- 55 -- --
Compensation charges.............. -- -- -- -- -- 1,067 -- 88
Deferred compensation............. -- -- -- -- -- 307 -- (307)
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- 7
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $98........ 865 4,902 -- -- -- -- -- --
Issuance of stock for notes
receivable from stockholders.... -- -- -- 450 -- 375 -- --
Stock in exchange for services.... -- -- -- 36 -- 41 -- --
Repurchase of common stock........ -- -- -- (324) -- (44) -- --
Net loss.......................... -- -- -- -- -- -- -- --
------ -------- ----- ------ --- -------- ----- -------
Balances at October 31, 1998...... 9,235 35,261 648 10,390 10 2,215 -- (300)
Issuance of Series D Redeemable
Convertible Preferred Stock,
net............................. 299 2,322 (326) -- -- -- -- --
Conversion of Redeemable
Convertible Preferred Stock to
common stock.................... (9,534) (37,583) (322) 29,250 29 37,554 322 --
Issuance of common stock.......... -- -- -- 8,920 8 67,977 -- --
Issuance of stock for notes
receivable from stockholders.... -- -- -- 4,704 5 6,407 -- --
Repayments on notes receivable
from stockholders............... -- -- -- -- -- -- -- --
Exercise of warrants for common
stock........................... -- -- -- 568 1 381 (322) --
Compensation charges.............. -- -- -- -- -- 80 -- --
Deferred compensation............. -- -- -- -- -- 5,077 -- (5,077)
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- 1,937
Repurchase of common stock........ -- -- -- (312) -- (93) -- --
Net income........................ -- -- -- -- -- -- -- --
------ -------- ----- ------ --- -------- ----- -------
Balances at October 31, 1999...... -- $ -- $ -- 53,520 $53 $119,598 $ -- $(3,440)
====== ======== ===== ====== === ======== ===== =======

NOTES TOTAL
RECEIVABLE STOCKHOLDERS
FROM ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT (DEFICIT)
------------ ----------- ------------
(IN THOUSANDS)

Balances at October 31, 1996...... $ -- $ (4,100) $ (3,957)
Exercise of options............... -- -- 90
Issuance of stock for notes
receivable from stockholders.... (75) -- --
Repurchase of common stock........ -- -- (5)
Issuance of Series C Redeemable
Convertible Preferred Stock, net
of issuance costs of $49........ -- -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $42........ -- -- --
Issuance of warrants related to
leases and notes payable........ -- -- --
Issuance of warrants.............. -- -- --
Deferred compensation............. -- -- 33
Net loss.......................... -- (9,619) (9,619)
------- -------- --------
Balances at October 31, 1997...... (75) (13,719) (13,458)
Exercise of options............... -- -- 55
Compensation charges.............. -- -- 1,155
Deferred compensation............. -- -- --
Amortization of deferred
compensation.................... -- -- 7
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $98........ -- -- --
Issuance of stock for notes
receivable from stockholders.... (375) -- --
Stock in exchange for services.... -- -- 41
Repurchase of common stock........ -- -- (44)
Net loss.......................... -- (15,111) (15,111)
------- -------- --------
Balances at October 31, 1998...... (450) (28,830) (27,355)
Issuance of Series D Redeemable
Convertible Preferred Stock,
net............................. -- -- --
Conversion of Redeemable
Convertible Preferred Stock to
common stock.................... -- -- 37,905
Issuance of common stock.......... -- -- 67,985
Issuance of stock for notes
receivable from stockholders.... (6,412) -- --
Repayments on notes receivable
from stockholders............... 1,202 -- 1,202
Exercise of warrants for common
stock........................... -- -- 60
Compensation charges.............. -- -- 80
Deferred compensation............. -- -- --
Amortization of deferred
compensation.................... -- -- 1,937
Repurchase of common stock........ -- -- (93)
Net income........................ -- 2,485 2,485
------- -------- --------
Balances at October 31, 1999...... $(5,660) $(26,345) $ 84,206
======= ======== ========

See accompanying notes to financial statements.

31
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BROCADE COMMUNICATIONS SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

YEAR ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (9,619) $(15,111) $ 2,485
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 1,093 2,374 3,693
Provision for doubtful accounts receivable............... 100 185 536
Noncash compensation expense............................. 33 1,202 2,017
Changes in assets and liabilities:
Accounts receivable................................... (2,746) (969) (14,245)
Inventories........................................... (471) (1,273) (1,942)
Prepaid expenses and other assets..................... (140) 205 (1,819)
Accounts payable...................................... 3,023 (45) 7,417
Accrued employee compensation......................... 474 154 3,786
Other accrued liabilities............................. 693 1,682 7,397
Deferred revenue...................................... 285 9 7,145
-------- -------- --------
Net cash provided by (used in) operating
activities....................................... (7,275) (11,587) 16,470
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (3,423) (3,775) (3,317)
Purchases of short-term investments........................ (15,920) -- (75,769)
Proceeds from disposition of short-term investments........ -- 15,920 12,000
-------- -------- --------
Net cash provided by (used in) investing
activities....................................... (19,343) 12,145 (67,086)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred
stock and warrants....................................... 26,070 4,902 1,996
Proceeds from issuance of common stock..................... 90 56 67,985
Exercise of warrants for common stock...................... -- -- 60
Payments received on loans to stockholders................. -- -- 1,202
Repurchase of common stock................................. (5) (44) (93)
Line of credit borrowings.................................. 500 1,672 --
Line of credit repayments.................................. -- (500) (1,672)
Proceeds from capital lease financing...................... 1,258 -- --
Payments on capital lease obligations...................... (504) (677) (784)
Proceeds from notes payable................................ 1,091 2,594 247
Repayments of notes payable................................ (30) (693) (3,209)
-------- -------- --------
Net cash provided by financing activities........... 28,470 7,310 65,732
-------- -------- --------
Net increase in cash and cash equivalents.................. 1,852 7,868 15,116
Cash and cash equivalents, beginning of period............. 700 2,552 10,420
-------- -------- --------
Cash and cash equivalents, end of period................... $ 2,552 $ 10,420 $ 25,536
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 351 $ 557 $ 359
======== ======== ========
Conversion of redeemable convertible preferred stock upon
initial public offering............................... $ -- $ -- $ 37,905
======== ======== ========
Issuance of stock for notes receivable from
stockholders.......................................... $ 75 $ 375 $ 6,412
======== ======== ========

See accompanying notes to financial statements.
32
34

BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS OF BROCADE

Brocade Communications Systems, Inc. (Brocade) was incorporated on August
24, 1995. Effective May 14, 1999, Brocade reincorporated in the State of
Delaware. In connection with the reincorporation, Brocade was authorized to
issue 50,000,000 shares of common stock with a par value of $.001 per share and
5,000,000 shares of undesignated preferred stock with a par value of $.001 per
share. On October 5, 1999, the board of directors approved an increase in the
authorized shares of common stock to 200,000,000 shares. Subsequent to October
31, 1999, Brocade effected a two-for-one split of its common stock. All share
and per share information have been retroactively adjusted to reflect this
split.

Brocade provides Fibre Channel switching solutions for deployment in
storage area networks ("SANs"). Brocade's SilkWorm family of Fibre Channel
switches operate at gigabit speeds and create a switch interconnect enabling
any-to-any connectivity between storage devices and servers. Brocade sells its
products and services primarily to leading storage system and server original
equipment manufacturers and system integrators.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Such estimates relate to the useful lives of fixed assets,
allowances for doubtful accounts and product returns, inventory and warranty
reserves, accrued liabilities and other reserves. Actual results could differ
from those estimates and such differences may be material to the financial
statements.

Cash, Cash Equivalents and Short-term Investments

All highly liquid investment securities with original maturities of three
months or less are considered cash equivalents, while investment securities with
original maturities of more than three months but less than one year are
considered short-term investments.

Brocade's short-term investments consist of U.S. Treasuries and Federal
Agency debt securities with original maturity dates between 90 days and one
year. The carrying value of short-term investments approximate fair value.

All of Brocade's investments are classified as available-for-sale.
Unrealized holding gains and losses are reported as a separate component of
other comprehensive income. At October 31, 1999, unrealized holding gains and
losses were not material. Realized gains and losses are included in interest
income in the statement of operations. The cost of securities sold is based on
the specific identification method.

Concentrations of Credit Risk

Financial instruments that potentially subject Brocade to concentrations of
credit risk consist primarily of cash equivalents and short-term investments and
accounts receivable. Brocade invests only in high credit quality short-term debt
instruments and limits the amount of credit exposure to any one entity. A
majority of Brocade's trade receivable balance is derived from sales to original
equipment manufacturers in the computer storage and server industry. At October
31, 1998 approximately 76% of accounts receivable was concentrated with four
customers. At October 31, 1999 approximately 74% of accounts receivable was
concentrated with four customers. Brocade performs on going credit evaluations
of its customers and generally does not require collateral on accounts
receivable. Brocade provides reserves for credit losses and product sales
returns.

33
35
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Inventories

Inventories are stated at the lower of cost or market, using the first in,
first out method. Inventory costs include material, labor and overhead. Deferred
charges represent the product costs associated with product shipments that are
recorded in deferred revenue. Inventories consisted of the following, (in
thousands):

OCTOBER 31,
----------------
1998 1999
------ ------

Raw materials.............................................. $1,203 $ 878
Work-in-process............................................ 6 173
Finished goods, including deferred charges................. 535 2,635
------ ------
$1,744 $3,686
====== ======

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to four years. Leasehold improvements are amortized using the
straight-line method over the shorter of the assets useful lives or the
remaining term of the lease. Property and equipment consisted of the following,
(in thousands):

OCTOBER 31,
------------------
1998 1999
------- -------

Computers and equipment.................................. $ 8,186 $10,530
Furniture and fixtures and leasehold improvements........ 779 711
Less: Accumulated depreciation and amortization.......... (3,642) (6,294)
------- -------
$ 5,323 $ 4,947
======= =======

Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated amortization of approximately
$2.6 million and $2.5 million, respectively, at October 31, 1999.

Software Development Costs

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," Brocade capitalizes eligible computer software development
costs upon the establishment of technological feasibility, which it has defined
as completion of designing, coding and testing activities. For the years ended
October 31, 1997, 1998 and 1999, the amount of costs eligible for
capitalization, after consideration of factors such as realizable value, were
not material and, accordingly, all software development costs have been charged
to research and development expense in the accompanying statements of operations
for all periods presented.

Accrued Employee Compensation

Accrued employee compensation consist of accrued wages, commissions and
payroll taxes, vacation payable, performance bonuses yet to be paid, payroll
deductions for the employee stock purchase plan and other benefit payroll
deductions.

34
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BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Other Accrued Liabilities

Other accrued liabilities consisted of the following, (in thousands):

OCTOBER 31,
----------------
1998 1999
------ ------

Accrued warranty........................................... $1,350 $1,856
Purchase commitments reserve............................... -- 3,629
Other...................................................... 1,083 4,345
------ ------
$2,433 $9,830
====== ======

Stock-Based Compensation

Brocade accounts for its stock option plans and its Employee Stock Purchase
Plan in accordance with the provisions of Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees" ("APB 25"). In 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which establishes a fair value based method of
accounting for stock-based plans. Companies that elect to account for
stock-based compensation plans in accordance with APB 25 are required to
disclose the pro forma net income (loss) that would have resulted from the use
of the fair value based method. Accordingly, pro forma disclosures that are
required under SFAS No. 123 are included in Note 7.

Stock Split

On November 8, 1999, Brocade's board of directors approved a two-for-one
split of Brocade's common stock. The stock began trading on a split-adjusted
basis on December 3, 1999. All references in the accompanying financial
statements to earnings per share and the number of common shares have been
retroactively restated to reflect the common stock split and the increase in
authorized common and preferred stock.

Revenue Recognition

Product revenue is generally recognized when products are shipped. Revenue
recognition is deferred for shipments to new customers where product returns
cannot be reasonably estimated or significant support services are required to
successfully launch the customer's product. These revenues are recognized when
the customer has successfully integrated and launched its products and Brocade
has met its support obligations. Allowances for warranty costs, credit losses
and estimated future returns are provided for upon shipment. Deferred revenues
as of October 31, 1998 and 1999 were approximately $543,000 and $7.7 million,
respectively.

In fiscal 1997, two customers contributed 67% and 27%, respectively of our
total revenues. In fiscal 1998, these same two customers accounted for 72% and
11%, respectively of our total revenues. In fiscal 1999, four customers
accounted for 34%, 14%, 12%, and 10%, respectively of total revenues. The level
of sales to any customer may vary from quarter to quarter. However, we expect
that significant customer concentration will continue for the foreseeable
future. The loss of any one of these customers, or a decrease in the level of
sales to any one of these customers, could have a material adverse impact on
Brocade's financial condition or results of operations.

35
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BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Computation of Basic and Diluted Net Income (Loss) Per Share and Pro Forma
Basic and Diluted Net Income (Loss) Per Share

Basic and diluted net income (loss) per common share are presented in
conformity with SFAS No. 128, "Earnings Per Share," ("SFAS No. 128") for all
periods presented. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
or granted for nominal consideration prior to the anticipated effective date of
an initial public offering must be included in the calculation of basic and
diluted net income (loss) per common share as if such stock had been outstanding
for all periods presented. To date, Brocade has not had any issuances or grants
for nominal consideration.

In accordance with SFAS No. 128, basic net income (loss) per common share
has been computed using the weighted average number of shares of common stock
outstanding during the period; less shares subject to repurchase. Diluted net
income (loss) per share is computed on the basis of the weighted average number
of common shares and common equivalent shares outstanding during the period.
Common equivalent shares result from the assumed exercise of outstanding stock
options that have a dilutive effect when applying the treasury stock method.
Brocade has excluded all convertible preferred stock, warrants for convertible
preferred stock, outstanding stock options and shares subject to repurchase from
the calculation of diluted net loss per common share for the years ended October
31, 1997 and 1998, because all such securities are antidilutive. The total
number of shares excluded from the calculations of diluted net loss per common
share were 35,123,546 and 39,012,626 for the years ended October 31, 1997 and
1998, respectively. See Notes 6 and 7 for further information on these
securities. Basic and diluted pro forma net income (loss) per common share have
been computed as described above and also give effect, under Securities and
Exchange Commission guidance, to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.

36
38
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents the calculation of basic and diluted and pro
forma basic and diluted net income (loss) per common share (in thousands, except
per share data).

YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
------- -------- -------

Net income (loss)........................................... $(9,619) $(15,111) $ 2,485
======= ======== =======
Basic and diluted net income (loss) per share:
Weighted average shares of common stock outstanding....... 9,188 10,348 30,264
Less: Weighted average shares subject to repurchase....... (5,194) (3,548) (4,170)
------- -------- -------
Weighted average shares used in computing basic net income
(loss) per share.......................................... 3,994 6,800 26,094
Dilutive effect of common share equivalents................. -- -- 25,052
------- -------- -------
Weighted average shares used in computing diluted net income
(loss) per share.......................................... 3,944 6,800 51,146
======= ======== =======
Basic net income (loss) per common share.................... $ (2.41) $ (2.22) $ 0.10
======= ======== =======
Diluted net income (loss) per share......................... $ (2.41) $ (2.22) $ 0.05
======= ======== =======
Pro forma net income (loss) per share:
Net income (loss)......................................... $(15,111) $ 2,485
======== =======
Weighted average shares used in computing basic net income
(loss) per share....................................... 6,800 26,094
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock
(unaudited)............................................ 28,436 16,794
Pro forma adjustment to reflect assumed exercise and
conversion of preferred stock warrants to purchase
593,762 common shares in 1998 and 1999 at an exercise
price of $6.78 per share (unaudited)................... 594 186
-------- -------
Weighted average shares used in computing pro forma basic
net income (loss) per share (unaudited)................ 35,830 43,074
Dilutive effect of common share equivalents (unaudited)... -- 8,072
-------- -------
Weighted average shares used in computing pro forma
diluted net income (loss) per share (unaudited)........ 35,830 51,146
======== =======
Pro forma basic net income (loss) per share (unaudited)... $ (0.42) $ 0.06
======== =======
Pro forma diluted net income (loss) per share
(unaudited)............................................ $ (0.42) $ 0.05
======== =======

Comprehensive Income

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 was adopted by
Brocade beginning on November 1, 1997. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
stockholder transactions. Accordingly, comprehensive income (loss) includes
certain changes in equity that are excluded from net income (loss).
Specifically, SFAS No. 130 requires unrealized holding gains and losses on
available-for-sale securities to be included in accumulated other comprehensive
income (loss). Unrealized holding gains (losses) on available-for-sale
securities for all periods presented are not significant and accordingly,
comprehensive income (loss) for all periods presented approximated net income
(loss).

37
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BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Reportable Segments

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information." ("SFAS
No. 131"). SFAS No. 131 was adopted by Brocade beginning on November 1, 1997.
SFAS No. 131 establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. Brocade is
organized and operates as one operating segment, the design, development,
manufacturing, marketing and selling of Fiber Channel switching solutions for
SAN's. Service revenues to date have not been significant. Brocade operates
principally in one geographic area, the United States. Major customers are
discussed above.

Capitalization of Internally Used Software

In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
("SOP No. 98-1"). SOP No. 98-1 requires entities to capitalize certain costs
related to internal-use software once certain criteria have been met. Brocade
adopted SOP 98-1 beginning on November 1, 1998. The adoption did not have a
material impact on Brocade's financial position or results of operations.

Recent Accounting Pronouncements

3. LINE OF CREDIT AND DEBT

In June 1997, Brocade entered into a revolving line of credit agreement
with a bank under which it could borrow up to $4,000,000. The line of credit
bore interest at the bank's prime rate and was repaid upon expiration in August
1999.

As of October 31, 1998, Brocade had approximately $3.0 million payable to
the same bank under an equipment loan agreement. The equipment loan agreement
provided for borrowings of up to $5,000,000. Borrowings were secured by the
related capital equipment, bore interest at the bank's prime rate plus 1.0% and
were payable through June 30, 2002. As of October 31, 1999, all borrowings under
this loan agreement were repaid.

38
40
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Notes payable as of October 31, 1998 and 1999 consisted of the following,
(in thousands):

OCTOBER 31,
------------------
1998 1999
------- -------

Note payable to bank..................................... $ 2,962 $ --
Less: current portion.................................... (1,231) --
------- -------
Long-term portion........................................ $ 1,731 $ --
======= =======

4. COMMITMENTS AND CONTINGENCIES

Brocade leases its facilities under operating lease agreements expiring
through November 2000. The leases require that Brocade pay all costs of
maintenance, utilities, insurance and taxes. Rent expense for the years ended
October 31, 1997, 1998 and 1999 was $495,475, $804,057 and $1,284,178,
respectively.

Brocade leases computers, office equipment and furniture under long-term
lease agreements that are classified as capital leases. The leases expire
through January 2001 and require a final buyout payment at the end of the lease
term.

Future minimum lease payments, including the buyout payments, under all
lease arrangements at October 31, 1999 were as follows (in thousands):

OPERATING CAPITAL
YEAR ENDED OCTOBER 31, LEASES LEASES
- ---------------------- --------- -------

Fiscal year 2000.......................................... $847 $ 476
Fiscal year 2001.......................................... -- 42
---- -----
Total minimum lease payments.............................. $847 518
==== =====
Less: imputed interest (15.27% -- 17.65%)................. (40)
Present value of payments under capital leases............ 478
Less: current portion..................................... (436)
-----
Long-term capital lease obligations....................... $ 42
=====

Subsequent to year end, Brocade entered into a lease for new office space
(See Note 10).

Brocade's former contract manufacturer filed a suit against Brocade,
alleging that Brocade is liable for breaching certain contracts with the
contract manufacturer. The suit claimed damages in excess of $3.0 million plus
interest, an unspecified amount of consequential and incidental damages, and
costs and attorneys' fees. Brocade filed a cross complaint against the contract
manufacturer for various credits Brocade claimed on its account with the
contract manufacturer. The suit was settled in December 1999. The settlement of
this litigation did not have a material impact on Brocade's financial
statements.

Brocade is subject to various claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position of Brocade.

5. RESTRUCTURING OF OPERATIONS

In the third quarter of fiscal 1998, Brocade initiated a plan to
restructure its operations to reduce its break even revenue level. The plan was
developed by management and approved by the Board of Directors with the
expectation that changes in certain programs and arrangements, with related head
count reductions, would immediately reduce operating expenses and improve cash
flows. The restructuring plan included the termination of the former Chief
Executive Officer for $1.1 million, the cancellation and abandonment of two

39
41
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

research and development projects, one to develop a 64-port fibre channel switch
and another to develop storage area network simulation for a total of $300,000,
a change in contract manufacturer arrangements for $1.2 million, and a reduction
in labor force. In connection with this plan, Brocade recorded a $3.2 million
charge to operating expenses as follows: $1.3 million is included in cost of
revenues, $700,000 is included in research and development expense and $1.2
million is included in general and administrative expense in the 1998 statement
of operations. The restructuring charge includes $1.7 million of employee
related expenses for 20 employee terminations (8 manufacturing employees, 4
research and development employees and 8 employees from other departments),
including severance for Brocade's former Chief Executive Officer, $1.2 million
for the write-off of excess or abandoned equipment (specifically tooling and
fixtures) and inventories related to discontinued and newly established contract
manufacturer arrangements, and $300,000 for write-offs of other abandoned
tangible and intangible assets and facilities in Southern California related to
cancelled new product development and simulation projects. Employees were
formally notified of their termination beginning on July 31, 1998 and continuing
through August 4, 1998. The termination of 17 employees was immediate. The
remainder of the terminations occurred through January 31, 1999. As of October
31, 1999, Brocade had incurred all costs related to the restructuring.

6. PREFERRED STOCK

Brocade is authorized to issue, from time to time, in one or more series,
5,000,000 shares of preferred stock at a $.001 par value. The board of directors
may determine the rights, preferences, privileges and restrictions granted or
imposed upon any series of preferred stock. As of October 31, 1999, no preferred
stock is outstanding.

Redeemable Convertible Preferred Stock

In August 1995, Brocade issued 1,425,000 shares of its Series A Redeemable
Convertible Preferred Stock ("Series A"). In June 1996, Brocade issued 816,250
shares of its Series B Redeemable Convertible Preferred Stock ("Series B"). In
December 1996, Brocade issued 3,333,333 shares of its Series C Redeemable
Convertible Preferred Stock ("Series C"). In fiscal years 1997, 1998 and 1999
Brocade issued 2,795,848 shares, 865,052 shares and 298,522 shares,
respectively, of its Series D Redeemable Convertible Preferred Stock ("Series
D"). Effective May 24, 1999, the Series A, Series B, Series C and Series D
shares automatically converted into common stock upon the closing of Brocade's
initial public offering. Prior to the conversion into common stock, the rights
with respect to Series A, Series B, Series C and Series D were as follows:

Redemption. At the request of the holders of the majority of voting power
of the then outstanding preferred stock any time after August 28, 2002, Brocade
shall, to the extent funds are legally available, redeem the preferred stock in
increments over a three-year period. In such event, Brocade shall pay $1.00 per
share for Series A, $4.00 per share for Series B, $3.00 per share for Series C
and $5.78 for Series D plus any declared but unpaid dividends.

Voting. Each share of Series A, Series B, Series C and Series D has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible.

Dividends. Holders of Series A, Series B, Series C and Series D are
entitled to receive noncumulative dividends when and as declared by the Board of
Directors at a rate of $0.08, $0.32, $0.24 and $0.46 per share, respectively,
per annum. After payment of such dividends, any additional dividends declared
will be paid to the holders of common stock and preferred stock in such amount
as they would be entitled to receive if their shares had been converted into
shares of common stock. No dividends have been declared.

Liquidation. In the event of any liquidation, dissolution or winding up of
Brocade, including a merger or sale of all or substantially all of the assets,
the holders of Series A, Series B, Series C and Series D are entitled

40
42
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

to receive pari passu a distribution of $1.00, $4.00, $3.00 and $5.78 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of common stock. The remaining assets, if
any, shall be distributed ratably among the holders of the common stock, Series
A, Series B, Series C and Series D, based on the number of shares held (assuming
conversion of the Series A, Series B, Series C and Series D).

Conversion. Each share of Series A, Series B, Series C and Series D is
convertible into common stock, at the holder's option or upon the consent of the
holders of a majority of the then outstanding Series A, Series B, Series C and
Series D shares voting as a single class. The Series A, Series B, Series C and
Series D shares are initially convertible into common stock at a ratio of eight
for one, four for one, two for one and two for one, respectively. The conversion
rates are protected by certain anti-dilution provisions. No adjustment in the
future conversion price of Series A, Series B, Series C or Series D shall be
made for the issuance of additional shares of common stock other than for a
common stock split, dividend, or distribution unless at the time of issuance of
the common stock the price per share for additional shares of common stock
issued is less than the conversion price in effect for the Series A, Series B,
Series C and Series D, respectively.

Warrants

Since inception, Brocade has issued warrants to purchase an aggregate of
51,197, 17,500 and 48,000 shares of Series A, Series B and Series C,
respectively. These warrants were issued in connection with equipment and
facilities lease agreements. Exercise prices range from $1.00 to $4.50 per
share. As of October 31, 1999, all these warrants have been exercised.

In connection with the initial sale and issuance of Series D, investors
were issued warrants to purchase 10% of the number of Series D shares purchased
by each investor at an exercise price of $6.78 per share. The total number of
shares of Series D purchasable upon exercise of these warrants was 296,881. As
of October 31, 1999, all these warrants have been exercised.

7. COMMON STOCK

Brocade completed an initial public offering on the Nasdaq National Market
on May 28, 1999 whereby 7,475,000 shares of common stock, including the exercise
of the underwriters over-allotment option, were sold with proceeds to Brocade of
$66.0 million.

At October 31, 1999, Brocade had reserved 7,938,180 shares related to stock
option plans of authorized but unissued shares of common stock for future
issuance.

Deferred Compensation

In connection with the grant of certain stock options to employees during
the years ended October 31, 1998 and 1999, Brocade recorded deferred
compensation of approximately $307,000 and $5.1 million, respectively,
representing the difference between the deemed value of the common stock for
accounting purposes and the option exercise price of such options at the date of
grant. Such amount is presented as a reduction of stockholders' equity and
amortized ratably over the vesting period of the applicable options.

Approximately $7,000 and $1.9 million was expensed during the years ended
October 31, 1998 and 1999, respectively, and the balance will be expensed
ratably over the period the options vest. Deferred compensation expense is
decreased in the period of forfeiture for any accrued but unvested compensation
arising from the early termination of an option holder's services. No
compensation expense related to any other periods presented has been recorded.

41
43
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1999 Employee Stock Purchase Plan

In March 1999, the Board of Directors approved the adoption of Brocade's
1999 Employee Stock Purchase Plan (the "Purchase Plan"), and Brocade's
shareholders approved the Purchase Plan in April 1999. Per the terms of the
Purchase Plan, the maximum number of shares of Brocade's common stock available
for sale under the Purchase Plan is 400,000 shares, plus an annual increase to
be added on the first day of Brocade's fiscal year, equal to the lesser of
2,500,000 shares, or 2.5% of the outstanding shares at such date. Accordingly,
on November 1, 1999, 1,338,001 additional shares were made available for sale
under the Purchase Plan. The Purchase Plan permits eligible employees to
purchase shares of common stock through payroll deductions at 85% of the fair
market value of the common stock, as defined in the Purchase Plan.

1999 Stock Plan

In March 1999, the Board of Directors approved Brocade's 1999 Stock Plan
(the "1999 Plan") and Brocade's shareholders approved the 1999 Plan in April
1999. The 1999 Plan provides for the grant of incentive stock options to
employees. Per the terms of the 1999 Plan, the maximum number of shares of
Brocade's common stock available for sale under the 1999 Plan is 15,214,000
shares, plus an annual increase to be added on the first day of Brocade's fiscal
year, equal to the lesser of 5,000,000 shares, or 5% of the outstanding shares
at such date. Accordingly, on November 1, 1999, 2,676,002 additional shares were
made available for sale under the 1999 Plan.

1999 Director Option Plan

In March 1999, the Board of Directors approved the 1999 Director Option
Plan (the "Director Plan") and Brocade's shareholders approved the Director Plan
in April 1999. The Director Plan provides for the grant of common stock to
non-employee directors. A total of 400,000 shares of common stock have been
reserved for issuance under the Director Plan.

1999 Nonstatutory Stock Option Plan

In September 1999, the Board of Directors approved Brocade's 1999
Nonstatutory Stock Option Plan (the "NSO Plan"). The NSO Plan provides for the
grant of nonstatutory stock options to employees and consultants. A total of
2,000,000 shares of common stock have been reserved for issuance under the NSO
Plan.

Stock Options

Brocade, under various stock option plans (the "Plans"), grants stock
options for shares of common stock to employees, directors and consultants of
Brocade. In accordance with the Plans, the stated exercise price shall not be
less than 85% of the estimated fair market value of common stock on the date of
grant. Incentive Stock Options ("ISOs") may not be granted at less than 100% of
the estimated fair market value of the common stock and stock options granted to
a person owning more than 10% of the combined voting power of all classes of
stock of Brocade must be issued at 110% of the fair market value of the stock on
the date of grant. The Plans provide that the options shall be exercisable over
a period not to exceed ten years, and the options generally vest over a period
of four years. The options typically vest 25% one year after the date of grant
and the remaining shares vest in equal monthly amounts over the following 36
months.

At October 31, 1999, an aggregate of 2,072,568 shares were available for
future option grants under all of the Plans.

Brocade accounts for the Plans and the Purchase Plan in accordance with APB
No. 25 whereby the difference between the exercise price and the fair value at
the date of grant is recognized as compensation expense. Had compensation
expense for the stock option plans been determined under the provisions of SFAS
42
44
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

No. 123, net income (loss) would have decreased or increased, respectively, to
the following pro forma amounts, (in thousands except per share data):

YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
------- -------- -------

Net income (loss) as reported........................ $(9,619) $(15,111) $ 2,485
Net loss Pro Forma................................... $(9,666) $(15,522) $(1,933)
Net income (loss) per share as reported.............. $ (2.22) $ 0.10
Net loss per share Pro Forma......................... $ (2.29) $ (0.07)

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999, respectively: risk-free
interest rate of 5.71% to 6.63%, 5.58% to 5.86% and 5.02% to 5.26%; expected
dividend yields of zero percent for all three periods; expected life of .5 years
beyond vesting for all three periods; and expected volatility of .0001% for all
periods except the year ended October 31, 1999, for which a volatility factor of
60% was used.

The following table summarizes stock option plan activity under all of the
Plans:

YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1998
----------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------

Outstanding at beginning of
year......................... 1,168,000 $.10 2,110,334 $ .16
Granted........................ 2,631,000 $.17 6,309,824 $1.10
Exercised.................... (1,261,332) $.13 (851,140) $ .52
Cancelled.................... (427,334) $.11 (523,190) $ .53
----------- ----------
Outstanding at end of year..... 2,110,334 $.16 7,045,828 $ .92
=========== ==========
Exercisable at end of year..... 72,468 $.11 931,614 $ .76
Weighted fair value per
share........................ $ .0261 $ .1512
=========== ==========

YEAR ENDED
OCTOBER 31, 1999
-----------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- --------------

Outstanding at beginning of period................ 7,045,828 $ .92
Granted........................................... 5,356,024 $20.87
Exercised....................................... (6,151,368) $ 1.27
Cancelled....................................... (384,872) $ .94
-----------
Outstanding at end of period...................... 5,865,612 $18.78
===========
Exercisable at end of period...................... 449,754
Weighted fair value per share..................... $ 9.6708
===========

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BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ -------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
OCTOBER 31, 1999 REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER PRICE
- ------------------------ --------- --------- -------------- ------- --------

$ 0.100 - $ 0.900.................. 911,364 7.07 $ 0.36 153,674 $0.33
$ 1.125 - $ 4.000.................. 3,545,448 9.07 $ 1.90 296,080 $1.15
$49.063 - $109.938.................. 1,408,800 9.81 $72.31 -- --
--------- ---- ------ ------- -----
$ 0.100 - $109.938.................. 5,865,612 8.93 $18.78 449,754 $0.87
========= ==== ====== ======= =====

At October 31, 1999, 3,621,806 shares issued upon exercise of stock options
with a weighted average exercise price of $.3524 were subject to repurchase by
Brocade.

8. INCOME TAXES

Brocade accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). A valuation allowance has been recorded for the
total deferred tax assets as a result of uncertainties regarding realization of
the assets based upon the limited operating history of Brocade, the lack of
profitability to date and the uncertainty of future profitability. The
components of net deferred tax assets are as follows (in thousands):

OCTOBER 31,
--------------------
1998 1999
-------- --------

Net operating loss carryforwards....................... $ 8,100 $ 16,300
Tax credit carryforwards............................... 1,400 2,000
Capitalized startup costs.............................. 300 200
Reserves and accruals.................................. 2,200 7,900
Capitalized research expenditures...................... 700 1,400
-------- --------
Total deferred tax assets.............................. 12,700 27,800
Less: Valuation allowance.............................. (12,700) (27,800)
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========

As of October 31, 1999, Brocade had federal net operating loss
carryforwards of approximately $44.0 million and state net operating loss
carryforwards of approximately $14.7 million. The federal net operating loss and
other tax credit carryforwards expire on various dates between 2010 through
2019. The state net operating loss carryforwards will expire beginning in 2003.

Under current tax law, net operating loss and credit carryforwards
available to offset future income in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.

44
46
BROCADE COMMUNICATIONS SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the difference between the U.S. Federal
statutory rate and Brocade's income tax provision for financial statement
purposes (in thousands):

OCTOBER 31,
1999
-----------

Provision for income taxes at statutory rate.............. $ 907
State taxes, net of federal benefit....................... 149
Losses for which no tax benefit recognized................ (1,912)
Stock compensation not deductible for tax................. 822
Other..................................................... 140
-------
Provision for income taxes................................ $ 106
=======

9. RELATED PARTY TRANSACTIONS

During fiscal 1997, 1998, and 1999, Brocade sold 500,000, 450,000 and 4.7
million shares, respectively, of its common stock to officers and a director of
Brocade in consideration for full recourse promissory notes in the aggregate
amount of $6.9 million. Should the officers terminate employment, these shares
are subject to a right of repurchase by Brocade. The right of repurchase lapses
over a four-year period. The notes bear interest at various rates ranging from
4.47% to 6.5% per annum and mature at various dates through May 2006.

10. SUBSEQUENT EVENTS (UNAUDITED)

In December 1999, Brocade entered into an agreement to lease approximately
210,000 square feet of office, laboratory, and administrative space in San Jose,
California. The term of the lease agreement is September 1, 2000 through August
31, 2010, and represents a lease commitment of $6.2 million per year to Brocade.
Brocade intends to occupy the space in September 2000 and sub-lease any excess
space to offset the rental expense. In conjunction with entering into the lease
agreement, Brocade signed an unconditional, irrevocable letter of credit for
$6.2 million as security for the lease.

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47

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable

PART III

Certain information required by Part III is incorporated by reference from
Brocade's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for Brocade's
fiscal 2000 Annual Meeting of Stockholders (the "Proxy Statement").

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding our executive
officers and directors as of December 30, 1999:

NAME AGE POSITION
- ---- --- --------

Gregory L. Reyes................ 37 President, Chief Executive Officer and Director
Paul R. Bonderson, Jr. ......... 47 Vice President, Engineering
Michael J. Byrd................. 39 Vice President, Finance and Chief Financial
Officer
Kumar Malavalli................. 56 Vice President, Technology
Victor M. Rinkle................ 46 Vice President, Operations
Charles W. Smith................ 38 Vice President, Worldwide Sales
Peter J. Tarrant................ 39 Vice President, Marketing and Business Development
Jean Zorzy...................... 47 Vice President, Program Management
Seth D. Neiman(1)............... 45 Chairman of the Board
Neal Dempsey(1)(2).............. 58 Director
Mark Leslie(2).................. 53 Director
Larry W. Sonsini................ 58 Director

- ---------------
(1) Member of audit committee.

(2) Member of compensation committee.

Gregory L. Reyes has served as our President and Chief Executive Officer
and a member of our board of directors since July 1998. From January 1995 to
November 1997, Mr. Reyes served as Chairman of the board of directors, and from
January 1995 to June 1998, served as President and Chief Executive Officer of
Wireless Access, Inc., a wireless data communications products company. From
January 1991 to January 1995, Mr. Reyes served as Divisional Vice President and
general manager of Norand Data Systems, a data collection company. Mr. Reyes
also serves as a director of Proxim, Inc., a wireless networking company. Mr.
Reyes received a B.S. in Economics and Business Administration from Saint Mary's
College in Moraga, California.

Paul R. Bonderson, Jr. co-founded Brocade in August 1995 and has served as
Vice President, Engineering since August 1995. From March 1986 to August 1995,
Mr. Bonderson held several engineering positions at Sun Microsystems, Inc., most
recently as Director of Engineering. Mr. Bonderson received a B.S. in Electrical
Engineering from California Polytechnic State University, San Luis Obispo.

Michael J. Byrd joined Brocade in April 1999 and became our Vice President,
Finance and Chief Financial Officer effective May 3, 1999. From February 1994 to
April 1999, Mr. Byrd served as Vice President, Finance and Chief Financial
Officer of Maxim Integrated Products, Inc., a designer, developer and
manufacturer of linear and mixed-signal integrated circuits. From 1982 to 1994,
Mr. Byrd held various positions at Ernst & Young, most recently as Partner. Mr.
Byrd received a B.S. in Business Administration from California Polytechnic
State University, San Luis Obispo.

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48

Kumar Malavalli co-founded Brocade in August 1995 and has served as our
Vice President, Technology since October 1995. From July 1993 to October 1995,
Mr. Malavalli served as Manager of Architecture and Standards in the Canadian
Network Operation at Hewlett-Packard Company. Mr. Malavalli was a member of the
industry team that originated the Fibre Channel architecture, has helped guide
the technology through the industry standards committees and currently chairs
the ANSI T11 Technical Committee, which oversees all standards related to the
development of Fibre Channel. From 1993 to 1999, Mr. Malavalli was the chairman
of the Fibre Channel Association Technical Committee. Mr. Malavalli received
both a B.S. in Physics and Mathematics and a B.S. in Electrical Engineering from
the University of Mysore, India.

Victor M. Rinkle has served as our Vice President, Operations since January
1998. From April 1989 to December 1997, Mr. Rinkle held several managerial
positions at Apple Computer, Inc., most recently as Vice President, Global
Supply Base Management. Mr. Rinkle received a B.B.A. in Marketing and Production
Logistics from the University of Houston.

Charles W. Smith has served as our Vice President, Worldwide Sales since
February 1997. From June 1996 to February 1997, Mr. Smith served as Director,
Corporate Account Sales at IBM. From July 1990 to February 1996, Mr. Smith held
various senior sales management positions at Conner Peripherals, Inc., a storage
solutions company, most recently as Vice President, US Sales, Western Region.
Mr. Smith received an A.S. in Aeronautics and Business from the College of San
Mateo and a B.S. in Business Management from San Jose State University.

Peter J. Tarrant has served as our Vice President, Marketing and Business
Development since December 1997. From October 1994 to December 1997, Mr. Tarrant
served as Vice President, Product Management and Vice President, Business
Development at Bay Networks, Inc., a computer networking company. From April
1990 to October 1994, Mr. Tarrant held several product management positions at
SynOptics, a predecessor of Bay Networks, Inc. most recently as Director,
Product Management. Mr. Tarrant received a B.Sc. in Electronic Engineering from
the University of Southampton, United Kingdom.

Jean E. Zorzy has served as our Vice President, Program Management since
May 1999. From February 1998 to May 1999, Ms. Zorzy served as our Director of
Supplier Management. From July 1986 to February 1998, Ms. Zorzy held several
positions at Apple Computer, most recently as Director, External Operations. Ms.
Zorzy received a B.A. in Psychology from American University in Washington, D.C.
and an M.B.A. from San Jose State University.

Seth D. Neiman has served as Chairman of the board of directors of Brocade
since August 1995. Mr. Neiman formerly served as our Chief Executive Officer
from August 1995 to June 1996. Since August 1994, Mr. Neiman has held various
positions at Crosspoint Venture Partners, a venture capital firm, and has been a
partner of Crosspoint since January 1996. From September 1991 to July 1994, Mr.
Neiman was Vice President of Engineering at Coactive Networks, a local area
networks company. Mr. Neiman also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Neiman received a
B.A. in Philosophy from Ohio State University.

Neal Dempsey has served as a director of Brocade since December 1996. Since
May 1989, Mr. Dempsey has been a General Partner of Bay Partners, a venture
capital firm. Mr. Dempsey also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Dempsey received a
B.A. in Business from the University of Washington.

Mark Leslie has served as a director of Brocade since January 1999. Mr.
Leslie has served as the Chief Executive Officer and a member of the board of
directors of VERITAS Software Corporation, a storage management software
company, since February 1990. Mr. Leslie also serves on the board of directors
of Versant Object Technology, as well as on the board of directors of a private
company. Mr. Leslie received a B.A. in Physics and Mathematics from New York
University.

Larry W. Sonsini has served as a director of Brocade since January 1999.
Mr. Sonsini has been a partner of the law firm of Wilson Sonsini Goodrich &
Rosati, P.C., since 1973 and is currently the Chairman of the Executive
Committee of the firm. Mr. Sonsini serves on numerous advisory boards and
committees, including the SEC's Advisory Committee on Capital Formation and
Regulatory Processes, the ABA Committee on
47
49

Federal Regulation of Securities and the Legal Advisory Committee to the Board
of Governors, New York Stock Exchange. Mr. Sonsini serves on the boards of
directors of Novell, Inc., Lattice Semiconductor Corporation and Pixar Animation
Studios, as well as on the boards of directors of several private companies. Mr.
Sonsini received an A.B. from the University of California, Berkeley and an
L.L.B. from Boalt Hall School of Law, University of California, Berkeley.

The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors" in the Proxy
Statement. The required information concerning executive officers of the Company
is contained in the section entitled "Executive Officers and Directors of the
Registrant" in Part I of this Form 10-K.

Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16 (a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this section is incorporated by reference from
the information in the sections entitled "Election of Directors -- Directors'
Compensation", "Executive Compensation" and "Stock Price Performance Graph" in
the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors -- Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this section is incorporated by reference from
the information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K

(1) Financial Statements:

Reference is made to the Index to Financial Statements of Brocade
Communications Systems, Inc. under Item 8 in Part II of this Form
10-K.

(2) Financial Statement Schedules:

The following financial statement schedule of Brocade Communications
Systems, Inc. for the years ended October 31, 1997, October 31, 1998,
and October 30, 1999 is filed as part of this Annual Report and
should be read in conjunction with the Financial Statements of
Brocade Communications Systems, Inc.

Schedule II -- Valuation and Qualifying Accounts............ Page 52

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50

(3) Exhibits:

The exhibits listed below are required by Item 601 of Regulation S-K.
Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K has been identified.

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------

3.2(1) Amended and Restated Certificate of Incorporation.
3.4(2) Bylaws of the Registrant.
4.1(3) Form of Registrant's Common Stock certificate.
10.1(4) Form of Indemnification Agreement entered into between
Brocade with each of its directors and executive officers.
10.2(5) 1995 Equity Incentive Plan and forms of agreements
thereunder.
10.3(6) 1998 Equity Incentive Plan and forms of agreements
thereunder.
10.4(7) 1998 Executive Equity Incentive Plan and forms of agreements
thereunder.
10.5(8) 1999 Employee Stock Purchase Plan.
10.6(9) 1999 Director Option Plan and form of agreement thereunder.
10.7(10) 1999 Stock Plan and forms of agreements thereunder.
10.8(11) Sublease between Symmetricom, Inc. and Brocade dated May 6,
1997.
10.9(12) Security and Loan Agreement between Brocade and Imperial
Bank dated June 19, 1997.
10.10(13) Amendment to Loan Documents between Brocade and Imperial
Bank dated January 30, 1998.
10.11(14) Second Amendment to Loan Documents between Brocade and
Imperial Bank dated August 17, 1998.
10.12(15) Third Amendment to Loan Documents between Brocade and
Imperial Bank dated December 15, 1998.
10.13(16) Master Equipment Lease Agreement between Venture Lending &
Leasing, Inc. and the Registrant dated September 5, 1996.
10.14(17)+ Master Purchase Agreement between Dell Products L.P. and
Brocade dated November 1, 1998.
10.15(18)+ Purchase Agreement between Sequent Computer Systems, Inc.
and Brocade.
10.16(19)+ Supplement No. 1 to Purchase Agreement between Sequent
Computer Systems, Inc. and Brocade dated September 26, 1997.
10.17(20)+ OEM Agreement between Storage Technology Corporation and
Brocade dated May 1, 1998.
10.18(21) Acknowledgment between Wind River Systems, Inc. and Brocade,
dated April 22, 1999.
10.19(22) Confidential Agreement and General Release of Claims between
Bruce J. Bergman, The Bergman Family Trust and Brocade dated
September 23, 1998.
10.20(23) Letter Agreement with Michael J. Byrd dated April 5, 1999.
10.21(24)+ OEM and License Agreement between Brocade and McDATA
Corporation, dated April 27, 1999.
10.22(25) 1999 Nonstatutory Stock Option Plan and form of Agreements
thereunder.
10.23+ Volume Pricing Agreement between Brocade and Data General
Corporation dated October 1, 1998.
10.24+ Manufacturing Agreement between Brocade and Solectron
California Corporation dated July 30, 1999.
10.25 Master Lease Agreement between Brocade and Spieker
Properties dated .
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27.1 Financial Data Schedule.

- ---------------
(1) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

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51

(2) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(3) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(4) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(5) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).

(6) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).

(7) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).

(8) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).

(9) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).

(10) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).

(11) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(12) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(13) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(14) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(15) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(16) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(17) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(18) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(19) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(20) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(21) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(22) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(23) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(24) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

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52

(25) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K

None

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999

BALANCE AT CHARGED TO REVERSALS TO BALANCE AT
BEGINNING OF COSTS AND COSTS AND END OF
DESCRIPTION PERIOD EXPENSES EXPENSES (DEDUCTIONS) PERIOD
- ----------- ------------ ---------- ------------ ------------ ----------
(IN THOUSANDS)

Allowance for doubtful accounts:
1997................................. $ -- $ 100 $-- $ -- $ 100
1998............................... 100 178 -- -- 278
1999............................... 278 596 (4) (52) 818
Sales returns and allowances:
1997............................... $ -- $ -- $-- $ -- $ --
1998............................... -- 7 -- -- 7
1999............................... 7 1,622 -- -- 1,629

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on January 28, 2000.

Brocade Communications Systems, Inc.

By: /s/ GREGORY L. REYES
------------------------------------
Gregory L. Reyes
President, Chief Executive Officer,
and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:

SIGNATURE TITLE DATE
--------- ----- ----

* President, Chief Executive Officer, January 28, 2000
- ------------------------------------------ and Director
Gregory L. Reyes

* Vice President, Finance and Chief January 28, 2000
- ------------------------------------------ Financial Officer
Michael J. Byrd

* Chairman of the Board January 28, 2000
- ------------------------------------------
Seth D. Neiman

* Director January 28, 2000
- ------------------------------------------
Neal Dempsey

* Director January 28, 2000
- ------------------------------------------
Mark Leslie

Director January 28, 2000
- ------------------------------------------
Larry W. Sonsini

*By: /s/ MICHAEL J. BYRD
----------------------------------------
Michael J. Byrd
Attorney-in-Fact

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EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------

- ---------------
(1) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(2) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(3) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

(4) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.

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