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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

(Mark One)

Commission file number: 000-25601

Brocade Communications Systems, Inc.

1745 Technology Drive

Securities registered pursuant to Section 12(b) of the Act: None

      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 þ          No o

      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.     o

      The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $7,900,000,000 as of December 28, 2001, 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 28, 2001 was 231,763,496 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement for its 2002 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Form 10-K Report.

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BROCADE COMMUNICATIONS SYSTEMS, INC.

FORM 10-K

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PART I

Item 1. Business

General

      This Annual Report on Form 10-K (Annual Report) contains forward-looking statements. These forward-looking statements include, without limitation, predictions regarding our future:

	•	revenues;
	•	customer concentration;
	•	gross margins;
	•	research and development expenses;
	•	sales and marketing expenses;
	•	general and administrative expenses;
	•	facilities lease losses;
	•	realization of deferred tax assets;
	•	liquidity and sufficiency of existing cash, cash equivalents, and short-term investments for near-term requirements;
	•	the effect of recent accounting pronouncements on our financial condition or results of operations; and
	•	new product features and introductions.

      You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

      Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the heading “Risk Factors.” All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

The World’s Storage Networking Leader

      We are the world’s leading provider of infrastructure for Storage Area Networks (SANs), offering a product family of Fibre Channel fabric switches which provide an intelligent networking foundation for SANs.

      We deliver and enable hardware and software products, education, and services that allow companies to implement highly available, scalable, manageable, and secure environments for business-critical storage applications. Companies can leverage our SAN infrastructure solutions to connect servers with storage devices and scale them independently, consolidate and share servers and storage resources, centralize data management, share valuable backup resources across the enterprise, and provision and manage more storage without increasing personnel resources. Our products and services allow companies to more easily keep pace with rapid growth in data storage requirements, reduce the total cost of ownership of data storage environments, improve computing network and application efficiency and performance, and simplify the implementation and management of SANs and SAN-based applications.

      Our SilkWorm® family of Fibre Channel fabric switches are fully networkable, enabling customers to create a high-performance SAN fabric that is highly reliable and scalable to support the interconnection of hundreds of server and storage devices, and is compatible with existing and recently introduced products, providing investment protection for the customer.

      Our products are sold through original equipment manufacturer (OEM) partners, master resellers, and fabric partners (systems integrators and value-added resellers). We have relationships with the majority of companies that supply substantially all of the world’s servers and external storage — these companies use our solutions as an intelligent networking platform for their SAN solutions.

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      We were incorporated on May 14, 1999, as a Delaware corporation and are the successor to operations originally begun on August 24, 1995. Our headquarters are located in San Jose, California. The mailing address for our headquarters is 1745 Technology Drive, San Jose, California, 95110, telephone number: (408) 487-8000. We can also be reached at our Web site at www.brocade.com. Information contained on our Web site is not a part of this Annual Report. All URLs included in this Annual Report are inactive textual references only.

Market Drivers

      During the last decade, a multitude of changes in computing technology, the implementation of enterprise resource software applications, and the globalization of business via the Internet have created a tremendous increase in data storage requirements — requiring many organizations to reassess the way they view their storage environments. Storage capacity requirements have grown exponentially, and continuous access to data and the devices on which it is stored is now a crucial business requirement.

      In addition to managing increased storage requirements, the current economic environment has created the additional challenge for IT executives of storing and managing data while reducing the total cost of ownership of their storage environments. This is especially true as business information becomes an increasingly strategic corporate asset that must be continuously accessible by employees, partners, and customers. To ensure their business information is stored securely and backed up reliably, many organizations are implementing Brocade-based SANs as an intelligent networking platform for their storage environments.

      High availability and security are fundamental requirements for storage environments — requiring an architecture with redundancy built into both the hardware and the network, as well as a secure platform that is resistant to intentional security breaches or inadvertent human error. In addition, business continuance has increased as a priority for IT executives — requiring a storage networking platform that supports a full spectrum of disaster recovery options from remote data backup to dynamic failover of the data center.

      SANs should be easy to implement, manage, and maintain and provide a high return on investment (ROI). Brocade-based SANs help companies centralize data management, improve server, storage and personnel resource utilization, and provide a highly available and secure platform for business continuance. SANs based on Brocade fabric switches meet some of the most challenging business requirements, including ensuring that all data is protected and accessible across the enterprise, improving efficiency of IT resource management, and maximizing system and data availability. In addition, through Brocade SANs, customers can extend the life of legacy environments by making it possible to leverage existing investments in direct-attached server and storage infrastructure by migrating them into a networked storage environment.

The Intelligent Fabric Services Architecture

      Our next generation products are based on an Intelligent Fabric Services Architecture, which defines a networking foundation for the unique requirements of enterprise storage environments and provides a flexible, intelligent platform for networking storage. This architecture uniquely provides the industry with a hardware foundation of 1 Gigabit per second (Gbit/sec) and 2 Gbit/sec fabric switches, including advanced fabric services such as trunking and frame filtering, enterprise-class security, and an open application programming interface (API) that simplifies fabric management for enterprise storage applications.

      We provide a family of switches under the SilkWorm trademark. Designed to support all SAN requirements from the entry-level to the enterprise, our switches enable high availability and security in the SAN fabric to support business continuance requirements and assure highly secure and scalable environments for storage applications.

      The SilkWorm family of Fibre Channel fabric switches includes 1 Gbit/sec switches available in 8-port, 16-port, and 64-port configurations, and a 2 Gbit/sec fabric switch currently available in 16-port configurations (the SilkWorm 3800). In addition, the recently announced SilkWorm 12000, scalable to 128 ports and

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      The SilkWorm 3800 and SilkWorm 12000 are based on our third generation Application Specific Integrated Circuit (ASIC) technology. Industry-first features of the architecture include trunking, which aggregates bandwidth between our switches in a SAN fabric to deliver up to 8 Gbit/sec actual speeds. As a result, applications deployed over this infrastructure are higher performing, easier to manage, and less expensive to operate. Other unique capabilities — such as frame filtering, increased zoning capabilities, security and network monitoring capabilities — facilitate the deployment of new SAN management applications, and enable new fabric services for clustering, virtualization, and shared file systems. We expect this architecture to be the foundation for all of our upcoming 2 Gbit/sec products.

      Our SilkWorm family of Fibre Channel fabric switches is based on the Brocade Fabric Operating System (Fabric OS). The Fabric OS provides a common, feature-rich platform for SAN-designed applications and offers advanced features for proactive SAN management and monitoring. For example, the capabilities delivered with the Brocade Fabric OS enable applications to dynamically discover physical components in a Brocade SAN and proactively monitor Brocade SAN fabric resources.

      We make the value-added features of the Fabric OS available to qualified partners through the Brocade Fabric Access Layer (Fabric Access), the application programming interface (API) to Fabric OS. These partners are providers of applications, technologies, and products that take advantage of the full features and functionality of the Brocade SAN infrastructure. In addition, we recently introduced Brocade Fabric Manager (Fabric Manager), a host-based centralized management software product dedicated to administering a multi-switch, multi-fabric Brocade environment. Fabric Manager complements existing Brocade SAN management tools, enabling SAN capacity planning through proactive analysis of SAN traffic, and allowing our fabric switches to self-monitor their environment and proactively notify applications of potential problems before they occur.

Market Initiatives

      In addition to providing an intelligent networking platform for storage environments — spanning entry-level to enterprise Fibre Channel fabric switches — we work with more than 150 companies to facilitate the development of technologies and products that further leverage the intelligence in Brocade-based SANs. Through our application programming interface, companies can simplify the management of SANs and gain additional capabilities within their storage and SAN management applications. In addition, our relationships with Cisco Systems, Inc. (Cisco) and others make it possible to internetwork SANs utilizing protocols such as Asynchronous Transfer Mode (ATM), Internet Protocol (IP), and Dense Wave Division Multiplexing (DWDM). Our investments in interoperability and standards, education and professional services ease the deployment of heterogeneous, multi-vendor SANs.

      Our Fabric OS provides an intelligent operating system foundation that allows strategic application partners to unlock the power resident within the SAN. Through Fabric Access, companies are taking advantage of our standards-based APIs to develop SAN-designed applications. These companies are developing applications that take specific advantage of the underlying Brocade Intelligent Fabric Services Architecture to simplify management of heterogeneous SANs while providing higher levels of storage application functionality. Brocade Fabric Access partners include companies such as BMC Software, Compaq Computer Corporation (Compaq), EMC Corporation (EMC), and VERITAS Software Corporation (Veritas).

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      The deployment of SANs on a large scale is creating the need to internetwork SANs over optical infrastructure through DWDM technologies and over IP-based networks. Brocade-based SANs can be internetworked via ATM, IP, and DWDM solutions from companies such as Adva Optical Networking, Cisco, CNT, LuxN, Nortel Networks, and ONI Systems. This enables the extension of SAN applications for business continuance — high-speed remote data mirroring, wide area data replication, and remote data backup — and new capabilities such as digital content distribution and storage outsourcing.

      We continue to invest in making SANs simpler to design, deploy, and manage, and in enabling end-to-end interoperability for heterogeneous, multivendor SANs.

	•	Standards: We are a major participant in the primary standards and industry groups for SANs, including the National Committee for Information Technology Standards (NCITS) T11 Technical Committee, the primary governing body for Fibre Channel-related standards; the Storage Networking Industry Association (SNIA); the Fibre Channel Industry Association (FCIA); the FibreAlliance; the Internet Engineering Task Force (IETF) and others. We have authored or contributed significantly to many of the storage networking standards in existence today.
	•	Interoperability and testing labs: In fiscal 2001, we invested extensively in interoperability and testing labs and plan to continue to invest in interoperability and testing facilities in the future. These facilities enable us to verify new and existing products in large, multivendor SANs, simplifying the complexity of deployment for end-users.
	•	Fabric Aware Program: The Brocade Fabric Aware program is an end-to-end interoperability initiative for enterprise SANs. With more than 40 leading industry partners, the program is a comprehensive testing and configuration initiative designed to foster end-to-end SAN interoperability in a multi-vendor, heterogeneous environment.
	•	SOLUTIONware: We offer a library of pretested, certified SAN configuration guides for popular SAN environment and application configurations. Brocade SOLUTIONware simplifies SAN deployment by providing a proven and pre-tested set of step by step instructions for addressing today’s most challenging business requirements: data storage management, resource management, and business continuance.

      We have established a worldwide education and training organization to deliver high-quality, technical training on SAN technologies and implementation to our partners and their customers. To date, we have trained thousands of SAN technical professionals at our education facilities, providing hands-on technical training in SAN design, implementation, and operation.

      The Brocade SAN Certification Program is an educational service that measures and recognizes IT professionals’ expertise in industry-leading SAN solutions and technologies. Designed to help increase SAN expertise and help ensure superior customer service and support of Brocade-based SANs, the program offers certification for IT professionals on Brocade SANs after completing rigorous testing administered by an independent testing organization.

      Brocade Professional Services Providers (PSPs) are authorized by us to work with SAN customers to assess storage environment requirements, recommend the most effective SAN design and solution, and implement a strategic infrastructure designed to handle the most demanding requirements.

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      Authorized PSPs are qualified consulting firms and systems integrators that have completed extensive training in SAN design and implementation using Brocade SAN infrastructure. In fiscal 2001, we grew our PSP program to include eight authorized PSPs in North America.

Sales, Marketing and Support

      Our solutions provide an intelligent platform for networking storage and are designed to meet SAN requirements from entry-level to the enterprise. SANs are one of the key foundation technologies of data centers and high-performance application environments in enterprises where data storage requirements are high and/or dynamic, and in which data availability and reliability are important business requirements.

      We sell and market our products through OEM partners, master resellers, and fabric partners located worldwide. To further accelerate end customer demand for our products, we employ a direct-touch sales force. Our sales force works with our OEM partners, master resellers, and fabric partners to help end customers understand the benefits of SANs, design SANs that enable the networking of their existing IT infrastructure, and ease the deployment of large heterogeneous SANs.

      Our OEM partners include the world’s leading providers of servers and storage. These companies supply the majority of the world’s external storage. Our OEM partners typically offer our products for sale after completing extensive product qualification cycles. Our OEM partners offer either Brocade-branded or OEM-branded products.

      Our master resellers are value-added distributors who are authorized to market, sell, and support the SilkWorm family of fabric switches and software, and provide support services and education to authorized fabric partners.

      Our fabric partners are leading systems integrators and value-added resellers who are authorized to market, sell, and support the SilkWorm family of fabric switches and software, and provide support services and education. Authorized fabric partners have completed comprehensive training on our products and advanced SAN configuration and integration.

      To address the demand for comprehensive maintenance programs for SAN products, we have created a service and support program that leverages the expertise and hands-on capabilities of all our technical resources. We offer several levels of maintenance contracts that can be purchased separately through our master resellers and fabric partners. The plans offer a wide range of service options, including 24 by 7 online self-help, telephone technical assistance and troubleshooting, and hardware repair and replacement.

Customers

      Our primary customers are OEMs, fabric partners, and master resellers. Currently, our major OEM customers include Compaq, Dell Computer Corporation, EMC, Fujitsu Siemens Computers, Hewlett-Packard Company (HP), Hitachi Data Systems, Inc., IBM, Silicon Graphics, Inc., Storage Technology, Sun Microsystems, Inc., and Unisys Corporation. Our major fabric partner customers include Datalink Corporation, Grass Valley Group, StorageNetworks, Inc., Tokyo Electron Limited, and XIOTech Corporation. Our major master reseller customers include Bell Microproducts and GE Access.

      Our revenues are derived primarily from sales of our SilkWorm family of products. For the year ended October 27, 2001, Compaq, EMC, and IBM each contributed over 10 percent of our total revenues. For the year ended October 28, 2000, Compaq and EMC each contributed over 10 percent of our total revenues. For the year ended October 31, 1999, Compaq, EMC, and Sequent Computer Systems each contributed over 10 percent of our total revenues. In September of 1999, IBM acquired Sequent Computer Systems. The level of sales to any customer may vary from quarter to quarter and 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 our financial condition or results of operations.

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Acquisitions and Investments

      Our strategy is to facilitate a rapid evolution of the SAN market to enable customers to deploy large SANs that are internetworked across optical infrastructures, IP-based networks, or other communications infrastructure. We are committed to helping SAN customers optimize server, storage, personnel, and application investments and extend those benefits across the enterprise. Enabling end-to-end SAN interoperability and reducing the cost of data management is important in the evolving SAN market. Our approach to acquisitions and investments is to help grow the SAN market and facilitate solutions that help SAN end-user customers get the most out of their server and storage investments. To date, we have made no acquisitions. We have made minority equity investments in companies that develop technology or provide services that are complementary to or broaden the markets for our products, and to promote our business and strategic objectives.

Research and Development

      The industry in which we compete is subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new product introductions. As a result, our success depends, in part, on our ability to continue to enhance our existing solutions and to develop and introduce new solutions that improve performance and reduce the total cost of ownership in the storage environment.

      We have invested heavily in research and development to support current and future product development. We continue to enhance and extend our products to anticipate and meet customer requirements. We continue to increase the speed and performance of our Fabric switching products, and to deliver higher port density and more cost-optimized solutions. We also continue to expand the capability of our Fabric OS by investing in delivering additional functionality of our distributed operating system and new value-added services and software to simplify the management and deployment of SANs. Our products are designed to support current industry standards and will continue to support emerging standards that are consistent with our product strategy. 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 this architecture to develop and introduce additional products and enhancements in the future.

      For the years ended October 27, 2001, October 28, 2000, and October 31, 1999, our research and development expenses totaled $110.7 million, $50.5 million, and $15.3 million, respectively. All expenditures for research and development costs have been expensed as incurred. We expect to continue to maintain our high level of investment in research and development.

Competition

      The current and potential market for SAN solutions and technologies is continually evolving and subject to rapid technological change. New SAN solutions and products are continually being introduced by major server and storage providers, and we expect that existing products will be continually enhanced. Currently we face primary competition from other developers of Fibre Channel interconnection products including Gadzoox Networks, Inc., INRANGE Technologies Corporation, McDATA Corporation, QLogic Corporation, and Vixel Corporation.

      In addition, as the SAN market evolves, non-Fibre Channel based interconnection products that interconnect servers and storage may become commercially available. To the extent that these products provide the ability to network servers and storage and support high-performance, block-data storage applications, they may compete with our current and future products. Competitive products might include, but are not limited to, non-Fibre Channel based emerging products based on Gigabit Ethernet, 10 Gigabit Ethernet, and InfiniBand. In addition, networking companies, manufacturers of networking equipment, or other companies may develop competitive products. Our OEM partners or other customers/partners could also 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, size and extent of installed base, ability to meet delivery schedules, customer service, and technical support.

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      Some of our potential competitors have longer operating histories, significantly greater resources, and greater brand recognition. As a result, these companies may have greater credibility with our existing and potential customers and 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. These advantages could allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. In addition, some of our potential competitors have established supplier or joint development relationships with current or potential customers of ours. These competitors may be able to leverage their existing relationships to discourage these customers from purchasing additional products from us or persuade them to replace our products with their products. Such increased competition may result in price reductions, lower gross margins, and reduction of market share. We may not 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 current or future competitive pressures will not materially harm our business.

Manufacturing

      We use Solectron Corporation, a third-party contract manufacturer, to manufacture our products. Solectron invoices us based on prices and payment terms mutually agreed upon and set forth in purchase orders we issue to Solectron. The pricing takes into account component costs, manufacturing costs, and margin requirements. Although the purchase orders we place with Solectron are cancelable, the terms of our manufacturing agreement with Solectron would require us to purchase all unused material not returnable or usable by other customers. 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 application specific integrated circuits (ASICs) and operating system and other software, as well as certain details in the fabrication and enclosure of our products. In addition, we determine the components that are incorporated into our products and select appropriate suppliers of those components. We are currently in the process of qualifying a second third-party contract manufacturer to manufacture some of our products.

      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 are ASICs, microprocessors, certain connectors, certain logic chips, programmable logic devices, and chassis. Our principal limited-source components include printed circuit boards and power supplies. In addition, we license certain software from Wind River Systems, Inc. that is incorporated into the Fabric OS. If we are unable to buy or license these components on a timely basis, we will not be able to deliver our products to customers in a timely manner. We use a rolling six-month forecast based on anticipated product orders to determine component requirements. If we overestimate component requirements, we may have excess inventory, which would increase our costs. If we underestimate component requirements, we may have inadequate inventory, which could interrupt the manufacturing process and result in lost or deferred revenue. In addition, lead times for components 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 the manufacturing and sales processes.

Patents, Intellectual Property, and Licensing

      We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality agreements, and other contractual restrictions with employees and third parties to establish and protect our proprietary rights. Despite these precautions, the measures we undertake may not prevent misappropriation or infringement of our proprietary technology. These measures may not preclude competitors from independently developing products with functionality or features similar to our products.

      We maintain a program to identify and obtain patent protection for our inventions. It is possible that we will not receive patents for every application we file. Furthermore, our issued patents may not adequately protect our technology from infringement or prevent others from claiming that our products infringe the patents of those 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

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      Some of our products are designed to include software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that such licenses generally could be obtained on commercially reasonable terms.

      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 require us to license back our technology or may not be available on terms acceptable to us, or at all. For these reasons, infringement claims could materially harm our business.

Backlog

      Our business is characterized by short-lead-time orders and fast delivery schedules. Sales of our products are generally made pursuant to contracts and purchase orders that are cancelable without significant penalties. These commitments 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. In addition, actual shipments depend on the manufacturing capacity of suppliers and the availability of products from such suppliers. As a result of the foregoing factors, we do not believe that backlog at any given time is a meaningful indicator of our ability to achieve any particular level of revenue or financial performance.

Employees

      At October 27, 2001, we had 1,066 employees. No employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with employees to be good. Employees are currently located in our U.S. headquarters in San Jose, California; our European headquarters in Geneva, Switzerland; our Asia Pacific headquarters in Hong Kong; and offices in North America, the United Kingdom, Germany, France, Canada, Korea, Japan, China, Singapore, and Australia. Competition for technical personnel in the computing industry continues to be significant. We believe that our success depends in part on our ability to hire, assimilate, and retain qualified personnel. We cannot assure you that we will continue to be successful at hiring, assimilating, and retaining employees in the future.

Executive Officers of the Registrant

      The following table sets forth certain information regarding our executive officers as of December 31, 2001:

      Gregory L. Reyes has served as our Chairman of the Board of Directors and Chief Executive Officer since May 2001. From July 1998 to May 2001, Mr. Reyes served as our President and Chief Executive Officer and was a member of our Board of Directors. Before joining Brocade, from January 1995 to June 1998, Mr. Reyes was President and Chief Executive Officer of Wireless Access, Inc., a wireless data communications products company. From January 1995 to November 1997, Mr. Reyes served as Chairman of the Board of Directors of Wireless Access. From January 1991 to January 1995, Mr. Reyes served as Divisional Vice President and

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      Michael J. Byrd has served as our President and Chief Operating Officer since May 2001. Mr. Byrd joined Brocade in April 1999 and served as our Vice President, Finance and Chief Financial Officer from May 1999 to May 2001. 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.

      Antonio Canova has served as our Vice President, Finance and Chief Financial Officer since May 2001. Mr. Canova joined Brocade in November 2000 as our Vice President, Finance. From April 2000 to November 2000, Mr. Canova served as Vice President, Chief Financial Officer, and Secretary of Wireless Inc., a wireless broadband equipment manufacturer. From 1984 to 2000, Mr. Canova held various positions at KPMG LLP, most recently as Partner. Mr. Canova received a B.S. in Accounting from Santa Clara University.

      Jack Cuthbert has served as our Vice President, Worldwide Sales since November 2001. From November 2000 to November 2001, Mr. Cuthbert served as our Vice President, Worldwide Sales, Marketing and Support, and from April 2000 to November 2000, Mr. Cuthbert served as our Vice President, Worldwide Marketing. He was Vice President North American Sales from October 1999 to April 2000, and was Director, Channel Sales from June 1998 to October 1999. From November 1996 to June 1998, Mr. Cuthbert served as Vice President, North American Sales at Macromedia, Inc., an Internet software development company. From July 1986 to July 1996, Mr. Cuthbert held various positions at SGI, a producer of visual computing systems, most recently Director, North American Channels. Mr. Cuthbert received a B.Sc. in Physics from the University of Waterloo in Canada and a M.S. in Engineering Physics from McMaster University in Canada.

Certain Financial Information

      Financial information relating to foreign and domestic sales and operations for the three years ended October 27, 2001, October 28, 2000, and October 31, 1999, is set forth in Note 11, “Segment Information,” of the Notes to Consolidated Financial Statements attached hereto. Financial information relating to revenues, income and total assets for the three years ended October 27, 2001, October 28, 2000, and October 31, 1999, can be found under “Selected Financial Data” and also in our Consolidated Financial Statements attached hereto.

      Brocade, the B weave logo and SilkWorm are registered trademarks of Brocade Communications Systems, Inc. or its subsidiaries in the United States and/or in other countries. All other brands, products, or service names are or may be trademarks or service marks of, and are used to identify, products or services of their respective owners.

Risk Factors

      Our quarterly revenues and operating results may 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 impact the predictability of our quarterly results include the following:

	•	changes in general economic conditions and specific economic conditions in the computer, storage, and networking industries. In particular, recent economic uncertainty has resulted in a general reduction in information technology (IT) spending. This reduction in IT spending has lead to a decline in our growth rates compared to historical trends;
	•	the timing of customer orders and product implementations, particularly large orders from and product implementations of our OEM customers;

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	•	the effects of terrorist activity and armed conflict, such as disruptions in general economic activity;
	•	announcements and new product introductions by competitors;
	•	deferrals of customer orders in anticipation of new products, services or product enhancements introduced by us or our competitors;
	•	our ability to obtain sufficient supplies of sole or limited sourced components, including application specific integrated circuits (ASICs), microprocessors, certain logic chips, programmable logic devices, chassis, printed circuit boards, and power supplies;
	•	increases in prices of components used in the manufacture of our products;
	•	our ability to attain and maintain production volumes and quality levels; and
	•	variations in the mix of our switches sold and the mix of distribution channels through which they are sold.

      Accordingly, the results of any prior periods should not be relied upon as an indication of future performance. To the extent that our operating results are below expectations of market analysts or investors our stock price may decline.

      In recent quarters, unfavorable economic conditions and reduced IT spending rates in the United States, Europe, and Asia have adversely affected our operating results and lead to a decline in our growth rates compared to historical trends. We are unable to predict when IT spending rates will return to historical levels, if at all. Should there be further reductions in either domestic or international IT spending rates, or should IT spending rates not return to historical levels, our revenues, operating results, and financial condition may continue to be adversely affected.

      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 these products is uncertain. Factors that may affect the market acceptance of our products include the performance, price and total cost of ownership of our products; the features and functionality of our products; the availability and price of competing products and technologies; and the success and development of our OEMs 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 and product enhancements on a timely basis and by keeping pace with technological developments and emerging industry standards. We expect to launch new products and upgrades to our existing products during the next year and our future revenue growth will be dependent on the success of these new products. We have in the past experienced delays in product development and such delays may occur in the future.

      As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories, and ensure that enough supplies of new products can be delivered to meet customers’ demands. Our failure to develop and successfully introduce new products and product enhancements could adversely affect our business and financial results. For example, we recently accelerated the transition of our product offerings from 1 to 2 Gbit/sec technology, which resulted in us recording charges of approximately $12.1 million for inventory purchase commitments, fixed asset impairments and other charges. Our failure to manage the transition to newer products could result in an increase in inventory levels and/or a decline in revenues.

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      In particular, in conjunction with the transition of our product offerings from 1 to 2 Gbit/sec technology, we have begun introducing products with new features and functionality. We face risks relating to this product transition, including risks relating to forecasting of demand for 2 Gbit/sec products and related transition issues, as discussed in the previous paragraph, as well as possible product and software defects and a potentially different sales and support environment due to the complexity of these new systems. If we fail to timely introduce new 2 Gbit/sec products with enhanced features, such as our SilkWorm 12000 family of products, or if there is no demand for these products, our business could be seriously harmed.

      Increased international political instability, as demonstrated by the September 2001 terrorist attacks, disruption in air transportation and further enhanced security measures as a result of the September 2001 terrorist attacks, the conflict in Afghanistan and the increasing tension in the Middle East, may hinder our ability to do business and may increase our costs. This increased instability may, for example, negatively impact the reliability and cost of transportation, negatively impact the desire of our employees and customers to travel, adversely affect our ability to obtain adequate insurance at reasonable rates, or require us to take extra security precautions for our operations. In addition, to the extent that air transportation is delayed or disrupted, the operations of our contract manufacturers and suppliers may be disrupted, particularly if shipments of components and raw materials are delayed. If this international political instability continues or increases, our business and results of operations could be harmed.

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

      We sell and market our products through OEM partners, fabric integrator partners and master resellers. We must continually assess, anticipate and respond to the needs of these OEM partners, fabric integrator partners and master resellers. We must ensure that our products integrate with solutions provided by these OEM partners, fabric integrator partners and master resellers. We must also continually assess, anticipate and respond to the needs of their customers, who are the end-users of our products. If we fail to respond to the needs of these groups, our business and operating results could be harmed.

      Because we sell and market our products through OEM partners, fabric integrator partners, and master resellers, our direct contact with the end-users of our products is often limited. Although we make every effort to communicate with, understand, and anticipate the current and future needs of the end-users of our products, to a large extent we rely on our OEM partners, fabric integrator partners, and master resellers for visibility into those end-user requirements. Our failure to adequately assess and anticipate future end-user needs could negatively impact the demand for our products and reduce our revenues.

      Similarly, we have limited ability to forecast the demand for our products. In preparing sales and demand forecasts, we largely rely on input from our OEM partners, fabric integrator partners, and master resellers. If we fail to effectively communicate with our customers about end-user demand or other time sensitive information, sales and demand forecasts may not reflect the most accurate, up-to-date information. Because

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      We plan to expand our international sales activities significantly. Expansion of international operations will involve inherent risks that we may not be able to control, 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;
	•	multiple, potentially conflicting, and changing governmental laws and regulations, including differing employment laws;
	•	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 of revenues has 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. In the future, a portion of our international revenues may be denominated in foreign currencies, including the Euro, which will subject us to risks associated with fluctuations in those foreign currencies. Additionally, we receive significant tax benefits from sales to our international customers. These benefits are contingent upon existing tax laws in both the United States and in the respective countries in which our international customers are located. Future changes in domestic or international tax laws could affect the continued realizability of the tax benefits we are currently receiving and expect to receive from sales to our international customers.

      Although our customer base has increased, we still depend on large, recurring purchases from a limited number of large OEM customers. Our agreements with our OEM customers are typically cancelable, non-exclusive, and have no minimum purchase requirements. For the fiscal year ended October 27, 2001, eight customers represented over 83 percent of our total revenues, and three customers, Compaq, EMC, and IBM, each represented at least 10 percent of our total revenues. In addition, HP and Compaq, two of our OEM customers, have announced their intent to merge, which may result in a disruption in our sales to these two customers. We anticipate that our revenues and operating results will continue to depend on sales to a relatively small number of customers. Therefore, the loss of any one significant customer, or a decrease in the level of sales to any one significant customer, could seriously harm our financial condition and results of operations.

      Our success will depend on our continuing ability to develop and manage relationships with significant OEMs, system integrators and resellers, as well as on the sales efforts and success of these customers. Our OEM customers may evaluate our products for a limited time period before they begin to market and sell them. Assisting these customers through the evaluation process may require significant sales, marketing, and management efforts on our part, particularly if our products are being qualified with multiple customers at the same time. In addition, once our products have been qualified, our customer agreements have no minimum purchase commitments. We may not be able to maintain or expand our distribution channels, manage distribution relationships successfully or market our products through OEMs effectively. Our failure to

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      We currently depend on Solectron, a third party manufacturer for numerous companies, to manufacture all of our products. If we should fail to effectively manage our relationship with 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. Although we are currently in the process of qualifying a second third-party contract manufacturer to manufacture some of our products, if we are required or choose to change contract manufacturers, we may lose revenue and damage our customer relationships.

      We have entered into a 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. Although our purchase orders placed with Solectron are cancelable, the terms of the agreement would require us to purchase from Solectron all inventory components not returnable or usable by other Solectron customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate manufacturing capacity from Solectron to meet customers’ delivery requirements or we may accumulate excess inventories. As of October 27, 2001, we had commitments to Solectron for purchases of components of approximately $37.9 million, net of amounts reserved for purchase commitments, which we, as of that date, expected to utilize during future normal ongoing operations. As of that date we also had commitments to other parties of $8.3 million, net of amounts reserved for purchase commitments, which we, as of that date, also expected to utilize during future normal ongoing operations.

      We currently purchase several key components used in the manufacture of our products from single or limited sources. We purchase ASICs, microprocessors, certain connectors, certain logic chips, programmable logic devices, and chassis from single sources, and printed circuit boards and power supplies from limited sources. In addition, we license certain software from third parties that is incorporated into our Fabric OS. If we are unable to buy or license these components on a timely basis, we will not be able to deliver product to our customers in a timely manner. We use a rolling six-month forecast based on anticipated product orders to determine component requirements. If we overestimate component requirements, we may have excess inventory, which would increase our costs. If we underestimate component requirements, we may have inadequate inventory, which could interrupt the manufacturing process and result in lost or deferred revenue. In addition, lead times for components 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 the manufacturing and sales processes.

      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 and we may not be able to compete successfully against current and future competitors. Furthermore, as the SAN market evolves, non-Fibre Channel-based products may become available to interconnect servers and storage. To the extent that these products provide the ability to network servers and storage and support high-performance, block-data storage applications, they may

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      The average unit prices of our products may decrease in the future in response to changes in product mix, competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors, or other factors. For example, the average unit prices of our products have declined over the past three years as a result of competitive pricing pressures and our efforts to increase market share. If we are unable to offset these factors by increasing sales volumes, our total revenues will decline. In addition, to maintain our gross margins, we must develop and introduce new products and product enhancements, and must continue to reduce the manufacturing cost of our products. Failure to reduce the manufacturing cost of our products in response to declines in unit selling prices would result in a decline in our gross margins.

      Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. Our products are becoming increasingly 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 engineering personnel from product development efforts and cause significant customer relations problems. Moreover, the occurrence of hardware and software errors, whether caused by us or another vendor’s SAN products, could delay or prevent the development of the SAN market.

      We may not be able to maintain profitability in the future. We expect to incur significant costs and expenses for product development, sales and marketing, customer support, and expansion of corporate infrastructure. We make investment decisions based upon anticipated revenues and margins. Failure of these anticipated revenues and margins to materialize could impact our future profitability.

      In addition, we have a limited operating history. Therefore, it is difficult to forecast future operating results based on historical results. We plan our operating expenses based in part on future revenue projections. Our ability to accurately forecast quarterly revenue is limited for the reasons discussed above in “Our quarterly revenues and operating results may fluctuate in future periods for a number of reasons, which could adversely affect the trading price of our stock.” 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 offset any unexpected shortfall in revenues. If this were to occur, we could incur losses and our operating results may be below our expectations and those of investors and market analysts.

      Our success depends to a significant degree upon the continued contributions of key management, engineering, and sales and marketing personnel, many of whom would be difficult to replace. We do not have 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 management to operate effectively, both individually and as a group.

      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, finance, and operations personnel. We have experienced difficulty in hiring qualified ASIC, software, system and test, sales and marketing, and customer support personnel. We may not be successful in attracting and retaining these individuals in the future. 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 the computer storage and server industry whose employees accept positions with competitors frequently claim that their

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      We rely on a combination of patent, copyright, trademark, trade secret laws, confidentiality agreements and other contractual restrictions 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 technology, software, documentation, and other confidential information. These measures may not preclude competitors from independently developing products with functionality or features similar to our products. Despite 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 take to prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect proprietary rights as fully as in the United States, will be effective.

      In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We have previously been 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 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 products or services that use the challenged intellectual property;
	•	obtain from the owner of the infringed intellectual property a license to the relevant intellectual property, which license may require us to license our intellectual property to such owner, or 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 revenues.

      As part of our strategy, we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. We may buy businesses, products or technologies in the future. In the event of any future purchases, we could:

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

      These purchases also involve numerous risks, including:

	•	problems combining the purchased operations, technologies, personnel or products;
	•	unanticipated costs;

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	•	diversion of management’s attention from our core business;
	•	adverse effects on existing business relationships with suppliers and customers;
	•	risks associated with entering markets in which we have no or limited prior experience; and
	•	potential loss of key employees of acquired organizations.

      We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future.

      Industry standards for SAN products are continuing to emerge, evolve, and achieve acceptance. To remain competitive, we must continue to introduce new products and product enhancements that meet these industry standards. All components of the SAN must interoperate together. Industry standards are in place to specify guidelines for interoperability and communication based on standards specifications. Our products comprise only a part of the entire SAN solution used by the end-customer and we depend on the companies that provide other components of the SAN solution, many of whom are significantly larger than us, to support the industry standards as they evolve. The failure of these providers to support these industry standards could adversely affect the market acceptance of our products.

      In addition, in the United States, our products comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop will be required to comply with standards established by authorities in various countries. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business.

      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;
	•	limiting the persons who may call special meetings of stockholders;
	•	prohibiting stockholder actions by written consent; and
	•	requiring super-majority voting to effect amendments to the foregoing provisions of our certificate of incorporation and bylaws.

      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 that we give prior notice of a change of control and grant certain manufacturing rights following the change of control.

      The market price of our common stock has experienced significant volatility in the past and may continue to fluctuate significantly in response to the following factors, some of which are beyond our control:

	•	macroeconomic conditions;
	•	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 OEM customers;
	•	additions or departures of key personnel;

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	•	sales of common stock in the future; and
	•	incurring additional debt.

      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 performance.

      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 are currently in litigation regarding alleged nondisclosure of improprieties in the distribution of shares in our initial public offering by our underwriters, including undisclosed fees and commissions received by the underwriters and alleged laddering arrangements. In addition, in the future we may be the target of other securities litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

      Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A substantial portion of our facilities, including our corporate headquarters, is located near major earthquake faults and we neither carry earthquake insurance nor have we set aside funds or reserves to cover such earthquake-related losses. Our facilities in the State of California have been subject to rolling electrical blackouts resulting from shortages of available electrical power. Should these blackouts continue to occur or increase in severity in the future, they could disrupt the operations of our affected facilities. Although we carry business interruption insurance to mitigate the impact of potential business interruptions, should a business interruption occur, our business could be seriously harmed.

      From time to time, we make equity investments for the promotion of business and strategic objectives. The market price and valuation of the securities that we hold in these companies may fluctuate due to market conditions and other circumstances over which we have little or no control. To the extent that the fair value of these securities is less than our cost over an extended period of time, our results of operations and financial position could be negatively impacted.

Item 2.     Properties

      Our principal administrative, sales and marketing, education, customer support, and research and development facilities are located in approximately 495,000 square feet of leased office space in San Jose, California. Of this total, we currently occupy approximately 300,000 square feet. The remaining 195,000 square feet is currently under construction and we intend to occupy a portion of this additional space upon its scheduled completion during the first quarter of calendar 2002. In the fourth quarter of fiscal 2001, we identified approximately 97,000 square feet of this committed office space that, based on our anticipated hiring needs, we do not expect to utilize for the foreseeable future. Accordingly, this space has been made available for sublease (see Note 3, “Facilities Lease Losses and Asset Impairment Charges,” of the Notes to Consolidated Financial Statements). The leases on these facilities will expire beginning August 2010. In addition to the San Jose facilities, we also lease sales, marketing, and administrative office space in various locations throughout the world.

Item 3.     Legal Proceedings

      We are subject to various legal proceedings, claims, and litigation that arise in the normal course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial position, results of operations, or cash flows.

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      On July 20, 2001, a putative class action captioned Chae v. Brocade Communications Systems, Inc. et al. was filed against us and three of our officers and directors (collectively the “Individual Defendants”) in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co., Inc., BT Alex Brown, Inc., and Dain Rauscher, Inc., the underwriters in our initial public offering. The complaint alleges violations of Section 10(b) of the Securities Act of 1934 (and Rule 10b-5 promulgated thereunder) against all defendants and violations of Section 20(a) of the Securities Act of 1934 against the Individual Defendants. The complaint seeks unspecified damages on behalf of a purported class of purchasers of common stock between May 24, 1999 and July 17, 2001. A second, substantively similar complaint, Radliff v. Brocade Communications Systems, Inc., was filed in the same court on September 25, 2001. We believe that the claims are without merit and intend to defend the actions vigorously.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2001.

PART II