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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 o No þ

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant was approximately $1,361,000,000 as of May 1, 2004 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 25, 2004, was 267,862,709 shares.

Portions of the Registrant’s Proxy Statement for its 2005 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.

On January 24, 2005, Brocade announced that its Audit Committee completed its previously announced internal review regarding Brocade’s stock option granting process. As a result of the review, Brocade recorded additional stock-based compensation charges and a valuation allowance against deferred tax assets related to previously recorded stock option tax benefits. The foregoing restatement adjustments did not affect our previously reported cash, cash equivalent and short-term investment balances in any of the years affected.

Brocade has recorded stock-based compensation calculated under the variable method of accounting and associated income tax adjustments. As a result of these charges, Brocade restated the previously filed financial statements for fiscal years ended October 25, 2003 and October 26, 2002, including the corresponding interim periods for fiscal years 2003 and 2002, and the interim periods ended January 24, 2004, May 1, 2004 and July 31, 2004. Brocade also recorded stock-based compensation and associated income tax adjustments to previously announced financial results for the fourth quarter and year ended October 30, 2004. These charges relate solely to matters pertaining to stock options granted prior to August 2003.

Except as otherwise stated, all financial information contained in this Annual Report on Form 10-K gives effect to this restatement and revision. Information regarding the effect of the restatement on our financial position and results of operations is provided in Note 3 of the Notes to Consolidated Financial Statements. Financial information included in reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Brocade for these periods should not be relied upon and are superseded by the information in this Annual Report on Form 10-K.

For years prior to 2002, Brocade reduced previously reported net income by approximately $303 million (consisting of a reduction to net income in years 1999 and 2000 of $15 million and $1,018 million, respectively, and an increase to net income in 2001 of $731 million) relating solely to stock-based compensation and associated income tax adjustments.

This Annual Report on Form 10-K (Annual Report) contains forward-looking statements. These forward-looking statements include predictions regarding our future:


	•	revenues and profits;
	•	gross margin;
	•	customer concentration;
	•	customer buying patterns;
	•	research and development expenses;
	•	sales and marketing expenses;
	•	general and administrative expenses;
	•	pricing and cost reduction activities;
	•	income tax provision and effective tax rate;
	•	realization of deferred tax assets;
	•	cash flows from employee participation in employee stock programs;
	•	liquidity and sufficiency of existing cash, cash equivalents, and investments for near-term requirements;
	•	purchase commitments;
	•	product development and transitions;
	•	competition and competing technology;
	•	outcomes of pending or threatened litigation; and
	•	financial condition and results of operations as a result of recent accounting pronouncements.

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.

Brocade Communications Systems, Inc. (Brocade or the Company) designs, develops, markets, sells, and supports data storage networking products and services, offering a line of storage networking products and services that enable companies to implement highly available, scalable, manageable, and secure environments for data storage applications. The Brocade SilkWorm® family of storage area networking (SAN) switches is designed to help companies reduce the cost and complexity of managing business information within a data storage environment, ensure high availability of mission critical applications and serve as a platform for corporate disaster recovery. Brocade products are installed around the world at companies, institutions, and other entities ranging from large enterprises to small and medium size businesses. Brocade products and services are marketed, sold, and supported worldwide to end-user customers through distribution partners, including original equipment manufacturers (OEMs), value-added distributors, systems integrators, and value-added resellers.

We were incorporated in California on August 24, 1995 and re-incorporated in Delaware on May 14, 1999. Our mailing address and executive offices are located at 1745 Technology Drive, San Jose, California 95110. Our telephone number is (408) 333-8000. Our corporate website is www.brocade.com. The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website when such reports are available on the U.S. Securities and Exchange Commission (SEC) website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

We offer a line of storage networking products and SAN management operating system that enables companies to network application servers with storage devices through a SAN. Our products and services are designed to help companies reduce the cost and complexity of managing business information within a data storage environment while enabling high levels of availability of mission critical business applications. In addition, our products assist companies in the development and delivery of disaster recovery programs. Our products are generally used in conjunction with application servers and storage subsystems, SAN interconnection components such as host bus adapters, and storage management software applications and tools. By networking servers and storage, companies can more easily share and consolidate server and storage resources; centralize and simplify data management; scale and provision storage resources more effectively, and improve application efficiency, performance and availability. As a result, companies are able to better utilize information technology (IT) assets, improve productivity of IT personnel, reduce capital and operational expenditures, and more reliably and securely store, manage, and administer business information.

We believe that as the need for data storage grows, companies will look to further simplify the complexity of storing, managing, and administering their data, while looking to maximize their IT investments and reduce capital expenditures. SANs, which have been installed at many of the world’s leading companies since the mid-1990’s, provide a platform that helps companies optimize their IT assets and support future data growth. We also believe companies will continue to expand the size and scope of their SANs and the number and types of applications that their SANs support. Consequently, components of SAN environments, which are

Since our inception, we have been a pioneer and innovator in developing the market for SAN-based solutions, and have grown to be a market leader in storage networking infrastructure. We believe that the future evolution of the storage networking market will be led by the providers of products that simplify the management of heterogeneous storage environments and maximize end-users’ IT investments on an ongoing basis. We also believe that storage networking infrastructure will evolve to provide increased capabilities that enable new types of storage management applications that simplify storage management, increase operational efficiencies, and reduce operating expense. As a result, many of our initiatives and investments are aimed at expanding the capabilities enabled by SANs, increasing end-to-end interoperability, protecting end-user investments in existing and new IT resources, and making it easier for our OEM and application partners to deliver products that manage heterogeneous storage environments.

Our SilkWorm® family of fabric switches, based on the Fibre Channel protocol, are devices that provide bandwidth and high-speed routing of data. They range from low cost entry-level 8-port switches to 128-port enterprise-class director switches and are available in different form-factors including fixed-port services, modular chassis, and embedded blades. Our SilkWorm Director is a highly reliable solution for deploying enterprise-class SANs in mission-critical environments. It supports key applications such as data backup, remote mirroring, and high-availability clustering as well as high-volume transaction processing applications such as ERP and data warehousing. These products have been designed to meet the storage networking needs of end-users in environments ranging from small and medium-size businesses to large enterprises with SAN fabrics that scale to thousands of ports, spread across multiple locations around the world. Our SilkWorm family of switches share a set of advanced fabric services that enable key SAN management functionality that we believe is unique to Brocade.

Brocade Fabric Operating System (Fabric OS) is the operating system firmware that provides the core infrastructure for deploying SANs. As the foundation for our family of SilkWorm switches, Fabric OS helps ensure the reliable and high-performance data transport that is critical for scalable SAN fabrics interconnecting multiple servers and storage devices. Our SAN management operating system also includes a common set of advanced fabric services that build upon the foundation of Fabric OS and help improve performance, availability, scalability, and the overall functionality of the network. These fabric services include the ability to proactively monitor the health and performance of the SAN, the ability to aggregate bandwidth between fabric switches to deliver higher performance for storage applications, and the ability to securely control data access in multi-vendor SAN environments. In addition, we offer management tools that enable end-users to manage and administer their SANs. We believe that our Fabric OS provides us with an advantage in the storage networking market, enabling differentiation and increasing licensable features and services.

We believe that some of the next generation storage management applications will be fabric-based, rather than server or storage array-based. In general, this means that elements of certain storage related applications will reside in the network of Fibre Channel switches, commonly referred to as the “fabric”, rather than in the server or storage array. We believe this will allow for increased centralization of storage management functions and higher performance of storage related applications. We also believe that these fabric-based applications, such as fabric-based routing services, storage volume management, data replication, and data migration, will accelerate the migration of intelligence into the SAN fabric and minimize operational cost and complexity for the end-user. The SilkWorm® Fabric Application Platform (SilkWorm Fabric AP) is an intelligent switching platform designed to host SAN fabric-based storage management applications while integrating with existing Brocade SAN infrastructures. As a result, this new platform can provide a highly scalable solution for managing server and storage environments much more efficiently. Brocade is working closely with its OEM

We work with industry-leading companies to facilitate the development of standards, technologies, products, and services that focus on the simplification of heterogeneous storage management, and the implementation and management of storage networking environments. We have an open approach to SAN management and work with nearly every leading provider of storage and SAN management applications and technologies.

Since our inception, we have been a major contributor to the evolution of industry standards ranging from Fibre Channel communication technology to SAN interoperability to storage and SAN management. We contribute to nearly every related industry standards committee, and have authored or co-authored the majority of the Fibre Channel protocol standards in existence today.

As SANs have increased in size and comprise more and different types of server, storage, and interconnection devices, the need for interoperability among those devices has similarly increased. We have invested a significant amount of resources for purposes of providing interoperability among Brocade solutions and the servers, storage, and storage management applications that run in the Brocade environment, as well as in driving standards for interoperability among SAN interconnection devices. We also continually certify Brocade solutions in operational storage environments through our own testing programs, our partners’ testing and qualification initiatives, and through certification programs for third party products, such as the Brocade Fabric Aware program, which we offer as a resource to our application and technology partners. Through our testing initiatives, we also certify interoperability configurations of common customer environments, such as remote data backup in a multi-vendor server and storage environment.

An important aspect of managing storage environments is the management software used to administer, manage, and provision storage resources and data. Our intelligent platform offers advanced fabric services that allow third-party developers of storage software applications to gain additional functionality and simplify the development of their applications.

Our education and training organization delivers high-quality, technical education and training on SAN technology, design, implementation, and management to our partners and their customers. The Brocade SAN Certification Program, our educational service, offers certification on Brocade SANs for IT professionals who have completed certain tests administered by an independent testing organization. This certification program is designed to measure the knowledge and proficiency of IT professionals in SAN solutions and technologies, and to help ensure that our customers receive superior customer service and support. Our education and training services are made available through our own education facilities and through our worldwide training provider network.

Our products are marketed, sold, and supported worldwide through a wide range of distribution partners, including OEM partners, master resellers, which are value-added distributors, and fabric partners, which are systems integrators and value-added resellers.


	•	Our OEM partners are leading storage systems and subsystems providers who offer our products under their own private label or as Brocade branded solutions. Sales through OEM partners comprise the majority of our business.
	•	Other distribution partners include Brocade-authorized value added distributors, systems integrators, and value-added resellers. These partners are authorized by us to market, sell, and support our SilkWorm family of fabric switches and software. Some also sell training and other value-added services.

We have OEM or distribution agreements with the majority of the companies that sell the world’s storage systems and subsystems. In addition, we employ a worldwide overlay sales force to assist our distribution partners in marketing Brocade SAN solutions, assessing SAN requirements and designing, implementing, and maintaining Brocade-based SANs.

Our major OEM customers include Dell Computer Corporation, EMC Corporation (EMC), Fujitsu Siemens, Hitachi Data Systems, Inc., Hewlett-Packard Company (HP), IBM Corporation (IBM), Network Appliance, Inc., Siemens AG, Storage Technology Corp., Sun Microsystems, Inc., and Unisys Corporation. Our primary non-OEM customers include Bell Microproducts, GE Access Distribution, Tokyo Electron Limited, and XIOTech.

For the years ended October 30, 2004, October 25, 2003 and October 26, 2002, EMC, HP, and IBM each represented greater than ten percent of our total revenues for combined totals of 70 percent, 67 percent, and 62 percent of our total revenues, respectively. The level of sales to any OEM customer may vary from quarter to quarter, and we expect that significant customer concentration will continue for the foreseeable future. The loss of, or a decrease in the level of sales to, or a change in the ordering pattern of, any one of these customers could have a material adverse impact on our financial condition or results of operations.

Historically, domestic revenues have been between 60 percent and 75 percent of total revenues. For the year ended October 30, 2004, domestic and international revenues were approximately 65 percent and 35 percent of our total revenues, respectively, and for the year ended October 25, 2003, domestic and international revenues were approximately 67 percent and 33 percent of our total revenues, respectively. Revenues are attributed to geographic areas based on the location of the customer to which our products are shipped. International revenues primarily consist of sales to customers in Western Europe and the greater Asia Pacific region. For the years ended October 30, 2004 and October 25, 2003, international revenues have increased primarily as a result of faster growth in the Asia Pacific region. However, certain OEM customers take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the practices of our OEM customers.

Our acquisition and investment strategy is focused on facilitating the evolution and expansion of the SAN market and enabling companies to further simplify storage management. We have made equity investments in companies that develop technology or provide services that are complementary to or broaden the markets for our products and further our business objectives. On January 27, 2003, we completed our acquisition of Rhapsody, a privately held technology company based in Fremont, California. This acquisition resulted in the

addition of the SilkWorm Fabric AP and SilkWorm Multiprotocol Router to our product offerings. As of October 30, 2004, the carrying value of our investments in non-publicly traded companies was $0.5 million.

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 significantly in product research and development. We continue to enhance and extend our products, and to increase the speed, performance, and port-density of our switching platform. We also continue to expand the value-added services of our intelligent platform to enable more functionality for end customers, OEM partners, and application partners and to further simplify storage management.

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 common platform architecture, which facilitates the product design, development, and testing cycle, and reduces the time to market for new products and features. We intend to continue to leverage this common architecture to develop and introduce additional hardware and software products and enhancements in the future.

Our product development process includes the certification of our products by our OEM partners, which is referred to as the product qualification process. During this process, we support our OEM Partners in the testing of our new products to insure they meet quality and functionality, and inoperability requirements. The process is completed once the OEM Partner has certified the product and announced general availability of that product to their customers. This process generally is completed in a range of two to four months.

For the years ended October 30, 2004, October 25, 2003, and October 26, 2002, our research and development expenses totaled $149.5 million, $145.7 million, and $113.2 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.

The current and potential market for SAN solutions and technologies is competitive and subject to rapid technological change. Major storage systems and server providers are continually introducing new SAN-oriented solutions and products, and enhancing existing SAN-oriented solutions and products. We believe our primary competition is from providers of Fibre Channel switching products for interconnecting servers and storage, including Cisco Systems Inc. (Cisco), Computer Network Technology Corporation (CNT), QLogic Corporation (QLogic), and McDATA Corporation (McDATA), which recently announced its intention to acquire CNT.

As the SAN market evolves, additional technologies may become available for interconnecting 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 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, or InfiniBand. In addition, networking companies, manufacturers of networking equipment, or other companies may develop competitive products. Our OEM partners or other partners could also develop and introduce products that compete 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, technical support, and distribution channels.

Some of our competitors have longer operating histories and significantly greater human and financial resources than us. These competitors may have the ability to devote a larger number of sales personnel to focus on the SAN industry, compete with us and potentially change the current distribution model. Our competitors could also adopt more aggressive pricing policies and devote greater resources to the development,

promotion, and sale of their products than us. As a result, they may be able to respond more quickly to changes in customer or market requirements. We may not have the financial resources, technical expertise or marketing, manufacturing, distribution, and support capabilities to compete successfully against current or future competitors. This could materially harm our business.

We use two third-party contract manufacturers, Solectron Corporation (Solectron) and Hon Hai Precision Industry Co., Ltd. (Foxconn), to manufacture our products. Solectron and Foxconn invoice us based on prices and payment terms mutually agreed upon and set forth in purchase orders we issue to them. Although the purchase orders we place with our contract manufacturers are cancelable, we could be required to purchase all unused material not cancelable, returnable or usable by other customers.

We use Solectron and Foxconn for final turnkey product assembly, but we also maintain key component selection and qualification expertise internally. We design and develop the key components of our products, including 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 we select appropriate suppliers of those components.

Although we use standard parts and components for our products where possible, our contract manufacturers, Solectron and Foxconn, currently purchase, on our behalf, several key components used in the manufacture of our products from single and limited supplier sources. Our principal single source components are ASICs. Our principal limited source components include microprocessors, certain connectors, certain logic chips, power supplies, and programmable logic devices. In addition, we license certain software from third parties that is incorporated into our Fabric Operating System and other software. If we are unable to buy or license these components on a timely basis, we may not be able to deliver our products to customers in a timely manner. We use rolling forecasts 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.

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. Our failure to protect our intellectual property could materially harm our business. In addition, our competitors may independently develop similar or superior technology, duplicate our products, or design around our patents. 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 resources and could materially harm our business.

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. Failure to do so 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 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.

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 negotiations 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.

As of October 30, 2004, we had 1,038 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 United States headquarters in San Jose, California; our European headquarters in Geneva, Switzerland; our Asia Pacific headquarters in Singapore; and offices throughout North America, Europe, and Asia Pacific. 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.

Financial information relating to foreign and domestic sales and operations for the three years ended October 30, 2004, October 25, 2003, and October 26, 2002, is set forth in Note 13, “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 30, 2004, October 25, 2003, and October 26, 2002, can be found in Item 6 “Selected Financial Data” and also in our Consolidated Financial Statements attached hereto.

Brocade, SilkWorm, and the Brocade logo are trademarks or registered trademarks of Brocade Communications Systems, Inc. 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.

The market for SANs is characterized by rapidly changing technology and accelerating product introduction cycles. 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 provide sufficient supplies of new products to meet customer demands. We must also achieve widespread market acceptance of the new or enhanced products in order to realize the benefits of our investments in these products. When we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand, excess inventories of

older products, hardware and software defects, and different sales and support requirements due to the complexity of the new products. In addition, we face the risk that the new or enhanced products may not achieve widespread market acceptance. Factors that may affect market acceptance include:


	•	product performance, price and total cost of ownership;
	•	product features and functionality;
	•	availability and price of competing products and technologies; and
	•	the ability of our OEM partners to successfully distribute, support and provide training for our products.

For example, during the second half of fiscal year 2004, we introduced six new SilkWorm products, which are the SilkWorm 24000 Director, the SilkWorm 3250 and SilkWorm 3850 entry level fabric switches, the SilkWorm Multiprotocol Router, a switch module for bladed server solutions, and the SilkWorm 4100 4 Gigabit per second fabric switch. Because we currently derive the majority of our revenues from sales of our SilkWorm product family and we expect that revenue from this product family will continue to account for a substantial portion of our revenues for the foreseeable future, sustained and widespread market acceptance of these products is critical to our future success. If we fail to successfully manage the transition to these new products or if the products do not achieve market acceptance, our business and financial results will be adversely affected. For instance, during the fourth quarter of fiscal year 2001, we recorded charges to cost of revenues of $7.7 million primarily associated with the accrual of purchase commitments for excess inventory components related to a transition of product offerings from 1 to 2 Gigabit per second technology.

The success of our new products also depends on several factors, including our ability to properly define the new products, timely complete and introduce the new products, differentiate of our new products from the products of our competitors and address the complexities of interoperability of our products with our OEM partners’ server and storage products. If we are not able to successfully develop new products or enter into new market segments, or if we are unable to obtain or maintain requisite third-party interoperability licenses, our business and results of operations will be harmed.

We recently introduced, and intend to continue to make substantial investments in, our Silkworm Fabric Application Platform product family. The first product in the Silkworm Fabric Application Platform product family that we announced for general availability is the Silkworm Multiprotocol Router. Our success with the Silkworm Multiprotocol Router and the subsequent products in the Silkworm Fabric Application Platform product family will depend on:


	•	the market acceptance of these products by both end-users and our OEM partners;
	•	the availability of complementary applications developed by our OEM partners and other application developers for these products; and
	•	our ability to timely develop and manufacture these products in volumes and with the performance levels and feature sets required by customers

We cannot be certain that these new products will be successfully developed or achieve market acceptance, or that we will benefit fully from the substantial investments we have made and continue to make in the Silkworm Fabric Application Platform product family. In addition, we cannot be certain that our OEM partners or other application developers will develop applications for these products in a timely manner, if at all, or if applications that are developed will meet end-user requirements. If we are unable to successfully manage any of these aspects of our Silkworm Fabric Application Platform product family introductions, our business and financial results will be adversely affected.

The SAN market is becoming more competitive and subject to rapid technological change. Increased competition has in the past resulted in greater pricing pressures, and reduced sales, margins, profits and

market share. Currently, we believe that we principally face competition from providers of Fibre Channel switching products for interconnecting servers and storage. These competitors include Cisco Systems, Computer Network Technology Corporation (CNT), Qlogic Corporation, and McDATA Corporation, which recently announced its intention to acquire CNT.

The SAN market is likely to become even more competitive as new products and technologies are introduced by existing competitors and as new competitors enter the market. These new competitive products could be based on existing technologies or new technologies that may or may not be compatible with our SAN technology. Competitive products might include, but are not limited to, non-Fibre Channel based emerging products utilizing Gigabit Ethernet, 10 Gigabit Ethernet, InfiniBand or iSCSI. In addition, our OEM partners, who also have relationships with some of our current competitors, could become new competitors by developing and introducing products competitive with our product offerings, choose to sell our competitors’ products instead of our products, or offer preferred pricing or promotions on our competitors’ products.

Some of our competitors have longer operating histories and significantly greater human, financial and capital resources than us. These competitors may have the ability to devote a larger number of sales personnel to focus on the SAN industry, compete with us and potentially change the current distribution model. Our competitors could also adopt more aggressive pricing policies and devote greater resources to the development, promotion, and sale of their products than we can. As a result, they may be able to respond more quickly to changes in customer or market requirements. We may not have the financial resources, technical expertise or marketing, manufacturing, distribution and support capabilities to compete successfully against current or future competitors. This could materially harm our business and financial results.

We depend on recurring purchases from a limited number of large OEM partners for the majority of our revenue. As a result, these large OEM partners have a significant influence on our quarterly and annual financial results. Our agreements with our OEM partners are typically cancelable, non-exclusive, have no minimum purchase requirements and have no specific timing requirements for purchases. For the fiscal year ended October 30, 2004, three customers each represented greater than ten percent of our total revenues for a combined total of 70 percent. We anticipate that our revenues and operating results will continue to depend on sales to a relatively small number of customers. The loss of any one significant customer, or a decrease in the level of sales to any one significant customer, or unsuccessful quarterly negotiation on key terms, conditions or timing of purchase orders placed during a quarter, could seriously harm our business and financial results.

In addition, some of our OEM partners purchase our products for their inventories in anticipation of customer demand. These OEM partners make decisions to purchase inventory based on a variety of factors, including their expectations of end customer demand, which may be affected by seasonality and their internal supply management objectives. Others require that we maintain inventories of our products in hubs adjacent to their manufacturing facilities and purchase our products only as necessary to fulfill immediate customer demand. If more of our OEM partners transition into a hub model, form partnerships, alliances or agreements with other companies that diverts business away from us, or otherwise change their business practices, their ordering patterns may become less predictable. Consequently, changes in ordering pattern may affect both the timing and volatility of our reported revenues. The timing of sales to our OEM partners, and consequently the timing and volatility of our reported revenues, may be further affected by the product introduction schedules of our OEM partners. Our OEM partners may delay or postpone their product orders in order to coordinate receipt of our products with their product introduction schedules. We also may be exposed to higher risks of obsolete or excess inventories.

Our OEM partners evaluate and qualify our products for a limited time period before they begin to market and sell them. Assisting these distribution partners through the evaluation process requires significant sales, marketing and engineering management efforts on our part, particularly if our products are being qualified with multiple distribution partners 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 effectively maintain or expand our distribution channels, manage distribution relationships successfully, or market our products through distribution partners. We must continually assess, anticipate and respond to the needs of our distribution partners and their customers, and ensure that our products integrate with their solutions. Our failure to manage successfully our distribution relationships or the failure of our distribution partners to sell our products could reduce our revenues significantly. In addition, our ability to respond to the needs of our distribution partners in the future may depend on third parties producing complementary products and applications for our products. If we fail to respond to the needs of these groups, our business and financial results could be harmed.

The average selling price per port for our products has declined in the past, and we expect it to continue to decline in the future as a result of changes in product mix, competitive pricing pressures, increased sales discounts, marketing programs, new product introductions by us or our competitors, the entrance of new competitors or other factors. For example, during the second half of fiscal year 2004, we introduced and began shipping several new products that expand and extend the breadth of our product offerings. Several of these new products have different revenues, gross margin, and profitability characteristics than our traditional products. It will take some time for us to be able to determine the impact that these new products will have on our total revenues, gross margins and overall profitability. If we are unable to offset any negative impact that changes in product mix, competitive pricing pressures, increased sales discounts, enhanced marketing programs, new product introductions by us or our competitors, or other factors may have on us by increasing the number of ports shipped or reducing product manufacturing cost, our total revenues and gross margins will decline.

In addition, to maintain our gross margins we must maintain or increase the number of ports shipped, develop and introduce new products and product enhancements, and continue to reduce the manufacturing cost of our products. While we have successfully reduced the cost of manufacturing our products, we may not be able to continue to reduce cost of production at historical rates. If we fail to effectively respond to declines in average selling price per port, our gross margins will further decline. 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 occurs, we could incur losses, our operating results and gross margins would be below our expectations and the expectations of investors and stock market analysts, and our stock price would be negatively affected.

Our future success depends upon our ability to address the rapidly changing needs of our customers by developing and manufacturing high-quality, cost-effective products and product enhancements on a timely basis, and by keeping pace with technological developments and emerging industry standards. This risk could become more pronounced as the SAN market becomes more competitive and subject to increased demand for new and improved technologies. In the past, we experienced delays in product development, and such delays could occur in the future. If we are required to develop new technologies and introduce new products more rapidly than in the past, or if we have to manage shorter product cycles and transitions, our business and financial results may be harmed.

We expect to launch new products and product enhancements during the next year that will further expand the market opportunity for our products. We also expect our future revenue growth to be dependent on the success of our current line of products and our ability to rapidly develop and introduce new products and new product enhancements. If we are unable to timely introduce our new products, our business and financial results will be adversely affected.

We have invested significant resources developing products that are dependent on the adoption rate of new technologies. For example, in the fourth quarter of fiscal year 2004, we announced the future availability of 4 Gigabit switch technology. The success of these products will depend upon the rate that our OEM partners and end users adopt this new technology. If these products are not adopted or are adopted more slowly by our customers than we planned, our business could be harmed. In addition, our ability to sell 4 Gigabit products is partially dependent upon the availability of components, such as HBAs and SFPs. If sufficient supply of the required components is not available, our business could be harmed.

We currently depend on two third-party contract manufacturers, Solectron and Foxconn, to manufacture our products. Each of our products is produced by one of the two contract manufacturers. If production is disrupted at one of these manufacturers’ facilities, our ability to produce a particular product could be terminated for an indefinite period of time. Qualifying a new contract manufacturer and commencing volume production is a lengthy and expensive process. If we are required or choose to change contract manufacturers and we encounter production, administrative or logistical obstacles during the transition, we may lose revenue and injure our customer relationships. In addition, if we fail to effectively manage the production of our products through Solectron and Foxconn, or if Solectron or Foxconn experience delays, disruptions, capacity constraints, component parts shortages or quality control problems in their manufacturing operations, shipment of our products to our customers could be delayed and our competitive position and reputation could be harmed.

We provide product forecasts to our contract manufacturers and place purchase orders with them in advance of the scheduled delivery of products to our customers. In preparing sales and demand forecasts, we rely largely on input from our distribution partners. Therefore, if our distribution partners are unable to accurately forecast demand, or if we fail to effectively communicate with our distribution partners about end-user demand or other time sensitive information, sales and demand forecasts may not reflect the most accurate, up-to-date information. If these forecasts are inaccurate we may be unable to obtain from our contract manufacturers adequate manufacturing capacity to meet customers’ delivery requirements, or we may accumulate excess inventories. Furthermore, we may not be able to identify forecast discrepancies until late in our fiscal quarter. Consequently, we may not be able to make adjustments to our business model. If we are unable to obtain adequate manufacturing capacity from our contract manufacturers, if we accumulate excess inventories, or if we are unable to make necessary adjustments to our business model, our business and financial results may be negatively affected. In addition, although the purchase orders placed with our contract manufacturers are cancelable, in certain circumstances we could be required to purchase certain unused material not returnable, usable by, or sold to other customers if we cancel any of our orders. This purchase commitment exposure is particularly high in periods of product transition, such as the introduction of our 3250 and 3850 switch products, which were introduced in the third quarter of fiscal year 2004. If we are required to purchase unused material from our contract manufacturers, we would incur unanticipated expenses and our business and financial results could be negatively affected.

As part of our business strategy, we may seek to transition a greater portion of our product manufacturing to third parties that are located overseas. This kind of transition would expose us to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, delays related to the acquisition of product components and distribution of our products, and potentially adverse tax consequences, all of which could harm our business. If we are not successful in our strategy to further transition our manufacturing to overseas markets, or if we are not successful in the implementation of this overseas manufacturing, our ability to manufacture and sell our products could be substantially impaired.

In January 2005, on management’s recommendation, our Board of Directors, in consultation with KPMG LLP, our independent auditors, and our advisors, concluded that our financial statements for the fiscal years ended 2002, 2003 and the nine months ended July 31, 2004, and the interim periods contained therein, should no longer be relied upon because of an error in such financial statements as addressed in Accounting Principles Board Opinion No. 20. We restated those financial statements, which appear elsewhere in this Annual Report on Form 10-K. As a result, the SEC may choose to begin an investigation or we may be the subject to litigation, which could require significant human and financial resources which could otherwise be devoted to the operation of our business. If we are subject to an SEC investigation or litigation, we could be required to pay damages or penalties or have other remedies imposed upon us. In addition, we could become the target of costly securities litigation related to other matters in the future. Any SEC investigation or litigation could adversely affect our business, results of operations, financial position and cash flows.

Our success depends to a significant degree upon the continued contributions of key management, engineering, sales and other personnel, many of whom would be difficult to replace. Our compensation packages include equity-based incentives. Therefore, our compensation packages could be adversely affected if our stock price does not increase.

We believe our future success will also depend, in large part, upon our ability to attract and retain highly skilled managerial, engineering, sales and other personnel, and on the ability of management to operate effectively, both individually and as a group. We have experienced difficulty in hiring qualified ASIC, software, system and test, sales, marketing, key management and customer support personnel. In addition, our recent reductions in force could potentially make attracting and retaining qualified employees more difficult 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 affect 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 competitors have engaged in unfair hiring practices or that there will be inappropriate disclosure of confidential or proprietary information. We may receive such claims in the future as we seek to hire additional qualified personnel. Such claims could result in material litigation. As a result, we could incur substantial costs in defending against these claims, regardless of their merits.

Our quarterly and annual 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. Factors that may affect the predictability of our annual and quarterly results include, but are not limited to, the following:


	•	changes, disruptions or downturns in general economic conditions, particularly in the information technology industry;
	•	the timing of customer orders, product qualifications, and product introductions of our OEM partners;
	•	announcements, introductions, and transitions of new products by us and our competitors or our OEM partners;
	•	declines in average selling price per port for our products as a result of competitive pricing pressures or new product introductions by us or our competitors;
	•	the emergence of new competitors in the SAN market;
	•	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 ASICs, microprocessors, certain connectors, certain logic chips, and programmable logic devices;
	•	increases in prices of components used in the manufacture of our products;
	•	our ability to attain and maintain production volumes and quality levels;
	•	variations in the mix of our products sold and the mix of distribution channels through which they are sold;
	•	pending or threatened litigation; and
	•	new legislation and regulatory developments.

Accordingly, the results of any prior periods should not be relied upon as an indication of future performance. It is possible that in some future quarter our revenues or operating results will not meet our projections or the expectations of stock market analysts or investors, and our stock price will decline.

In the past, unfavorable or uncertain economic conditions and reduced global IT spending rates have adversely affected our operating results and have led to a decline in our growth rates. We are unable to predict changes in general economic conditions and when IT spending rates will be affected. Furthermore, even if IT spending rates are positively affected, we cannot be certain that the market for SAN solutions will be positively impacted. If there are future reductions in either domestic or international IT spending rates, or if IT spending rates do not improve, our revenues, operating results and financial condition may be adversely affected.

Our storage networking products are sold as part of storage systems and subsystems. As a result, the demand for our storage networking products has historically been affected by changes in storage requirements associated with growth related to new applications and an increase in transaction levels. Although in the past we have experienced historical growth in our business as enterprise-class customers have adopted SAN technology, demand for SAN products in the enterprise-class sector continues to be adversely affected by weak or uncertain economic conditions, and because larger businesses are focusing on more efficiently using their existing IT infrastructure rather than making new equipment purchases. If weakened IT spending levels persist, and new products improve our customers’ ability to utilize their existing storage infrastructure, the demand for SAN products may decline. If this occurs, our business and financial results will be harmed.

Many of our OEM partners experience seasonality and uneven sales patterns in their businesses. For example, some of our partners close a disproportionate percentage of their sales transactions in the last month, weeks and days of each fiscal quarter; and other partners experience spikes in sales during the fourth calendar quarter of each year. Because the majority of our sales are derived from OEM partners, if they experience seasonality, we are likely to experience similar seasonality. In addition, we have experienced quarters where uneven sales patterns of our OEM partners have resulted in a significant portion of our revenue occurring in the last month of our fiscal quarter. This exposes us to additional inventory risk as we have to order products in anticipation of expected future orders. It is difficult for us to evaluate the degree to which the seasonality and uneven sales patterns of our OEM partners or other customers may affect our business in the future because the historical growth of our business may have lessened the effect of this seasonality and uneven sales patterns on our business in the past.

We purchase certain key components used in the manufacture of our products from single or limited sources. We purchase application specific integrated circuits (ASICs) from a single source, and we purchase microprocessors, certain connectors, logic chips, power supplies and programmable logic devices from limited sources. We also license certain third-party software that is incorporated into our operating system software and other software products. If we are unable to timely purchase or license these components or experience

We use rolling forecasts 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. If we overestimate or underestimate our component requirements, or if we experience shortages, our business and financial results could be harmed.

Our ability to successfully implement our business plan, develop and offer products, and manage our business in a rapidly evolving market requires a comprehensive and effective planning and management process. We continue to change the scope of our operations domestically and internationally, including managing our headcount appropriately. During fiscal year 2003 and the second quarter of fiscal year 2004, we completed programs to restructure certain business operations that included workforce reductions and structural cost reductions. If we do not properly manage these cost and headcount reductions, our ability to generate revenue and to produce and sell products could be harmed.

Changes in our business, headcount, organizational structure 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, enterprise-wide management information and reporting systems, and procedures, and our failure to continue to train and manage our workforce worldwide, could seriously harm our business and financial results.

In the past we have vacated certain unused facilities and made various assumptions in recording facilities lease loss reserves, including the time period over which the facilities are expected to be vacant, expected sublease terms, expected sublease rates, anticipated future operating expenses, and expected future use of the facilities. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or lease termination agreements with terms as favorable as those assumed when arriving at our estimates. If actual results differ significantly from our estimates, we may be required to take additional charge and our financial results could be harmed.

We completed our acquisition of Rhapsody on January 27, 2003. As part of our business strategy, we expect to continue 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. If we buy other businesses, products or technologies in the future, we could:


	•	incur significant unplanned expenses and personnel costs;
	•	issue stock, or assume stock option plans that would dilute our current stockholders’ percentage ownership;
	•	use cash, which may result in a reduction of our liquidity;
	•	incur debt; or
	•	assume liabilities.


	•	problems integrating the purchased operations, technologies, personnel or products;
	•	unanticipated costs, litigation and other contingent liabilities;
	•	diversion of management’s attention from our core business;
	•	adverse effects on existing business relationships with suppliers and customers;
	•	risks associated with entering into markets in which we have no, or limited, prior experience;
	•	unconsummated transactions; and
	•	potential loss of our key employees or the key employees of an acquired organizations.

We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire, or to realize expected benefits of acquisitions that we may undertake in the future. If this occurs, our business and financial results may be adversely affected.

We did not attain profitability for the full fiscal years 2004 or 2003, and we may not be able to attain profitability in the future. We make our investment decisions and plan our operating expenses based in part on future revenue projections. However, our ability to accurately forecast quarterly and annual revenues is limited, as discussed above in “Our quarterly and annual revenues and operating results may fluctuate in future periods due to a number of factors, which could adversely affect the trading price of our stock.” If our projected revenues and margins do not materialize, our future profitability could be adversely affected. Moreover, we expect to incur significant costs and expenses for product development, sales, marketing and customer support, most of which 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.

We also make operating and investment decisions based on our anticipated future expansion, which may have an adverse effect on our earnings in the short term. For example, in fiscal year 2004, we purchased a 194,000 square foot building located near our San Jose headquarters. Our building purchase has adversely affected our earnings per share for our fiscal year 2004 as we recorded a $75.6 million charge related to lease termination, facilities consolidation and other associated costs (see Note 6, “Liabilities Associated with Facilities Lease Losses,” of the Notes to Consolidated Financial Statements).

During fiscal year 2003 and the second quarter of fiscal year 2004, we completed programs to restructure certain business operations that included workforce reductions and the impairment of certain assets no longer being used as a result of the restructuring programs. These actions involve numerous risks, including unanticipated costs, diversion of management’s attention from our core business and adverse effects on existing business relationships with suppliers, customers, and employees. We may not be able to achieve our planned reduction in spending related to these restructuring programs if we incur unforeseen expenses in future quarters or if we are unable to reduce expenses without jeopardizing further development, marketing and sales of our products. Additionally, it is possible that these reductions in spending may not be sufficient to achieve their intended goals. If we are unable to achieve our planned reduction in spending or if our current reductions in spending are insufficient, we may be required to undertake additional restructuring activities that may involve our personnel, real estate, fixed assets, marketing programs and research and development programs.

FASB’s recent change to mandate the expensing of stock options, would require us to record charges to earnings for employee stock option grants and will adversely affect our financial results. In addition, the FASB requires certain valuation models to estimate the fair value of employee stock options. These models, including the Black-Scholes option-pricing model, use varying methods, inputs and assumptions selected across companies. If another party asserts that the fair value of our employee stock options are misstated, securities

class action litigation could be brought against us or the market price of our common stock could decline or both could occur. As a result of these changes, we could incur losses and our operating results and gross margins may be below our expectations and those of investors and stock market analysts.

A portion of our outstanding stock options are subject to variable accounting under Accounting Principles Board Opinion No. 25. Under variable accounting we are required to remeasure the value of the options, and the corresponding compensation expense, at the end of each reporting period until the option is exercised, cancelled, or expires unexercised. As a result, the stock-based compensation recognized in any given period can vary substantially due to changes in the market value of our common stock. In order to illustrate the volatility associated with stock price movements we offer the following example. If the market value of our common stock at the end of the first quarter of fiscal year 2005 is $7, we will record additional compensation expense in that quarter of approximately $0.5 million. If, however the market value of our common stock at the end of the first quarter of fiscal year 2005 is $9, the compensation expense recorded will increase to $4.0 million. We are unable to predict the future market value of our common stock and therefore are unable to predict the compensation expense that we will record in future periods.

International political instability, evidenced by the occurrence and threat of terrorist attacks, enhanced national security measures and military action and armed conflicts, may halt or hinder our ability to do business and may increase our costs. In addition, concerns about other international crises, such as the spread of the SARS and West Nile viruses, may have an adverse effect upon the world economy and could adversely affect our business operations or the operations of our OEM partners, contract manufacturers and suppliers. This political instability and concerns about other international crises may, for example:


	•	negatively affect the reliability and cost of transportation;
	•	negatively affect the desire and ability of our employees and customers to travel;
	•	disrupt the production capabilities of our OEM partners, contract manufacturers and suppliers;
	•	adversely affect our ability to obtain adequate insurance at reasonable rates; and
	•	require us to take extra security precautions for our operations.

Furthermore, 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.

We plan to continue to expand our international operations and sales activities. 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 design, manufacture, sell, and support our products;
	•	increased complexity and costs of managing international operations;
	•	increased exposure to foreign currency exchange rate fluctuations;
	•	commercial laws and business practices that favor local competition;
	•	multiple, potentially conflicting, and changing governmental laws and regulations, including differing labor and employment laws;
	•	longer sales cycles and manufacturing lead times;
	•	difficulties in collecting accounts receivable;
	•	reduced or limited protections of intellectual property rights;


	•	more complicated logistics and distribution arrangements; and
	•	political and economic instability.

To date, no material amount of our international revenues and costs of revenues have been denominated in foreign currencies. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products more expensive and, thus, not competitively priced in foreign markets. Additionally, a decrease in the value of the United States dollar relative to foreign currencies could increase our operating costs in foreign locations. In the future, a larger 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.

Networking products frequently contain undetected software or hardware errors, or “bugs,” 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 another vendor’s SAN products, or ours, could delay or prevent the development of the SAN market.

We rely on a combination of patent, copyright, trademark, and trade secret laws, confidentiality agreements, and other contractual 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 technology, software, documentation, and other confidential information. These measures may not preclude the disclosure of our confidential or propriety information, or prevent 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 and we have been a party to such litigation. Moreover, we are currently a party to an intellectual property-related lawsuit, and may be a party to litigation in the future, to protect our intellectual property or as a result of an alleged infringement of the intellectual property of others. These claims and any resulting lawsuit, including the current 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’s 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 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 technology that is the subject of an infringement claim.

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

We are evaluating our internal controls in order to allow management to report on, and our independent auditors to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. We may encounter unexpected delays in implementing the requirements relating to internal controls, therefore, we cannot be certain about the timing of completion of our evaluation, testing and remediation actions or the impact that these activities will have on our operations since there is no precedent available by which to measure the adequacy of our compliance. We also expect to incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required in order to comply with the management certification and auditor attestation requirements. If we are not able to timely comply with the requirements set forth in Section 404, we might be subject to sanctions or investigation by regulatory authorities. Any such action could adversely affect our business and financial results. The requirement to comply with Section 404 of the Sarbanes-Oxley Act of 2002 will become effective for our fiscal year ending October 29, 2005.

In addition, in our system of internal controls we may rely on the internal controls of third parties including, but not limited to, payroll service providers, financial institutions, contract manufacturers, master resellers and certain OEM customers. In our evaluation of our internal controls, we will consider the implication of our reliance on the internal controls of third parties. Until we have completed our evaluation, we are unable to determine the extent of our reliance on those controls, the extent and nature of the testing of those controls, and remediation actions necessary where that reliance cannot be adequately evaluated and tested.

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 standard specifications. Our products encompass only a part of the entire SAN solution utilized by the end-user, and we depend on the companies that provide other components of the SAN solution, 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 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, and our agreements with certain of our customers require that we give prior notice of a change of control and grant certain manufacturing rights following a change of control. In addition, we currently have in place a stockholder rights plan. Furthermore, any of these things could prevent or delay a change in control of Brocade, which could hinder stockholders’ ability to receive a premium for our stock.

Also, if we incur a “fundamental change” as defined in our convertible subordinated debt, we could be required to repurchase all of our outstanding notes. A “fundamental change” is generally defined as any transfer or event in which all or substantially all of our common stock is exchanged for, converted into or acquired for, or constitutes solely the right to receive consideration which is not all or substantially all common stock that is listed on a United States national securities exchange or the Nasdaq National Market or similar automated quotation system.

The market price of our common stock has experienced significant volatility in the past and will likely 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 and ratings by securities analysts;
	•	changes in market valuations of other technology companies;
	•	announcements of financial results by us or other technology companies;
	•	announcements by us, our competitors, customers, or similar businesses of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
	•	losses of major OEM partners;
	•	additions or departures of key personnel;
	•	sales by us of common stock or convertible securities;
	•	incurring additional debt; and
	•	other risk factors detailed in this section.

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 how the business performs.

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. In the event of a major earthquake, we could experience business interruptions, destruction of facilities and loss of life. We do not carry earthquake insurance and have not set aside funds or reserves to cover such potential earthquake-related losses.

Our operations are also subject to business interruptions that may occur as a result of a change or upgrade in our information technology systems, consolidation of our business operations, or a transition to new facilities in the United States of America or abroad. We do not carry sufficient insurance to mitigate the effect of potential material business interruptions. Consequently, should a material business interruption occur, our business and financial results could be seriously harmed.

Our principal administrative, sales and marketing, education, customer support, and research and development facilities are located in approximately 495,000 square feet of office space in San Jose, California. We currently occupy approximately 405,000 square feet of our total office space. Approximately 301,000 square feet of our office space is leased, and the remaining 194,000 is owned by Brocade. The leases on our leased office space will expire in August 2010. In addition to the San Jose facilities, we also lease sales, marketing, and administrative office space in various locations throughout the world.

From time to time, claims are made against us in the ordinary course of our business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse affect on our results of operations for that period or future periods.

On July 20, 2001, the first of a number of putative class actions for violations of the federal securities laws was filed in the United States District Court for the Southern District of New York against Brocade, certain of its officers and directors, and certain of the underwriters for Brocade’s initial public offering of securities. A consolidated amended class action captioned In Re Brocade Communications Systems, Inc. Initial Public Offering Securities Litigation was filed on April 19, 2002. The complaint generally alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in Brocade’s initial public offering and seeks unspecified damages on behalf of a purported class of purchasers of common stock from May 24, 1999 to December 6, 2000. The lawsuit against Brocade is being coordinated for pretrial proceedings with a number of other pending litigations challenging underwriter practices in over 300 cases as In Re Initial Public Offering Securities Litigation, 21 MC 92(SAS). In October 2002, the individual defendants were dismissed without prejudice from the action, pursuant to a tolling agreement. On February 19, 2003, the Court issued an Opinion and Order dismissing all of the plaintiffs’ claims against Brocade. In July 2004, a stipulation of settlement for the claims against the issuer defendants, including Brocade, was submitted to the Court for approval. The settlement is subject to a number of conditions, including approval by the Court.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

Our 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 the stock. See “Item 6 — Selected Financial Data” for the high and low bid prices per share of our common stock as reported on the Nasdaq National Market, for the periods indicated.

According to records of our transfer agent, we had 861 stockholders of record at December 17, 2004 and we believe there are a substantially greater number of beneficial holders. 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. See Note 11, “Stockholders’ Equity,” of the Notes to Consolidated Financial Statements for equity compensation plan information.

The following table summarizes employee stock repurchase activity for the three months ended October 30, 2004 (in thousands, except per share amounts):


(1)	The total number of shares repurchased include those shares of Brocade common stock that employees deliver back to Brocade to satisfy tax-withholding obligations at the settlement of restricted stock exercises, and upon the termination of an employee, the forfeiture of either restricted shares or unvested common stock as a result of early exercises. As of October 30, 2004, approximately 265,000 shares are subject to repurchase by Brocade.

(2)	In August 2004, our board of directors approved a share repurchase program for up to $100.0 million of our common stock. The purchases may be made, from time to time, in the open market and will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. To date, no shares had been purchased under this program.

The following selected financial data should be read in conjunction with our consolidated 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 on Form 10-K. On January 24, 2005, Brocade announced that its Audit Committee completed an internal review regarding Brocade’s stock option granting process. As a result of the review, Brocade recorded additional stock-based compensation charges and a valuation allowance against deferred tax assets related to previously recorded stock option tax benefits. In addition, the selected financial data has been restated, as indicated, as a result of this review (see Note 3, “Restatement of Consolidated Financial Statements,” and Note 19, “Selected Quarterly Information (Unaudited),” of the Notes to Consolidated Financial Statements).

This selected quarterly information has been restated for the first three fiscal quarters in 2004 from previously reported information filed on Form 10-Q, and for all quarters of fiscal year 2003 from previously reported information filed on Form 10-Q and Form 10-K, as a result of the restatement of our financial results discussed in this Annual Report on Form 10-K.

The consolidated statement of operations data set forth below for each of the years in the three-year period ended October 30, 2004, the consolidated balance sheet data as of October 30, 2004 and October 25, 2003, are derived from, and qualified by reference to, the audited financial statements appearing elsewhere in this Annual Report on Form 10-K. The balance sheet data as of October 26, 2002 is derived from audited financial statements not included herein. The statement of operations data for the years ended October 27, 2001 and October 28, 2000, and the balance sheet data as of October 27, 2001 and October 28, 2000, are derived from unaudited financial statements not included herein and have also been adjusted to reflect the results of the audit committee review. All references to earnings per share and the number of common shares have been retroactively restated to reflect three two-for-one stock splits effected on December 3, 1999, March 15, 2000, and December 22, 2000, respectively.

We have not amended our annual reports on Form 10-K or quarterly reports on Form 10-Q for the quarterly periods affected by the restatement. The information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such reports should no longer be relied upon.

Note: On February 2, 2000, we changed our fiscal year end to the last Saturday in October, beginning with the fiscal year ended October 28, 2000. This change did not have a material impact on our financial position or results of operations. We report our fiscal year on a 52/53-week period ending on the last Saturday in October of each year. Accordingly, the fiscal year ends for fiscal years 2004, 2003, and 2002 were October 30, 25, and 26, respectively. As is customary for companies that use the 52/53-week convention, every 5th year contains a 53-week fiscal year. As a result, our fiscal year 2004 was a 53-week fiscal year. Also as a result, our second quarter of fiscal year 2004 included one extra week and was 14 weeks in length. Fiscal years 2003 and 2002 were both 52-week fiscal years.


(1)	See Note 3, “Restatement of Consolidated Financial Statements,” and Note 19, “Selected Quarterly Information (Unaudited),” of the Notes to Consolidated Financial Statements.

(2)	The fiscal year ended October 30, 2004 includes the impact of restructuring costs of $9.0 million related to a restructuring plan implemented during the three months ended May 1, 2004 (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements). The fiscal year ended October 30, 2004 also includes a net lease termination charge and other of $75.6 million. During the three

months ended January 24, 2004, we purchased a previously leased building located near our San Jose headquarters for $106.8 million in cash. The $106.8 million consisted of $30.0 million for the purchase of land and a building and $76.8 million for a lease termination fee (see Note 6, “Liabilities Associated with Facilities Lease Losses,” of the Notes to Consolidated Financial Statements). In addition, in the fiscal year ended October 30, 2004 we recorded a $6.9 million charge in settlement of a claim relating to our acquisition of Rhapsody and recorded a total of $5.6 million gain on repurchases of convertible subordinated debt.


(3)	The fiscal year ended October 25, 2003 includes the impact of our acquisition of Rhapsody, which was completed in the second quarter of fiscal year 2003. In connection with our acquisition of Rhapsody, we recorded in-process research and development expense of $134.9 million (see Note 4, “Acquisition of Rhapsody Networks, Inc.,” of the Notes to Consolidated Financial Statements). The fiscal year ended October 25, 2003 also includes restructuring costs of $20.8 million (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements), gain on repurchases of convertible subordinated debt of $11.1 million, and net gains on the disposition of non-marketable private strategic investments of $3.6 million.

(4)	The fiscal year ended October 27, 2001 includes the impact of the following items recorded during the fourth quarter ended October 27, 2001: charges to cost of revenues of $7.7 million primarily associated with the accrual of purchase commitments for excess inventory components related to a transition of product offerings from 1 to 2 Gigabit per second (Gbit/sec) technology; charges included in operating expenses of $45.5 million related to estimated facilities lease losses and the impairment of certain related leasehold improvements following a comprehensive evaluation of real estate facility requirements; charges included in operating expenses of $4.4 million related to the impairment of equipment no longer used in research and development and sales and marketing efforts associated with a transition of product offerings from 1 to 2 Gbit/sec technology; and losses on investments of $19.5 million related to other-than-temporary declines in the fair value of private minority equity investments in non-publicly traded companies as a result of significant deterioration in the private equity markets, and related adjustment for income tax provisions.

(5)	The first quarter of fiscal year 2004 includes net lease termination charge and other of $75.6 million. During the three months ended January 24, 2004, we purchased a previously leased building located near our San Jose headquarters for $106.8 million in cash. The $106.8 million consisted of $30.0 million for the purchase of land and a building and $76.8 million for a lease termination fee (see Note 6, “Liabilities Associated with Facilities Lease Losses,” of the Notes to Consolidated Financial Statements). The first quarter of fiscal year 2004 also includes a reduction of $0.4 million to our previously recorded restructuring costs and gain on repurchases of convertible subordinated debt of $0.5 million.


	The first quarter of fiscal year 2003 includes restructuring costs of $10.1 million related to a company-wide workforce reduction of approximately 12 percent, consolidation of excess facilities, and the restructuring of certain business functions (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements).

(6)

The second quarter of fiscal year 2004 includes the impact of restructuring costs of $10.5 million related to a restructuring plan implemented during the three months ended May 1, 2004 (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements). In addition, in the second quarter of fiscal year 2004 we recorded a $6.9 million charge in settlement of a claim relating to our acquisition of Rhapsody.

The second quarter of fiscal year 2003 includes restructuring costs of $10.9 million related to a workforce reduction of approximately nine percent, primarily in the sales, marketing, and engineering organizations, and the impairment of certain assets associated with reorganized or eliminated functions (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements). In addition, in the second quarter of fiscal year 2003, in connection with our acquisition of Rhapsody, we recorded in-process research and development expense of $134.9 million (see Note 4, “Acquisition of Rhapsody Networks, Inc.,” of the Notes to Consolidated Financial Statements).


(7)	The third quarter of fiscal year 2004 includes a gain on repurchases of convertible subordinated debt of $3.5 million.

(8)	The fourth quarter of fiscal year 2004 includes a reduction of $1.1 million to our fiscal year 2004 restructuring costs. The fourth quarter of fiscal year 2004 also includes a gain on repurchases of convertible subordinated debt of $1.6 million.


	The fourth quarter of fiscal year 2003 includes a reduction of $0.2 million to our restructuring costs. The fourth quarter of fiscal year 2003 also includes gain on repurchases of convertible subordinated debt of $11.1 million, and gain on the disposition of private strategic investments of $3.1 million.

(9)

The unaudited selected consolidated financial data for fiscal years 2001 and 2000 have been revised to reflect adjustments related to the restatement described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restatement of Consolidated Financial Statements” and Note 3 of the Notes to Consolidated Financial Statements. As a result of the adjustments, the Company reduced previously reported net income by approximately $303 million (consisting of a reduction to net income in years 1999 and 2000 of $15 million and $1,018 million, respectively, and an increase to net income in 2001 of $731 million) relating solely to stock-based compensation and associated income tax adjustments. In the accompanying audited financial statements for the year ended October 26, 2002 these adjustments are reflected as opening adjustments to the Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss).

On January 24, 2005, Brocade announced that its Audit Committee completed its previously announced internal review. As a result of certain findings of the review, Brocade determined that certain of its historical financial statements required restatement.

Specifically, Brocade determined that the restatement was required because it incorrectly accounted for: (A) grants that were made to new hires on their offer acceptance date, rather than the date of their commencement of employment, during the period May 1999 to July 2000; (B) grants that were made to persons engaged on a part-time basis prior to their new hire full-time employment during the period August 2000 to October 2002; and (C) grants where there was insufficient basis to rely on Brocade’s process and related documentation to support recorded measurement dates used to account for certain stock options granted prior to August 2003. Therefore, Brocade recorded additional stock-based compensation charges relating to many of its stock option grants made during the period 1999 through the third quarter of fiscal year 2003. In addition, Brocade recorded a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits.

These charges affected the previously filed financial statements for fiscal years ended October 25, 2003 and October 26, 2002, including the corresponding interim periods for fiscal years 2003 and 2002, and the interim periods ended January 24, 2004, May 1, 2004 and July 31, 2004. Brocade also recorded stock-based compensation and associated income tax adjustments to previously announced financial results for the fourth quarter and year ended October 30, 2004. These adjustments relate solely to matters pertaining to stock options granted prior to August 2003.

The foregoing restatement adjustments did not affect our reported cash, cash equivalents and short-term investments balance as of October 30, 2004 and October 25, 2003.

Our fiscal year is the 52 or 53 weeks ending on the last Saturday in October. As is customary for companies that use the 52/53-week convention, every fifth year contains a 53-week year. Fiscal year 2004 was a 53-week fiscal year. The second quarter of fiscal year 2004 consisted of 14 weeks, which is one week more

than a typical quarter. Fiscal years 2003 and 2002 were both 52-week fiscal years. The following table sets forth certain restated financial data for the periods indicated as a percentage of total net revenues:


(1)	See Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements.

Revenues. Our revenues are derived primarily from sales of our SilkWorm family of products. Our SilkWorm products, which range in size from 8 ports to 128 ports, connect servers and storage devices creating a SAN. Net revenues for the year ended October 30, 2004 were $596.3 million, an increase of 14 percent compared with net revenues of $525.3 million for the year ended October 25, 2003. For the year ended October 30, 2004, the increase in net revenues reflected a 42 percent increase in the number of ports shipped, partially offset by a 22 percent decline in average selling price per port. Net revenues for the year ended October 25, 2003 represented a decrease of 7 percent compared with net revenues of $562.4 million for the year ended October 26, 2002. For the year ended October 25, 2003, the decrease in net revenues reflected a 15 percent increase in the number of ports shipped, offset by a 19 percent decline in average selling price per port. The declines in average selling prices are the result of increased competition. We believe the increase in the number of ports shipped reflects higher demand for our products as end-users continue to consolidate storage and servers infrastructures using SANS, expand SANs to support more applications, and deploy SANs in new environments. We also believe some of the increase in ports shipped reflects the initial stocking of new products by our OEM customers.

We expect the number of ports shipped to fluctuate depending on the demand for our existing and recently introduced products as well as the timing of product transitions by our OEM customers. We also expect that average selling price per port will likely decline at rates consistent with the rates we experienced in

the year ended October 30, 2004, unless they are adversely affected by accelerated pricing pressures, new product introductions by us or our competitors, or other factors that may be beyond our control.

Historically, domestic revenues have been between 60 percent and 75 percent of total revenues. Domestic and international revenues were approximately 65 percent and 35 percent of our total revenues, respectively, for the year ended October 30, 2004. For the year ended October 25, 2003, domestic and international revenues were approximately 67 percent and 33 percent of our total revenues, respectively, and for the year ended October 26, 2002, domestic and international revenues were approximately 70 percent and 30 percent of our total revenues, respectively. Revenues are attributed to geographic areas based on the location of the customer to which our products are shipped. International revenues primarily consist of sales to customers in Western Europe and the greater Asia Pacific region. For the years ended October 30, 2004 and October 25, 2003, international revenues have increased primarily as a result of faster growth in the Asia Pacific region relative to North America and Europe. However, certain OEM customers take possession of our products domestically and then distribute these products to their international customers. Because we account for all of those OEM revenues as domestic revenues, we cannot be certain of the extent to which our domestic and international revenue mix is impacted by the practices of our OEM customers.

A significant portion of our revenue is concentrated among a relatively small number of OEM customers. For the year ended October 30, 2004, three customers, EMC, HP and IBM, each represented greater than ten percent of our total revenues for a combined total of 70 percent of our total revenues. For the years ended October 25, 2003 and October 26, 2002, the same three customers each represented greater than ten percent of our total revenues for combined totals of 67 percent and 62 percent of our total revenues, respectively. We expect that a significant portion of our future revenues will continue to come from sales of products to a relatively small number of OEM customers. Therefore, the loss of, or a decrease in the level of sales to, or a change in the ordering pattern of, any one of these customers could seriously harm our financial condition and results of operations.

Gross margin. Gross margin for the year ended October 30, 2004 was 56.2 percent compared to 54.1 percent and 60.9 percent for the years ended October 25, 2003 and October 26, 2002, respectively. Cost of goods sold consists of product costs, which are variable, and manufacturing operations costs, which are generally fixed. For the year ended October 30, 2004, product costs relative to net revenues decreased by 0.9% as compared to the year ended October 25, 2003 due to decreases in component and manufacturing costs. Manufacturing operations costs relative to net revenues decreased by 1.3% principally due to increases in net revenues and savings from the restructuring programs we implemented during the second quarter of fiscal year 2004 (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements attached hereto). In addition, gross margin decreased by 0.1% due to higher stock compensation expense in the year ended October 30, 2004 primarily as a result of changes in the market value of common stock (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto). For the year ended October 25, 2003, the reduction in gross margins was principally the result of increased product costs and manufacturing operations costs relative to net revenues. In addition, gross margin was further decreased by 1.2% due to stock compensation expense adjustment in the year ended October 26, 2002 as a result of changes in the market value of common stock and additional stock options granted for the period (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto). The increase in product costs relative to net revenues was primarily the result of declines in average unit selling prices of our products, partially offset by lower component and manufacturing costs. The increase in manufacturing operations costs was a result of increased production volume and a greater installed base, combined with the costs associated with the migration of manufacturing operations to Asia.

Gross margin is primarily affected by average selling price per port, number of ports shipped, and cost of goods sold. We expect that average selling price per port for our products will continue to decline at rates consistent with the rates we experienced in the year ended October 30, 2004, unless they are further affected by accelerated pricing pressures, new product introductions by us or our competitors, or other factors that may be beyond our control. We believe that we have the ability to partially mitigate the effect of declines in average selling price per port on gross margins through our product and manufacturing operations cost reductions.

During fiscal year 2003, the average selling price per port began to decline at a faster pace than we experienced in fiscal year 2002. If this dynamic reoccurs, we may not be able to reduce our costs fast enough to prevent a decline in our gross margins. In addition, we must also maintain or increase current volume of ports shipped to maintain our current gross margins. If we are unable to offset future reductions of average selling price per port with reductions in product and manufacturing operations costs, or if as a result of future reductions in average selling price per port our revenues do not grow, our gross margins would be negatively affected.

We recently introduced several new products and expect to introduce additional new products 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 provide sufficient supplies of new products to meet customer demands. Our gross margins may be adversely affected if we fail to successfully manage the introductions of these new products.

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

For the year ended October 30, 2004, R&D expenses increased by $3.8 million, or three percent, to $149.5 million, compared with $145.7 million for the year ended October 25, 2003. This increase is primarily due to $10.2 million increase in expenses related to consulting and new product development spending, including costs associated with new SilkWorm products we introduced during the second half of fiscal year 2004, offset by a $4.7 million decrease in salaries and related expenses and a $2.9 million decrease in facilities expenses due to savings from our building purchase. The decrease in salaries and related expenses reflects the effects of our recent restructuring programs, partially offset by incremental expenses related to the extra week in the second quarter of fiscal year 2004. In addition, R&D expenses increased by $0.4 million due to higher stock compensation expense in the year ended October 30, 2004 primarily as a result of changes in the market value of common stock (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto).

For the year ended October 25, 2003, R&D expenses increased by $32.5 million, or 29 percent, compared with $113.2 million for the year ended October 26, 2002. R&D expenses increased by $19.7 million due to changes in stock compensation expense primarily as a result of changes in the market value of common stock and additional stock options granted for the period (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto). In addition, the increase in R&D expense is also due to continued investment in research and development associated with new products introduced in fiscal year 2004 as well as the incremental spending associated with product development related to our acquisition of Rhapsody.

Excluding any stock option compensation related charges, which will vary depending on the changes in the market value of our common stock, we currently anticipate that R&D expenses in fiscal year 2005 will remain consistent with fiscal year 2004 in absolute dollars.

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

For the year ended October 30, 2004, sales and marketing expenses decreased by $13.8 million, or 12 percent, to $101.3 million, compared with $115.1 million for the year ended October 25, 2003. This decrease is primarily due to a $9.0 million decrease in travel and marketing program expenses resulting from various cost-cutting actions and a $5.5 million decrease in salaries and related expenses, which reflects the effect of headcount reductions that occurred in the fiscal years 2004 and 2003, partially offset by incremental expenses related to the extra week in the second quarter of fiscal year 2004. In addition, sales and marketing expenses increased by $0.2 million due to higher stock compensation expense in the year ended October 30,

2004 primarily as a result of changes in the market value of common stock (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto).

For the year ended October 25, 2003, sales and marketing expenses increased by $7.2 million, or seven percent, compared with $107.9 million for the year ended October 26, 2002. Sales and marketing expenses increased by $10.5 million due to changes in stock compensation expense primarily as a result of changes in the market value of common stock and additional stock options granted for the period (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto). In addition, the increase in sales and marketing expenses was due to increased salaries and related expenses, offset by decreased commissions and decreased travel and marketing program expenses resulting from various cost-cutting actions.

Excluding any stock option compensation related charges, which will vary depending on the changes in the market value of our common stock, we currently anticipate that sales and marketing expenses in fiscal year 2005 will decrease in absolute dollars as a result of savings related to the restructuring program we undertook in fiscal year 2004.

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

G&A expenses for the year ended October 30, 2004 increased by $3.1 million, or 15 percent, to $24.4 million, compared with $21.3 million for the year ended October 25, 2003. For the year ended October 25, 2003, G&A expenses increased by $13.9 million, or 187 percent, compared with $7.4 million for the year ended October 26, 2002. The increase in G&A for both fiscal years 2004 and 2003 is primarily due to increased salaries and related expenses as a result of an increase in personnel. In addition, in fiscal year 2004 we incurred incremental expenses related to the extra week in the second quarter of fiscal year 2004, as well as expenses related to the Section 404 of the Sarbanes-Oxley Act of 2002. Further, for the year ended October 30, 2004 G&A expenses increased by $0.3 million due to higher stock compensation expense in the year ended October 30, 2004 primarily as a result of changes in the market value of common stock (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto). For the year ended October 25, 2003 G&A expenses increased by $11.4 million due to changes in stock compensation expense primarily as a result of changes in the market value of common stock and additional stock options granted for the period (see Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements attached hereto).

Excluding any stock option compensation related charges, which will vary depending on the changes in the market value of our common stock, we currently anticipate that G&A expenses in fiscal year 2005 will increase in absolute dollars resulting from the cost related to our recent internal review, as described above, and expenses associated with the Sarbanes-Oxley Section 404 compliance.

Settlement of an acquisition-related claim. In the second quarter of fiscal year 2004, we recorded a $6.9 million charge in settlement of a claim relating to our acquisition of Rhapsody. Under the terms of the settlement, in the third quarter of fiscal year 2004 we issued 1.3 million shares of common stock to the former Rhapsody shareholders in exchange for a release of claims.

Amortization of deferred stock compensation. Amortization of deferred stock compensation decreased to $0.5 million for the year ended October 30, 2004, compared with $0.6 million, and $1.0 million for the years ended October 25, 2003, and October 26, 2002, respectively. In the second quarter of fiscal 2003, we recorded $1.7 million of deferred stock compensation in connection with our acquisition of Rhapsody. The $1.7 million of deferred stock compensation represented the intrinsic value of unvested restricted common stock and stock options assumed in the transaction, and is being amortized over the respective remaining service periods on a straight-line basis (see Note 4, “Acquisition of Rhapsody Networks, Inc.,” of the Notes to Consolidated

In addition to the deferred stock compensation connected with our acquisition of Rhapsody, we have recorded deferred stock compensation arising from stock option grants subject to variable accounting and restricted stock award grants to certain employees. Compensation expense resulting from these non-acquisition related grants are included in R&D, sales and marketing, or G&A, based on the department of the employee receiving the award. Accordingly, amortization of deferred stock compensation does not include the compensation expense arising from these awards.

Total stock-based compensation expense recognized for the years ended October 30, 2004, and October 25, 2003 was $3.3 million and $1.5 million, respectively. For the year ended October 26, 2002, we recognized a $46.5 million net reversal of previously recognized stock-based compensation expense. Stock-based compensation expense related to stock options subject to variable accounting will vary significantly as a result of future changes in the market value of our common stock. The increase in stock-based compensation during fiscal year 2004 as compared to fiscal year 2003 is due to an increase in the market value of our common stock during fiscal year 2004. The increase in stock-based compensation during fiscal year 2003 as compared to fiscal year 2002 is due to a smaller decline in the market value of our common stock during fiscal year 2003 as compared to fiscal year 2002.

Restructuring Costs. Restructuring costs for the years ended October 30, 2004, October 25, 2003, and October 26, 2002 were $9.0 million, $20.8 million, and none, respectively. For the year ended October 30, 2004, restructuring costs consist of $10.5 million related to a restructuring plan implemented during the three months ended May 1, 2004, and a reduction of $1.5 million to restructuring costs related to our previously recorded restructuring liabilities, primarily due to lower than expected costs related to outplacement costs and severance (see Note 5, “Restructuring Costs,” of the Notes to Consolidated Financial Statements). As a result of this restructuring, we expect to realize savings in future quarters as a result of changes in headcount and business structure. For the year ended October 25, 2003, restructuring costs consisted of $10.9 million related to a program to restructure and reorganize certain business operations during the three months ended April 26, 2003, and $9.9 million related to a company-wide restructuring program implemented during the three months ended January 25, 2003.

In-process research and development. On January 27, 2003, we completed our acquisition of Rhapsody, a provider of next-generation intelligent switching platforms. As of the acquisition date, Rhapsody was a development stage company that had no recognized revenue and a core technology that required substantial additional resources to bring it to technological feasibility. Therefore, we accounted for the acquisition as an asset purchase and allocated the total purchase price of $138.5 million to the assets acquired, liabilities assumed, and acquired in-process R&D based on their respective fair values. We allocated the excess of purchase price over the fair value of net assets received to acquired in-process R&D and acquired non-monetary assets on a pro-rata basis. We expensed the acquired in-process R&D of $134.9 million during the three months ended April 26, 2003 because it had not yet reached technological feasibility and had no alternative future use (see Note 4, “Acquisition of Rhapsody Networks, Inc.,” of the Notes to Consolidated Financial Statements). We did not record any acquired in-process R&D in any of the other periods presented. We completed the development of this technology in fiscal year 2004.

Lease termination charge and other, net. Lease termination charge and other, net for the year ended October 30, 2004 was $75.6 million. During the three months ended January 24, 2004, we purchased a previously leased building located near our San Jose headquarters for $106.8 million. Of the $106.8 million, $30.0 million was allocated to the purchase of land and building and $76.8 million was considered a lease termination fee (see Note 6, “Liabilities Associated with Facilities Lease Losses and Asset Impairment Charges,” of the Notes to Consolidated Financial Statements). No lease termination charge was recorded in any of the other periods presented.

Interest and other income, net. Interest and other income, net increased slightly to $18.8 million for the year ended October 30, 2004 from $18.4 million for the year ended October 25, 2003, primarily as a result of higher average rates of return due to investment mix and increase in interest rates, offset by decreased average

cash, cash equivalent and investment balances. Net interest and other income was $22.7 million for the year ended October 26, 2002, $4.3 million higher than in the year ended October 25, 2003. The decrease in fiscal year 2003 as compared to fiscal year 2002 was primarily the result of declining interest rates.

Interest expense. Interest expense was $10.7 million, $13.3 million and $11.4 million for the years ended October 30, 2004, October 25, 2003 and October 26, 2002, respectively. Interest expense primarily represents the interest cost associated with our convertible subordinated debt. The decrease in interest expense for the year ended October 30, 2004, compared with the year ended October 25, 2003 was primarily the result of the repurchases of our convertible subordinated debt, resulting in a lower debt outstanding as of October 30, 2004. The increase in interest expense for the year ended October 25, 2003, compared with the year ended October 26, 2002, was primarily due to the inclusion of a full year of interest expense related to our convertible subordinated debt during fiscal year 2003, partially offset by reduction of interest expense due to repurchases of convertible subordinated debt. For the year ended October 26, 2002, interest expense related to our convertible subordinated debt, which was outstanding for ten months during the period. As of October 30, 2004 and October 25, 2003, the outstanding balance of our convertible subordinated debt was $352.3 million and $443.0 million, respectively (see Note 9, “Convertible Subordinated Debt,” of the Notes to Consolidated Financial Statements).

Gain on repurchases of convertible subordinated debt. During the years ended October 30, 2004 and October 25, 2003, we repurchased $90.7 million and $107.1 million in face value of our convertible subordinated debt, respectively, on the open market. For the year ended October 30, 2004, we paid an average of $0.93 for each dollar of face value for an aggregate purchase price of $84.1 million, which resulted in a pre-tax gain of $5.6 million. For the year ended October 25, 2003, we paid an average of $0.88 for each dollar of face value for an aggregate purchase price of $94.4 million, which resulted in a pre-tax gain of $11.1 million. We did not repurchase any of our convertible subordinated debt during the year ended October 26, 2002 (see Note 9, “Convertible Subordinated Debt,” of the Notes to Consolidated Financial Statements).

Gain (loss) on investments, net. For the year ended October 30, 2004, net gain on investments was $0.4 million consisting of gains on the disposition of previously written down non-marketable private strategic investments. For the year ended October 25, 2003, net gain on investments of $3.6 million consisting of gains on the disposition of previously written down non-marketable private strategic investments of $5.8 million, offset by an impairment charge of $2.2 million that resulted from an other-than-temporary decline in the estimated fair value of a minority equity investment in a different non-publicly traded company. Our net gain on investments for the year ended October 26, 2002 was $7.1 million, resulting from the sale of United States government agency debt securities. As of October 30, 2004 and October 25, 2003, we had net unrealized holding gains of $0.1 million and $8.8 million, respectively, associated with our remaining investment portfolio. The carrying value of our equity investments in non-publicly traded companies at October 30, 2004 and October 25, 2003 was $0.5 million and zero, respectively.

Provision for income taxes. Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from variable stock option expenses, net operating losses, tax carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In determining future taxable income, we are responsible for assumptions utilized including the amount of state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgments about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. Cumulative losses incurred in the most recent four of the last six fiscal years represented sufficient

negative evidence to require a full valuation allowance. As of October 30, 2004, we had established a valuation allowance against the deferred tax assets, which we intend to maintain until sufficient positive evidence exists to support reversal of the valuation allowance. Future reversals or increases to our valuation allowance could have a significant impact on our future earnings.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

In the year ended October 30, 2004, we have recorded income tax provision of $14.1 million, compared to income tax provision of $11.9 million and $5.3 million in the years ended October 25, 2003 and October 26, 2002, respectively. Our income tax provision is primarily for our international operations. We expect to continue to record an income tax provision for our international operations in the future. Since the Company has a full valuation allowance against deferred tax assets which result from U.S. operations, U.S. income tax expense or benefits are offset by releasing or increasing, respectively, the valuation allowance. To the extent that international revenues and earnings differ from those historically achieved, a factor largely influenced by the buying behavior of our OEM partners, or unfavorable changes in tax laws and regulations occur, our income tax provision could change.

We consider the operating earnings of some of our non-United States subsidiaries to be indefinitely invested outside the United States. No provision has been made for the United States federal and state, or foreign taxes that may result from future remittances of undistributed earnings of foreign subsidiaries, the cumulative amount of which is approximately $90.3 million as of October 30, 2004. If we repatriate foreign earnings, we will have to adjust the income tax provision in the provision in the period in which the decision to repatriate earnings of foreign subsidiaries is made. We are currently evaluating the impact of the one-time favorable foreign dividend provisions recently enacted as part of the American Jobs Creation Act of 2004, and may decide to repatriate some level of earnings of our foreign subsidiaries in the future.

Cash, cash equivalents, short-term investments and long-term investments were $736.9 million as of October 30, 2004, a decrease of $98.7 million over the prior year total of $835.6 million. For the year ended October 30, 2004, we generated $42.0 million in cash from operating activities. Cash from operations significantly exceeded net loss for the year ended October 30, 2004 due to non-cash expense items, primarily related to depreciation and amortization and loss on disposal of property and equipment, and an increase in deferred revenue. Cash from operations was partially reduced by lease termination fees associated with the purchase of the building near our San Jose headquarters and an increase in accounts receivable. Days sales outstanding in receivables for the year ended October 30, 2004 was 56 days.

Net cash used in investing activities for the year ended October 30, 2004 totaled $215.5 million and was primarily the result of $161.7 million in net purchases of short and long-term investments and other non-marketable investments, as well as $53.8 million invested in capital equipment, including $30.0 million for the purchase of the building near our San Jose headquarters.

Net cash used in financing activities for the year ended October 30, 2004 totaled $72.2 million. Net cash used in financing activities was primarily the result of repurchases of our convertible subordinated debt, partially offset by $21.2 million in net proceeds from employee participation in employee stock programs and exercises of stock options.

Net proceeds from the issuance of common stock related to employee participation in employee stock programs have historically been a significant component of our liquidity. The extent to which our employees

participate in these programs generally increases or decreases based upon changes in the market price of our common stock. As a result, our cash flow resulting from the issuance of common stock related to employee participation in employee stock programs will vary. As a result of our recent voluntary stock options exchange program, we do not expect to generate significant cash flow from the issuance of common stock related to the employee participation in employee stock programs during fiscal year 2005 unless our future common stock price exceeds $6.54 per share.

We have manufacturing agreements with Solectron and Foxconn under which we provide twelve-month product forecasts and place purchase orders in advance of the scheduled delivery of products to our customers. The required lead-time for placing orders with both Solectron and Foxconn depends on the specific product. As of October 30, 2004, our aggregate commitment to Solectron and Foxconn for inventory components used in the manufacture of Brocade products was $56.3 million, net of purchase commitment reserves of $4.3 million, which we expect to utilize during future normal ongoing operations. Although the purchase orders we place with Solectron and Foxconn are cancelable, the terms of the agreements require us to purchase from Solectron and Foxconn all inventory components not returnable or usable by, or sold to, other customers of Solectron or Foxconn. Our purchase commitments reserve reflects our estimate of purchase commitments we do not expect to consume in normal operations.

On December 21, 2001, and January 10, 2002, we sold an aggregate of $550 million in principal amount of two percent convertible subordinated notes due January 2007 (the notes or convertible subordinated debt) (see Note 9, “Convertible Subordinated Debt,” of the Notes to Consolidated Financial Statements). Holders of the notes may, in whole or in part, convert the notes into shares of our common stock at a conversion rate of 22.8571 shares per $1,000 principal amount of notes (approximately 8.1 million shares may be issued upon conversion based on outstanding debt of $352.3 million as of October 30, 2004) at any time prior to maturity on January 1, 2007. At any time on or after January 5, 2005, we may redeem the notes in whole or in part at the following prices expressed as a percentage of the principal amount:

We are required to pay interest on January 1 and July 1 of each year, beginning July 1, 2002. Debt issuance costs are being amortized over the term of the notes. The amortization of debt issuance costs will accelerate upon early redemption, repurchase, or conversion of the notes. The net proceeds remain available for general corporate purposes, including working capital and capital expenditures.

During fiscal years 2004 and 2003, we repurchased on the open market $90.7 million and $107.1 million in face value of our convertible subordinated debt, respectively. For the year ended October 30, 2004, we paid an average of $0.93 on each dollar of face value for an aggregate purchase price of $84.4 million, which resulted in a pre-tax gain of $5.6 million. For the year ended October 25, 2003, we paid an average of $0.88 on each dollar of face value for an aggregate purchase price of $94.4 million, which resulted in a pre-tax gain of $11.1 million. As of October 30, 2004, the remaining balance outstanding of the convertible subordinated debt was $352.3 million.

On November 18, 2003, we purchased a previously leased building located near our San Jose headquarters, and issued a $1.0 million guarantee as part of the purchase agreements.

The following table summarizes our contractual obligations (including interest expense) and commitments as of October 30, 2004 (in thousands):


(1)	Amount reflects total gross purchase commitments under our manufacturing agreements with Solectron and Foxconn. Of this amount, we have reserved $4.3 million for estimated purchase commitments that we do not expect to consume in normal operations.

Share Repurchase Program. In August 2004, our board of directors approved a share repurchase program for up to $100.0 million of our common stock. The purchases may be made, from time to time, in the open market and will be funded from available working capital. The number of shares to be purchased and the timing of purchases will be based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. To date, no shares had been purchased under this program.

Equity Investments. Under the terms of certain investment agreements related to our investments in non-publicly traded companies, we may be required to make additional investments of up to $5.0 million if certain milestones are met.

We believe that our existing cash, cash equivalents, short-term and long-term investments, and cash expected to be generated from future operations will be sufficient to meet our capital requirements at least through the next 12 months, although we may elect to seek additional funding prior to that time, if available. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support our product development efforts and the expansion of our sales and marketing programs, the timing of introductions of new products and enhancements to our existing products, and market acceptance of our products.

Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates and judgments, including those related to sales returns, bad debts, excess inventory and purchase commitments, investments, warranty obligations, restructuring costs, lease losses, income taxes, and contingencies and litigation. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The methods, estimates, and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our Consolidated Financial Statements. The SEC considers

an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations, and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation. We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our Consolidated Financial Statements:


	•	Revenue recognition, and allowances for sales returns, sales programs, and doubtful accounts;
	•	Stock-based compensation;
	•	Warranty reserves;
	•	Inventory and purchase commitment reserves;
	•	Restructuring charges and lease loss reserves;
	•	Litigation costs; and
	•	Accounting for income taxes.

Revenue recognition, and allowances for sales returns, sales programs, and doubtful accounts. Product revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, fee is fixed or determinable, and collection is probable. However, for newly introduced products, many of our large OEM customers require a product qualification period during which our products are tested and approved by the OEM customer for sale to their customers. Revenue recognition, and related cost, is deferred for shipments to new OEM customers and for shipments of newly introduced products to existing OEM customers until satisfactory evidence of completion of the product qualification has been received from the OEM customer. In addition, revenue from sales to our master reseller customers is recognized in the same period in which the product is sold by the master reseller (sell through).

We reduce revenue for estimated sales returns, sales programs, and other allowances at the time of shipment. Sales returns, sales programs, and other allowances are estimated based on historical experience, current trends, and our expectations regarding future experience. Reductions to revenue associated with sales returns, sales programs, and other allowances include consideration of historical sales levels, the timing and magnitude of historical sales returns, claims under sales programs, and other allowances, and a projection of this experience into the future. In addition, we maintain allowances for doubtful accounts, which are also accounted for as a reduction in revenue, for estimated losses resulting from the inability of our customers to make required payments. We analyze accounts receivable, historical collection patterns, customer concentrations, customer creditworthiness, current economic trends, changes in customer payment terms and practices, and customer communication when evaluating the adequacy of the allowance for doubtful accounts. If actual sales returns, sales programs, and other allowances exceed our estimate, or if the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and charges may be required.

Service revenue consists of training, warranty, and maintenance arrangements, including post-contract customer support (PCS) services. PCS services are offered under renewable, annual fee-based contracts or as part of multiple element arrangements and typically include upgrades and enhancements to our software operating system software, and telephone support. Service revenue, including revenue allocated to PCS elements, is deferred and recognized ratably over the contractual period. Service contracts are typically one to three years in length. Training revenue is recognized upon completion of the training.

Our multiple-element product offerings include computer hardware and software products, and support services. We also sell certain software products and support services separately. Our software products are essential to the functionality of our hardware products and are, therefore, accounted for in accordance with Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2), as amended. We allocate revenue to each element based upon vendor-specific objective evidence (VSOE) of the fair value of the element or, if VSOE is not available, by application of the residual method. VSOE of the fair value for an element is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. Changes in the allocation of revenue to each element in a multiple element arrangement may affect the timing of revenue recognition.

Stock-Based Compensation. The Company 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), whereby the difference between the exercise price and the fair market value on the date of grant is recognized as compensation expense. Under the intrinsic value method of accounting, no compensation expense is recognized in the Company’s Consolidated Statements of Operations when the exercise price of the Company’s employee stock option grants equals the market price of the underlying common stock on the date of grant, and the measurement date of the option grant is certain. The measurement date is certain when the date of grant is fixed and determinable. When the measurement date is not certain, then the Company records stock compensation expense using variable accounting under APB 25. When variable accounting is applied to stock option grants, the Company remeasures the intrinsic value of the options at the end of each reporting period or until the options are exercised, cancelled or expire unexercised. Compensation expense in any given period is calculated as the difference between total earned compensation at the end of the period, less total earned compensation at the beginning of the period. Compensation earned is calculated under an accelerated vesting method in accordance with FASB Interpretation 28. As a result, changes in stock prices will change the intrinsic value of the options and compensation expense or benefit recognized in any given period.

Warranty reserves. We provide warranties on our products ranging from one to three years. Estimated future warranty costs are accrued at the time of shipment and charged to cost of revenues based upon historical experience, current trends and our expectations regarding future experience. If actual warranty costs exceed our estimate, additional charges may be required.

Inventory and purchase commitment reserves. We write down inventory and record purchase commitment reserves for estimated excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based upon forecast of future product demand, product transition cycles, and market conditions. Although we strive to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and commitments, and our reported results. If actual market conditions are less favorable than those projected, additional inventory write-downs, purchase commitment reserves, and charges against earnings might be required.

Restructuring charges and lease loss reserves. We monitor and regularly evaluate our organizational structure and associated operating expenses. Depending on events and circumstances, we may decide to take additional actions to reduce future operating costs as our business requirements evolve. In determining restructuring charges, we analyze our future operating requirements, including the required headcount by business functions and facility space requirements. Our restructuring costs, and any resulting accruals, involve significant estimates made by management using the best information available at the time the estimates are made, some of which maybe provided by third parties. In recording severance reserves, we accrue liability when all of the following conditions have been met: employees’ rights to receive compensation for future absences is attributable to employees’ services already rendered; the obligation relates to rights that vest or accumulate; payment of the compensation is probable; and the amount can be reasonably estimated. In recording facilities lease loss reserves, we make various assumptions, including the time period over which the facilities are expected to be vacant, expected sublease terms, expected sublease rates, anticipated future operating expenses, and expected future use of the facilities. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or lease termination agreements with terms as favorable as those assumed when arriving at our estimates. We regularly evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring and lease loss accruals including the various assumptions noted above. If actual results differ significantly from our estimates, we may be required to adjust our restructuring and lease loss accruals in the future.

Litigation costs. We are subject to the possibility of legal actions arising in the ordinary course of business. We regularly monitor the status of pending legal actions to evaluate both the magnitude and likelihood of any potential loss. We accrue for these potential losses when it is probable that a liability has

been incurred and the amount of loss, or possible range of loss, can be reasonably estimated. If actual results differ significantly from our estimates, we may be required to adjust our accruals in the future.

Accounting for income taxes. The determination of our tax provision is subject to judgments and estimates due to operations in multiple tax jurisdictions outside the United States. Sales to our international customers are principally taxed at rates that are lower than the United States statutory rates. The ability to maintain our current effective tax rate is contingent upon existing tax laws in both the United States and in the respective countries in which our international subsidiaries are located. Future changes in domestic or international tax laws could affect the continued realization of the tax benefits we are currently receiving and expect to receive from international sales. In addition, an increase in the percentage of our total revenue from international customers or in the mix of international revenue among particular tax jurisdictions could change our overall effective tax rate. Also, our current effective tax rate assumes that United States income taxes are not provided for undistributed earnings of certain non-United States subsidiaries. These earnings could become subject to United States federal and state income taxes and foreign withholding taxes, as applicable, should they be either deemed or actually remitted from our international subsidiaries to the United States.

The carrying value of our net deferred tax assets is subject to a full valuation allowance. At some point in the future, the Company may have sufficient United States taxable income to release the valuation allowance and accrue United States tax. We evaluate the expected realization of our deferred tax assets and assess the need for valuation allowances quarterly.

In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective for annual financial statements for fiscal years ending after December 15, 2003. The adoption of the disclosure provision of EITF Issue No. 03-1 did not have any material effect on our financial position, results of operations, or cash flows. We will evaluate the additional effect, if any, of the remainder of EITF Issue No. 03-1 when final guidance is released.

In June 2004, the FASB issued EITF Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock.” EITF Issue No. 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF Issue No. 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF Issue No. 02-14 are effective for the reporting period beginning after September 15, 2004. We are in the process of determining the effect, if any, of the adoption of EITF Issue No. 02-14 will have on our financial position, results of operations, or cash flows.

In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123R). SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” SFAS 123R is effective for interim reporting period that begins after June 15, 2005. We are in the process of determining the effect of the adoption of SFAS 123R will have on our financial position, results of operations, or cash flows.

We are exposed to market risk related to changes in interest rates and equity security prices.

Our exposure to market risk due to changes in the general level of United States interest rates relates primarily to our cash equivalents and short-term and long-term investment portfolios. Our cash, cash equivalents, and short-term and long-term investments are primarily maintained at five major financial institutions in the United States. As of October 30, 2004, we did not hold any derivative instruments. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk.

The following table presents the hypothetical changes in fair values of our investments in debt securities issued by United States government agencies as of October 30, 2004 that are sensitive to changes in interest rates (in thousands):

These instruments are not leveraged and are classified as available-for-sale. The modeling technique used measures the change in fair values arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and 150 BPS, which are representative of the historical movements in the Federal Funds Rate.

The following table (in thousands) presents our cash equivalents and short-term and long-term investments subject to interest rate risk and their related weighted average interest rates at October 30, 2004. Carrying value approximates fair value.

Our convertible subordinated debt is subject to a fixed interest rate and the notes are based on a fixed conversion ratio into common stock. Therefore, we are not exposed to changes in interest rates related to our long-term debt instruments. The notes are not listed on any securities exchange or included in any automated quotation system; however, the notes are eligible for trading on the Portal^SM Market. On October 29, 2004, the average bid and ask price on the Portal Market of our convertible subordinated notes due 2007 was 94.5, resulting in an aggregate fair value of approximately $332.9 million. Our common stock is quoted on the Nasdaq National Market under the symbol “BRCD.” On October 29, 2004, the last reported sale price of our common stock on the Nasdaq National Market was $6.79 per share.

Our exposure to market risk due to equity security price fluctuations primarily relates to investments in marketable equity securities. These investments are principally in companies in the volatile high-technology

sector. We do not attempt to reduce or eliminate the market exposure on these securities. Adverse changes in equity prices of 25 percent, 50 percent, and 75 percent would result in decreases of approximately $0.2 million, $0.4 million, and $0.6 million in the fair value of marketable equity securities at October 30, 2004, respectively. At October 30, 2004, our equity securities balance of $0.9 million was included in other current assets on the accompanying Consolidated Balance Sheets.

We have audited the accompanying consolidated balance sheets of Brocade Communications Systems, Inc. and subsidiaries (the Company) as of October 30, 2004 and October 25, 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 30, 2004. In connection with our audit of the consolidated financial statements, we have also audited the related financial statement schedule listed in Item 15(2). These consolidated financial statements and related financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and related financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brocade Communications Systems, Inc. and subsidiaries as of October 30, 2004 and October 25, 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended October 30, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 3 to the accompanying consolidated financial statements, the consolidated balance sheet of Brocade Communications Systems, Inc. and subsidiaries as of October 25, 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended October 25, 2003 have been restated.


(1)	See Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements.

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


(1)	See Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements.

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


(1)	See Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements.

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


(1)	See Note 3, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements.

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

Brocade Communications Systems, Inc. (Brocade or the Company) designs, develops, markets, sells, and supports data storage networking products and services, offering a line of storage networking products that enables companies to implement highly available, scalable, manageable, and secure environments for data storage applications. The Brocade SilkWorm® family of storage area networking switches is designed to help companies reduce the cost and complexity of managing business information within a data storage environment. Brocade products and services are marketed, sold, and supported worldwide to end-user customers through distribution partners, including original equipment manufacturers (OEMs), value-added distributors, systems integrators, and value-added resellers.

Brocade was incorporated on May 14, 1999 as a Delaware corporation, succeeding operations that began on August 24, 1995. The Company’s headquarters is located in San Jose, California.

The Company’s fiscal year is the 52 or 53 weeks ending on the last Saturday in October. As is customary for companies that use the 52/53-week convention, every fifth year contains a 53-week year. Fiscal year 2004 was a 53-week fiscal year. The second quarter of fiscal year 2004 consisted of 14 weeks, which is one week more than a typical quarter. Fiscal years 2003 and 2002 were both 52-week fiscal years.

The Consolidated Financial Statements include the accounts of Brocade Communication Systems, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.

Investment securities with original or remaining maturities of more than three months but less than one year are considered short-term investments. Investment securities with original or remaining maturities of one year or more are considered long-term investments. Short-term and long-term investments consist of debt securities issued by United States government agencies, municipal government obligations, and corporate bonds and notes. Short-term and long-term investments are maintained at three major financial institutions, are classified as available-for-sale, and are recorded on the accompanying Consolidated Balance Sheets at fair value. Fair value is determined using quoted market prices for those securities. Unrealized holding gains and losses are included as a separate component of accumulated other comprehensive income on the accompanying Consolidated Balance Sheets, net of any related tax effect. Realized gains and losses are calculated based on the specific identification method and are included in gain (loss) on investments, net on the Consolidated Statements of Operations.

The Company recognizes an impairment charge when the declines in the fair values of its investments below the cost basis are judged to be other-than-temporary. The Company considers various factors in

determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

Equity securities consist of equity holdings in public companies and are classified as available-for-sale when there are no restrictions on the Company’s ability to immediately liquidate such securities. Marketable equity securities are recorded on the accompanying Consolidated Balance Sheets at fair value. Fair value is determined using quoted market prices for those securities. Unrealized holding gains and losses are included as a separate component of accumulated other comprehensive income on the accompanying Consolidated Balance Sheets, net of any related tax effect. Realized gains and losses are calculated based on the specific identification method and are included in interest and other income, net on the Consolidated Statements of Operations.

From time to time the Company makes equity investments in non-publicly traded companies. These investments are included in other assets on the accompanying Consolidated Balance Sheets, and are generally accounted for under the cost method as the Company does not have the ability to exercise significant influence over the respective company’s operating and financial policies. The Company monitors its investments for impairment on a quarterly basis and makes appropriate reductions in carrying values when such impairments are determined to be other-than-temporary. Impairment charges are included in interest and other income, net on the Consolidated Statements of Operations. Factors used in determining an impairment include, but are not limited to, the current business environment including competition and uncertainty of financial condition; going concern considerations such as the rate at which the investee company utilizes cash, and the investee company’s ability to obtain additional private financing to fulfill its stated business plan; the need for changes to the investee company’s existing business model due to changing business environments and its ability to successfully implement necessary changes; and comparable valuations. If an investment is determined to be impaired, a determination is made as to whether such impairment is other-than-temporary (see Note 15). As of October 30, 2004 and October 25, 2003, the carrying values of the Company’s equity investments in non-publicly traded companies were $0.5 million and zero, respectively.

Fair value of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, employee notes receivable, accounts payable, and accrued liabilities, approximate cost because of their short maturities. The fair value of investments and marketable equity securities is determined using quoted market prices for those securities or similar financial instruments. The fair value of convertible subordinated debt is determined using the average bid and ask price on the Portal Market for the convertible debt.

Inventories are stated at the lower of cost or market, using the first-in, first-out method. Inventory costs include material, labor, and overhead. The Company provides inventory allowances based on excess and obsolete inventories determined primarily by future demand forecasts. All of our inventory is located offsite.

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of four years are used for computer equipment, software, furniture and fixtures, except for the Company’s enterprise-wide, integrated business information system, which is being depreciated over five to seven years. Estimated useful lives of up to four years are used for engineering and other equipment. Estimated useful life

of 30 years is used for building. Leasehold improvements are amortized using the straight-line method over the shorter of the useful life of the asset or the remaining term of the lease.

Prior to fiscal year 2003, the Company historically provided loans to various non-executive employees principally related to the respective employees’ relocation to the San Francisco Bay area. The loans are generally evidenced by secured promissory notes to the Company and bear interest at prevailing rates. Notes receivable from employees are included in prepaid expenses and other current assets, and other assets in the accompanying Consolidated Balance Sheets depending upon their remaining term. As of October 30, 2004 and October 25, 2003, the Company had outstanding loans to various employees totaling $1.6 million and $3.0 million, respectively.

Accrued employee compensation consists of accrued wages, commissions, payroll taxes, vacation, payroll deductions for the Company’s employee stock purchase plan, and other employee benefit payroll deductions.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term and long-term investments, and accounts receivable. Cash, cash equivalents, and short-term and long-term investments are primarily maintained at five major financial institutions in the United States. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits. The Company principally invests in United States government agency debt securities and corporate bonds and notes, and limits the amount of credit exposure to any one entity.

A majority of the Company’s trade receivable balance is derived from sales to OEM partners in the computer storage and server industry. As of October 30, 2004 and October 25, 2003, 85 percent and 77 percent of accounts receivable were concentrated with five customers, respectively. The Company performs ongoing credit evaluations of its customers and does not require collateral on accounts receivable balances. The Company has established reserves for credit losses and sales returns, and other allowances. The Company has not experienced material credit losses in any of the periods presented.

For the fiscal years ended October 30, 2004, October 25, 2003, and October 26, 2002, three customers each represented greater than ten percent of the Company’s total revenues for combined totals of 70 percent, 67 percent, and 62 percent of total revenues, respectively. The level of sales to any single customer may vary and the loss of any one of these customers, or a decrease in the level of sales to any one of these customers, could seriously harm the Company’s financial condition and results of operations.

The Company currently relies on single and limited supply sources for several key components used in the manufacture of its products. Additionally, the Company relies on two contract manufacturers for the production of its products. The inability of any single and limited source suppliers or the inability of either contract manufacturer to fulfill supply and production requirements, respectively, could have a material adverse effect on the Company’s future operating results.

The Company’s business is concentrated in the storage area networking industry, which has been impacted by unfavorable economic conditions and reduced global IT spending rates. Accordingly, the Company’s future success depends upon the buying patterns of customers in the storage area networking industry, their response to current and future IT investment trends, and the continued demand by such customers for the Company’s products. The Company’s continued success will depend upon its ability to

enhance its existing products and to develop and introduce, on a timely basis, new cost-effective products and features that keep pace with technological developments and emerging industry standards.

Product revenue. Product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. However, for newly introduced products, many of the Company’s large OEM customers require a product qualification period during which the Company’s products are tested and approved by the OEM customer for sale to their customers. Revenue recognition, and related cost, is deferred for shipments to new OEM customers and for shipments of newly introduced products to existing OEM customers until satisfactory evidence of completion of the product qualification has been received from the OEM customer. Revenue from sales to the Company’s master reseller customers is recognized in the same period in which the actual sell-through occurs.

The Company reduces revenue for estimated sales returns, sales programs, and other allowances at the time of shipment. Sales returns, sales programs, and other allowances are estimated based upon historical experience, current trends, and the Company’s expectations regarding future experience. In addition, the Company maintains allowances for doubtful accounts, which are also accounted for as a reduction in revenue. The allowance for doubtful accounts is estimated based upon analysis of accounts receivable, historical collection patterns, customer concentrations, customer creditworthiness, current economic trends, and changes in customer payment terms and practices.

Service revenue. Service revenue consists of training, warranty, and maintenance arrangements, including post-contract customer support (PCS) services. PCS services are offered under renewable, annual fee-based contracts or as part of multiple element arrangements and typically include upgrades and enhancements to the Company’s software operating system, and telephone support. Service revenue, including revenue allocated to PCS elements, is deferred and recognized ratably over the contractual period. Service contracts are typically one to three years in length. Training revenue is recognized upon completion of the training. Service revenue was not material in any of the periods presented.

Multiple-element arrangements. The Company’s multiple-element product offerings include computer hardware and software products, and support services. The Company also sells certain software products and support services separately. The Company’s software products are essential to the functionality of its hardware products and are, therefore, accounted for in accordance with Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2), as amended. The Company allocates revenue to each element based upon vendor-specific objective evidence (VSOE) of the fair value of the element or, if VSOE is not available, by application of the residual method. VSOE of the fair value for an element is based upon the price charged when the element is sold separately. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.

Warranty Expense. The Company provides warranties on its products ranging from one to three years. Estimated future warranty costs are accrued at the time of shipment and charged to cost of revenues based upon historical experience.

Eligible software development costs are capitalized upon the establishment of technological feasibility in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Technological feasibility is defined as completion of designing, coding and testing activities. Total eligible software development costs have not been material to date.

Costs related to internally developed software and software purchased for internal use are capitalized in accordance with Statement of Position 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.” During the year ended October 28, 2000, the Company purchased an enterprise-wide, integrated business information system. As of October 30, 2004, a net book value of $5.2 million, related to the purchase and subsequent implementation and upgrade of this system was included in property and equipment. These costs are being depreciated over the initial estimated useful life of seven years.

The Company expenses all advertising costs as incurred. Advertising costs were not material in any of the periods presented.

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using a discounted cash flow model. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts, along with net operating loss carryforwards and credit carryforwards. A valuation allowance is recognized to the extent that it is more likely than not that the tax benefits will not be realized.

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period, less shares subject to repurchase. Diluted net income (loss) per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares result from the assumed exercise of outstanding stock options, by application of the treasury stock method, that have a dilutive effect on earnings per share, and from the assumed conversion of outstanding convertible debt if it has a dilutive effect on earnings per share.

Assets and liabilities of non-United States subsidiaries that operate where the functional currency is the local currency are translated to United States dollars at exchange rates in effect at the balance sheet date with the resulting translation adjustments recorded as a separate component of accumulated other comprehensive income. Income and expense accounts are translated at average exchange rates during the year. Where the functional currency is the United States dollar, translation adjustments are recorded in other income or expense.

The Company 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), whereby the difference between the exercise price and the fair market value on the date of grant is recognized as compensation expense. Under the intrinsic value method of accounting, no compensation expense is recognized in the Company’s Consolidated Statements of Operations when the exercise price of the Company’s employee stock option grants equals the market price of the underlying common stock on the date of grant, and the measurement date of the option grant is certain. The measurement date is certain when the date of grant is fixed and determinable. When the measurement date is not certain, then the Company records stock compensation expense using variable accounting under APB 25. When variable accounting is applied to stock option grants, the Company remeasures the intrinsic value of the options at the end of each reporting period or until the options are exercised, cancelled or expire unexercised. Compensation expense in any given period is calculated as the difference between total earned compensation at the end of the period, less total earned compensation at the beginning of the period. Compensation earned is calculated under an accelerated vesting method in accordance with FASB Interpretation 28.

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), established 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 under SFAS 123.

Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an Amendment of FASB Statement No. 123” (SFAS 148), amended the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The pro forma information resulting from the use of the fair value based method under SFAS 123 is as follows (in thousands except per share amounts):

The fair value of stock options granted under the Plans during fiscal year 2004, and the fair value of common stock issued under the Purchase Plan during fiscal year 2004, was approximately $34.4 million. Pro forma compensation expense associated with stock options granted under the Plans during fiscal year 2004, and common stock issued under the Purchase Plan during fiscal year 2004, was approximately $10.7 million.

When the measurement date is certain, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for each respective fiscal year ended:

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options. Under the Black-Scholes option-pricing model, the weighted-average fair value of employee stock options granted during the years ended October 30, 2004, October 25, 2003, and October 26, 2002, was $1.92 per share, $1.96 per share, and $13.70 per share, respectively. When the measurement date is not certain, compensation cost is estimated based on the intrinsic value of the award remeasured at the end of each reporting period.

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, the useful lives of fixed assets, allowances for doubtful accounts and product returns, inventory and warranty reserves, facilities lease losses and other charges, fixed asset and investment impairment charges, accrued liabilities and other reserves, taxes, and contingencies. Actual results could differ materially from these estimates.

On November 8, 1999, January 21, 2000, and November 29, 2000, the Company’s Board of Directors approved two-for-one splits of the Company’s common stock. The stock began trading on a split-adjusted basis on December 3, 1999, March 15, 2000, and December 22, 2000, respectively. All references in the accompanying consolidated financial statements and notes thereto to earnings per share and the number of common shares have been retroactively restated to reflect the common stock splits.

In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective for annual financial statements for fiscal year ending after December 15, 2003. The Company’s adoption of the disclosure provision of EITF Issue No. 03-1 did not have any material effect on the Company’s

financial position, results of operations, or cash flows. The Company will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance is released.

In June 2004, the FASB issued EITF Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock.” EITF Issue No. 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF Issue No. 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF Issue No. 02-14 are effective for the reporting period beginning after September 15, 2004. The Company is in the process of determining the effect, if any, of the adoption of EITF Issue No. 02-14 will have on the Company’s financial position, results of operations, or cash flows.

In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123R). SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” SFAS 123R is effective for interim reporting period that begins after June 15, 2005. The Company is in the process of determining the effect of the adoption of SFAS 123R will have on its financial position, results of operations, or cash flows.

Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.

On January 24, 2005, the Company announced that its Audit Committee completed an internal review regarding the Company’s stock option granting process. As a result of certain findings of the review, the Company determined that certain of its historical financial statements required restatement.

Specifically, the Company determined that the restatement was required because it incorrectly accounted for: (A) grants that were made to new hires on their offer acceptance date, rather than the date of their commencement of employment, during the period May 1999 to July 2000; (B) grants that were made to persons engaged on a part-time basis prior to their new hire full-time employment during the period August 2000 to October 2002; and (C) there was insufficient basis to rely on the Company’s process and related documentation to support recorded measurement dates used to account for certain stock options granted prior to August 2003. Therefore, the Company recorded additional stock-based compensation charges relating to many of its stock option grants made during the period 1999 through the third quarter of fiscal year 2003. In addition, the Company recorded a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits.

These charges affected the previously filed financial statements for fiscal years ended October 25, 2003, and October 26, 2002, including the corresponding interim periods for fiscal years 2003 and 2002, and the interim periods ended January 24, 2004, May 1, 2004 and July 31, 2004. The Company also recorded stock-based compensation and associated income tax adjustments to previously announced financial results for the fourth quarter and year ended October 30, 2004. These adjustments relate solely to matters pertaining to stock

options granted prior to August 2003. These adjustments did not have any impact on previously reported cash flows from operating, investing, or financing activities for the three years ended October 30, 2004.

As a result of the stock compensation adjustments, the Company’s deferred tax assets previously recognized have now been fully reserved. The Company expects to realize a tax benefit in future reporting periods when it is able to utilize net operating loss carryforwards to offset future income.

The following table presents the impact of the financial statement adjustments on the Company’s previously announced consolidated statements of operations for the year ended October 30, 2004, and previously reported consolidated statements of operations for the years ended October 25, 2003, and October 26, 2002.


(1)	Adjustments reflect stock-based compensation expense associated with stock options subject to variable accounting under APB 25 and changes in the Company’s tax provision as a result of a full valuation allowance applied against deferred tax assets related to stock option tax benefits.

The following table presents the impact of the financial statement adjustments on the Company’s previously announced consolidated balance sheet for the year ended October 30, 2004, and previously reported consolidated balance sheet for the year ended October 25, 2003.


(1)	Adjustments reflect stock-based compensation expense associated with stock options subject to variable accounting under APB 25 and changes in the Company’s tax provision as a result of a full valuation allowance applied against deferred tax assets related to stock option tax benefits.

On January 27, 2003, the Company completed its acquisition of Rhapsody Networks, Inc. (Rhapsody), a provider of next-generation intelligent switching platforms. In exchange for all of the outstanding securities of Rhapsody, the Company issued 19.8 million shares of its common stock and assumed warrants to purchase 0.4 million shares of Brocade common stock and options to purchase 0.3 million shares of Brocade common stock. In addition, in the second quarter of fiscal year 2004, the Company recorded a $6.9 million charge in settlement of a claim relating to its acquisition of Rhapsody. Under the terms of the settlement, in the third quarter of fiscal year 2004 the Company issued 1.3 million shares of its common stock to the former Rhapsody shareholders in exchange for a release of claims.

The total purchase price was $138.5 million, consisting of Brocade common stock valued at $129.3 million; restricted common stock, assumed warrants, and assumed options valued at $7.9 million, reduced by the intrinsic value of unvested restricted stock and stock options of $1.7 million; and direct acquisition costs of $3.0 million. The value of the common stock issued was determined based on the average of the five-day trading period ended November 7, 2002, or $6.95 per share. The fair value of the restricted common stock, assumed warrants, and assumed options was determined using the Black-Scholes option-pricing model. The deferred stock compensation of $1.7 million will be amortized over the remaining service period on a straight-line basis.

As of the acquisition date, Rhapsody was a development stage company with no recognized revenue and a core technology that had not yet reached technological feasibility. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities necessary to establish that the technology can be utilized to meet design specifications, including functions, features, and technical performance requirements. The Company incurred $17.2 million in expenses related to bringing the Rhapsody core technology to technological feasibility. The Company completed the development of this technology in fiscal year 2004 and is beginning to generate revenues related to this technology. Based upon the factors noted above, the Company concluded that for accounting purposes it was not purchasing a business with an existing revenue stream, but rather a group of assets centered on a core technology that the Company believes will ultimately be developed into a saleable product. As a result, the acquisition of Rhapsody was accounted for as an asset purchase.

The purchase price was allocated to the assets acquired, liabilities assumed, and acquired in-process research and development (in-process R&D) based on their respective fair values. The excess of purchase price over the fair value of net assets received was allocated to acquired in-process R&D and acquired non-monetary assets on a pro-rata basis.

The following table summarizes the allocation of purchase price for the acquisition of Rhapsody (in thousands):

The value assigned to acquired in-process R&D was estimated based on the income approach using discount rates ranging from 35 percent to 45 percent. The income approach estimates the present value of the anticipated cash flows attributable to the respective assets under development once they have reached technological feasibility. The anticipated cash flows were based upon estimated prospective financial information, which was determined to be reasonable and appropriate for use in reaching the value assigned to acquired in-process R&D. No intangible assets were identified. The amount allocated to in-process R&D was expensed in the period of acquisition since the in-process R&D had not yet reached technological feasibility and had no alternative future use.

During the quarter ended May 1, 2004, the Company implemented a restructuring plan designed to optimize the Company’s business model to drive improved profitability through reduction of headcount as well as certain structural changes in the business. The plan encompassed organizational changes, which includes a reduction in force of 110 people, or nine percent, announced on May 19, 2004. As a result, the Company recorded $10.5 million in restructuring costs consisting of severance and benefit charges, equipment impairment charges, and contract termination and other charges. Severance and benefits charges of $7.5 million consisted of severance and related employee termination costs, including outplacement services, associated with the reduction of the Company’s workforce. Equipment impairment charges of $1.2 million primarily consisted of excess equipment that is no longer being used as a result of the restructuring program. Contract termination and other charges of $1.7 million were primarily related to the cancellation of certain contracts in connection with the restructuring of certain business functions.

Remaining accrued liabilities related to the Company’s fiscal 2004 second quarter restructuring program are included in other accrued liabilities on the accompanying Consolidated Balance Sheets. During the quarter ended October 30, 2004, the Company recorded a reduction of $1.0 million to restructuring costs, primarily because actual payments were lower than the estimated amount. No other material changes in estimates were made to the fiscal 2004 second quarter restructuring accrual. The Company expects to pay or otherwise substantially settle the remaining accrued liabilities during the next fiscal year.

During the quarter ended April 26, 2003, the Company reevaluated certain aspects of its business model and completed a program to restructure certain business operations, reorganize certain aspects of the Company, and reduce the Company’s operating expense structure. The restructuring program included a workforce reduction of approximately nine percent, primarily in the sales, marketing, and engineering organizations. In addition, as a result of the restructuring, certain assets associated with reorganized or eliminated functions were determined to be impaired.

Total restructuring costs incurred of $10.9 million consisted of severance and benefit charges, equipment impairment charges, and contract termination and other charges. Severance and benefits charges of $4.2 million consisted of severance and related employee termination costs, including outplacement services, associated with the reduction of the Company’s workforce. Equipment impairment charges of $5.2 million primarily consisted of excess equipment that is no longer being used as a result of the restructuring program. Contract termination and other charges of $1.5 million were primarily related to the cancellation of certain contracts in connection with the restructuring of certain business functions.

Remaining accrued liabilities related to the Company’s fiscal 2003 second quarter restructuring program are included in other accrued liabilities on the accompanying Consolidated Balance Sheets. During the year ended October 30, 2004, the Company recorded a reduction of $0.5 million to restructuring costs, primarily due to lower than expected outplacement and contract termination costs. No other material changes in estimates were made to the fiscal 2003 second quarter restructuring accrual. The Company expects to pay or otherwise substantially settle the remaining accrued liabilities during the next fiscal year.

During the quarter ended January 25, 2003, the Company completed a restructuring program to reduce the Company’s expense structure. The restructuring program included a company-wide workforce reduction of approximately 12 percent, consolidation of excess facilities, and the restructuring of certain business functions. This restructuring program affected all of the Company’s functional areas.

Total restructuring costs incurred of $10.1 million consisted of severance and benefit charges, equipment impairment charges, and contract termination and other charges. Severance and benefits charges of $8.5 million consisted of severance and related employee termination costs related to the reduction of the Company’s workforce, including outplacement services and the write-off of unrecoverable employee loans of certain terminated employees. Contract termination charges of $0.9 million were primarily related to the cancellation of certain contracts in connection with the restructuring of certain business functions and the consolidation of excess facilities. Equipment impairment charges of $0.6 million were related to excess computer equipment resulting from the workforce reduction, consolidation of excess facilities, and the restructuring of certain business functions.

Remaining accrued liabilities related to the Company’s fiscal 2003 first quarter restructuring program are included in other accrued liabilities on the accompanying Consolidated Balance Sheets. No material changes in estimates were made to the fiscal 2003 first quarter restructuring accrual. The Company expects to pay or otherwise substantially settle the remaining accrued liabilities during the next fiscal year.

The following table summarizes the total restructuring costs incurred and charged to restructuring expense during the second quarter of fiscal year 2004 and the first and second quarters of fiscal year 2003, costs paid or otherwise settled, and the remaining unpaid or otherwise unsettled accrued liabilities (in thousands) as of October 30, 2004:

On November 18, 2003, the Company purchased a building located at its San Jose headquarters. This 194,000 square foot facility was previously leased, and certain unused portions of the facility were previously reserved and included in the facilities lease loss liability noted below. The total consideration for the building purchase was $106.8 million, consisting of the purchase of land and building valued at $30.0 million and a lease termination fee of $76.8 million. The value of the land and building as of the purchase date was determined based on the estimated fair market value of the land and building. As a result of the building purchase, during the quarter ended January 24, 2004, the Company recorded adjustments of $23.7 million to the previously recorded facilities lease loss reserve, deferred rent, and leasehold improvement impairments related to the purchased facility.

During the quarter ended January 24, 2004, the Company consolidated the engineering organization and development, test and interoperability laboratories into the purchased facilities and vacated other existing leased facilities. As a result, the Company recorded a charge of $20.9 million related to estimated facilities lease losses, net of expected sublease income, on the vacated facilities. These charges represented the fair value of the lease liability based on assumptions regarding the vacancy period, sublease terms, and the probability of subleasing this space. The assumptions that the Company used were based on market data, including the then current vacancy rates and lease activities for similar facilities within the area. Should there be changes in real estate market conditions or should it take longer than expected to find a suitable tenant to

sublease the remaining vacant facilities, adjustments to the facilities lease losses reserve may be necessary in future periods based upon then current actual events and circumstances.

The following table summarizes the activity related to the lease termination charge and other, net incurred in the year ended October 30, 2004 (in thousands):

During the quarter ended October 27, 2001, the Company recorded a charge of $39.8 million related to estimated facilities lease losses, net of expected sublease income, and a charge of $5.7 million in connection with the estimated impairment of certain related leasehold improvements. These charges represented the low-end of an estimated range of $39.8 million to $63.0 million and may be adjusted upon the occurrence of future triggering events.

During the three months ended July 27, 2002, the Company completed a transaction to sublease a portion of these vacant facilities. Accordingly, based on then current market data, the Company revised certain estimates and assumptions, including those related to estimated sublease rates, estimated time to sublease the facilities, expected future operating costs, and expected future use of the facilities. The Company reevaluates its estimates and assumptions on a quarterly basis and makes adjustments to the reserve balance if necessary. No material adjustments were made to the facilities lease losses reserve for the year ended October 30, 2004.

In November 2003 the Company purchased a previously leased building. In addition, the Company consolidated the engineering organization and development, test and interoperability laboratories into the purchased facilities and vacated other existing leased facilities. As a result, the Company recorded adjustments to the facilities lease loss reserve recorded in fiscal year 2001 described above, and recorded additional reserves in connection with the facilities consolidation.

The following table summarizes the activity related to the facilities lease loss reserve, net of expected sublease income (in thousands):

Cash payments for facilities leases related to the above noted facilities lease loss reserve will be paid over the respective lease terms through fiscal year 2010.

The following tables provide details of selected balance sheet items (in thousands):

Leasehold improvements at October 30, 2004 and October 25, 2003 are shown net of estimated impairments related to facilities lease losses (see Note 6).

The following tables summarize the Company’s investments and equity securities (in thousands):

For the year ended October 30, 2004, gross realized gains on sales of marketable equity securities were $0.2 million. For the year ended October 25, 2003, gross realized gains on sales of marketable equity securities were $2.7 million. For the year ended October 26, 2002, gross gains of $7.1 million were realized on sales of investments in debt securities issued by United States government agencies. At October 30, 2004 and October 25, 2003, net unrealized holding gains of $0.1 million and $8.8 million, respectively, were included in accumulated other comprehensive income in the accompanying Consolidated Balance Sheets.

The following table provides the breakdown of the investments with unrealized losses at October 30, 2004 (in thousands):

The gross unrealized losses related to fixed income securities were due to changes in interest rates. The Company’s management has determined that the gross unrealized losses on its investment securities at October 30, 2004 are temporary in nature. The Company reviews its investments to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Substantially all of the Company’s fixed income securities are rated investment grade or better.

The following table summarizes the maturities of the Company’s investments in debt securities issued by United States government agencies, municipal government obligations, and corporate bonds and notes as of October 30, 2004 (in thousands):

On December 21, 2001, and January 10, 2002, the Company sold, in private placements pursuant to Section 4(2) of the Securities Act of 1933, as amended, an aggregate of $550 million in principal amount, two percent convertible subordinated notes due January 2007 (the notes or convertible subordinated debt). The initial purchasers purchased the notes from the Company at a discount of 2.25 percent of the aggregate principal amount. Holders of the notes may, in whole or in part, convert the notes into shares of the Company’s common stock at a conversion rate of 22.8571 shares per $1,000 principal amount of notes (approximately 8.1 million shares may be issued upon conversion based on outstanding debt of $352.3 million as of October 30, 2004) at any time prior to maturity on January 1, 2007. At any time on or after January 5, 2005, the Company may redeem the notes in whole or in part at the following prices expressed as a percentage of the principal amount:

The Company is required to pay interest on January 1 and July 1 of each year, beginning July 1, 2002. Debt issuance costs of $12.4 million are being amortized over the term of the notes. The amortization of debt issuance costs will accelerate upon early redemption or conversion of the notes. The net proceeds remain available for general corporate purposes, including working capital and capital expenditures. As of October 30, 2004, the remaining balance of unamortized debt issuance costs was $3.4 million.

During fiscal years 2004 and 2003, the Company repurchased on the open market $90.7 million and $107.1 million in face value of its convertible subordinated debt, respectively. For the year ended October 30, 2004, the Company paid an average of $0.93 for each dollar of face value for an aggregate purchase price of $84.4 million, which resulted in a pre-tax gain of $5.6 million. For the year ended October 25, 2003, the Company paid an average of $0.88 for each dollar of face value for an aggregate purchase price of $94.4 million, which resulted in a pre-tax gain of $11.1 million. As of October 25, 2004, the remaining balance outstanding of the convertible subordinated debt was $352.3 million.

The notes are not listed on any securities exchange or included in any automated quotation system, however, the notes are eligible for trading on the Portal^SM Market. On October 29, 2004, the average bid and ask price on the Portal Market of the notes was 94.5, resulting in an aggregate fair value of approximately $332.9 million.

The Company leases its facilities under various operating lease agreements expiring through November 2013. In connection with these agreements the Company has signed unconditional, irrevocable letters of credit totaling $8.3 million as security for the leases. In addition to base rent, many of the operating lease agreements require that the Company pay a proportional share of the respective facilities’ operating expenses. Rent expense for the years ended October 30, 2004, October 25, 2003, and October 26, 2002 was $11.2 million, $22.7 million, and $20.0 million, respectively.

Future minimum lease payments under all non-cancelable operating leases at October 30, 2004 were as follows (in thousands):

At October 30, 2004, the Company had recorded $22.5 million in facilities lease loss reserve related to future lease commitments for unused space, net of expected sublease income (see Note 6).

The Company provides warranties on its products ranging from one to three years. Estimated future warranty costs are accrued at the time of shipment and charged to cost of revenues based upon historical experience. The Company’s accrued liability for estimated future warranty costs is included in other accrued liabilities on the accompanying Consolidated Balance Sheets. The following table summarizes the activity

related to the Company’s accrued liability for estimated future warranty costs during the year ended October 30, 2004 (in thousands):

In addition, the Company has standard indemnification clauses contained within its various customer contracts whereby the Company indemnifies the parties to whom it sells its products with respect to the Company’s product infringing upon any patents, trademarks, copyrights, or trade secrets, as well as against bodily injury or damage to real or tangible personal property caused by a defective Company product. As of October 30, 2004, there have been no known events or circumstances that have resulted in an indemnification related liability to the Company.

The Company has manufacturing agreements with Solectron Corporation (Solectron) and Hon Hai Precision Industry Co. (Foxconn) under which the Company provides twelve-month product forecasts and places purchase orders in advance of the scheduled delivery of products to the Company’s customers. The required lead-time for placing orders with both Solectron and Foxconn depends on the specific product. As of October 30, 2004, the Company’s aggregate commitment to Solectron and Foxconn for inventory components used in the manufacture of Brocade products was $56.3 million, net of purchase commitment reserves of $4.3 million, which the Company expects to utilize during future normal ongoing operations. The Company’s purchase orders placed with Solectron and Foxconn are cancelable, however if cancelled, the agreement with Solectron and Foxconn require the Company to purchase from Solectron and Foxconn all inventory components not returnable, usable by, or sold to, other customers of Solectron or Foxconn.

From time to time, claims are made against the Company in the ordinary course of its business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting the Company from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse affect on the Company’s results of operations for that period or future periods.

On July 20, 2001, the first of a number of putative class actions for violations of the federal securities laws was filed in the United States District Court for the Southern District of New York against the Company, certain of its officers and directors, and certain of the underwriters for the Company’s initial public offering of securities. A consolidated amended class action captioned In Re Brocade Communications Systems, Inc. Initial Public Offering Securities Litigation was filed on April 19, 2002. The complaint generally alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in the Company’s initial public offering and seeks unspecified damages on behalf of a purported class of purchasers of common stock from May 24, 1999 to December 6, 2000. The lawsuit against the Company is being coordinated for pretrial proceedings with a number of other pending litigations challenging underwriter practices in over 300 cases as In Re Initial Public Offering Securities Litigation, 21 MC 92(SAS). In October

2002, the individual defendants were dismissed without prejudice from the action, pursuant to a tolling agreement. On February 19, 2003, the Court issued an Opinion and Order dismissing all of the plaintiffs’ claims against the Company. In July 2004, a stipulation of settlement for the claims against the issuer defendants, including the Company, was submitted to the Court for approval. The settlement is subject to a number of conditions, including approval by the Court.

On December 9, 2002, the Company announced that its Board of Directors approved a voluntary stock option exchange program (the Exchange Program) for employees. Under the Exchange Program, employees were offered the opportunity to exchange an aggregate of approximately 67.3 million outstanding stock options with exercise prices equal to or greater than $12.00 per share for new stock options to be granted at an exchange ratio determined by the date the exchanged stock options were granted. Participating employees other than the then Chief Executive Officer (CEO) would receive new stock options in exchange for their eligible outstanding stock options at an exchange ratio of either 1 for 1, 1 for 2, or 1 for 3, depending on the grant date of the exchanged stock option. The then CEO would receive new stock options in exchange for eligible outstanding stock options at an exchange ratio of 1 for 10.

In accordance with the Exchange Program, on January 9, 2003, the Company cancelled 58.7 million outstanding stock options and issued promises to grant new stock options to participating employees. On July 10, 2003, the first business day that was six months and one day after the cancellation of the exchanged options, the Company granted to participating employees 26.6 million new stock options at an exercise price of $6.54 per share. The exercise price per share of the new stock options was equal to the fair market value of the Company’s common stock at the close of regular trading on July 10, 2003. The 26.6 million new stock options represent approximately 10 percent of the Company’s total shares of common stock outstanding as of October 30, 2004, and could have a dilutive effect on the Company’s future earnings per share to the extent that the future market price of the Company’s common stock exceeds $6.54 per share. No financial or accounting effect to the Company’s financial position, results of operations, or cash flows for the years ended October 30, 2004 and October 25, 2003 was associated with this transaction.

On February 5, 2002, the Company’s Board of Directors adopted a stockholder rights plan. Under the plan, the Company declared and paid a dividend of one right for each share of common stock held by stockholders of record as of the close of business on February 19, 2002. Each right initially entitles stockholders to purchase a fractional share of the Company’s preferred stock at $280 per share. However, the rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events. If a person or group acquires or announces a tender or exchange offer that would result in the acquisition of 15 percent or more of the Company’s common stock while the stockholder rights plan remains in place, then, unless the rights are redeemed by the Company for $0.001 per right, the rights will become exercisable by all rights holders except the acquiring person or group for shares of the Company or the third party acquirer having a value of twice the right’s then-current exercise price. The stockholder rights plan may have the effect of deterring or delaying a change in control of Brocade.

In March 1999, the Board of Directors approved the adoption of the Company’s 1999 Employee Stock Purchase Plan (the Purchase Plan), and the Company’s shareholders approved the Purchase Plan in April 1999. The Purchase Plan permits eligible employees to purchase shares of the Company’s common stock through payroll deductions at 85 percent of the fair market value at certain plan-defined dates. The maximum

number of shares of the Company’s common stock available for sale under the Purchase Plan is 1.6 million shares, plus an annual increase to be added on the first day of the Company’s fiscal year, equal to the lesser of 20.0 million shares, or 2.5 percent of the outstanding shares of common stock at such date. Accordingly, on October 31, 2004 and October 26, 2003, 6.6 million and 6.4 million additional shares, respectively, were made available for issuance under the Purchase Plan. During the years ended October 30, 2004, October 25, 2003, and October 26, 2002, the Company issued 2.3 million shares, 2.4 million shares, and 0.6 million shares, respectively, under the Purchase Plan. At October 30, 2004, 24.5 million shares were available for future issuance under the Purchase Plan.

In the second quarter of fiscal 2003, the Company recorded $1.7 million of deferred stock compensation in connection with its acquisition of Rhapsody. The $1.7 million of deferred stock compensation represented the intrinsic value of unvested restricted common stock and assumed stock options, and is being amortized over the respective remaining service periods on a straight-line basis (see Note 4, “Acquisition of Rhapsody Networks, Inc.,” of the Notes to Consolidated Financial Statements). As of October 30, 2004, the remaining unamortized balance of the deferred stock compensation related to the Rhapsody acquisition was $0.2 million. In addition, in fiscal year 2004 the Company recorded $1.7 million of deferred stock compensation in connection with restricted stock award grants to certain employees. As of October 30, 2004, the remaining unamortized balance of this deferred stock compensation was $0.9 million. Deferred stock compensation is presented as a reduction of stockholders’ equity and amortized ratably over the vesting period of the applicable options. Accordingly, the Company recorded $0.5 million, $0.6 million, and $1.0 million, as amortization of deferred stock compensation during the years ended October 30, 2004, October 25, 2003, and October 26, 2002, respectively. Amortization of deferred stock compensation for the year ended October 30, 2004 does not include the compensation expense related to the restricted stock awards. Deferred stock compensation is decreased in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder’s services. At October 30, 2004, total unamortized deferred stock compensation was $1.1 million.

In March 1999, the Board of Directors approved the 1999 Director Option Plan (the Director Plan) and the Company’s shareholders approved the Director Plan in April 1999. The Director Plan provides for the grant of common stock to Directors of the Company. At October 30, 2004, the Company had reserved 1.5 million shares of authorized but unissued shares of common stock for future issuance under the Director Plan. Of this amount, 1.1 million shares were outstanding, and 0.4 million shares were available for future grants.

In March 1999, the Board of Directors approved the Company’s 1999 Stock Plan (the 1999 Plan) and the Company’s shareholders approved the 1999 Plan in April 1999. The 1999 Plan provides for the grant of incentive stock options and/or nonstatutory stock options to employees. Per the terms of the 1999 Plan, the maximum number of shares of the Company’s common stock available for sale under the 1999 Plan is 118.8 million shares, plus an annual increase to be added on the first day of the Company’s fiscal year, equal to the lesser of 40.0 million shares, or 5.0 percent of the outstanding shares of common stock at such date. Accordingly, on October 31, 2004 and October 26, 2003, 13.2 million and 12.9 million additional shares, respectively, were made available for grant under the 1999 Plan. At October 30, 2004, the Company had reserved 62.7 million shares of authorized but unissued shares of common stock for future issuance under the 1999 Plan. Of this amount, 33.6 million shares were outstanding, and 29.1 million shares were available for future grants.

In September 1999, the Board of Directors approved the Company’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 51.4 million shares of common stock have been reserved for issuance under the NSO Plan. At October 30, 2004, the Company had reserved approximately 46.0 million shares of authorized but unissued shares of common stock for future issuance under the NSO Plan. Of this amount, 14.7 million shares were outstanding, and 31.3 million shares were available for future grants. No stock options were granted under the NSO Plan during fiscal year 2004. During the year ended October 25, 2003, the Company granted 18.5 million shares under the NSO Plan.

In January 2003, in connection with the Rhapsody acquisition, the Company assumed the Rhapsody’s Stock Option Plan (the Rhapsody Plan). The Rhapsody Plan provides for the grant of incentive stock options and/or nonstatutory stock options to employees and consultants. At October 30, 2004, there were no shares outstanding or available for future grants under the Rhapsody Plan.

The Company, under the various stock option plans (the Plans) discussed above, grants stock options for shares of common stock to employees and directors. In accordance with the Plans, the stated exercise price for non-qualified stock options shall not be less than 85 percent of the estimated fair market value of common stock on the date of grant. Incentive stock options may not be granted at less than 100 percent of the estimated fair market value of the common stock, and stock options granted to a person owning more than 10 percent of the combined voting power of all classes of stock of the Company must be issued at 110 percent 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. The majority of options granted under the Plans vest over a period of four years. Certain options granted under the Plans vest over shorter periods. At October 30, 2004, the Company had cumulatively reserved 110.2 million shares of authorized but unissued shares of common stock for future issuance under the Plans. Of this amount, 49.5 million shares were outstanding, and 60.8 million shares were available for future grants.

The following table summarizes stock option plan activity under all of the Plans (in thousands except per share amounts):

The following table summarizes information about stock options outstanding and exercisable at October 30, 2004 (in thousands except number of years and per share amounts):

At October 30, 2004, 0.3 million shares of common stock issued upon exercise of stock options with a weighted-average exercise price of $0.35 per share were subject to repurchase by the Company. There was no dilutive impact of potential common shares associated with stock options, by application of the treasury stock method, for the years ended October 30, 2004 or October 25, 2003, as the Company had a net loss for each of those years. The dilutive impact of potential common shares associated with stock options, by application of the treasury stock method, for the year ended October 26, 2002 were 9.9 million.

The following table summarizes information, as of October 30, 2004, with respect to shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans (in thousands except per share amounts):


(1)	Consists of the Purchase Plan, the Director Plan, the 1999 Plan and the Rhapsody Plan.

(2)	Consists solely of the NSO Plan.

(3)	Excludes purchase rights accruing under the Purchase Plan. As of October 30, 2004, the Purchase Plan had a shareholder-approved reserve of 30.6 million shares, of which 24.5 million shares were available for future issuance.

(4)	Consists of shares available for future issuance under the Purchase Plan, the Director Plan, the 1999 Plan, and the Rhapsody Plan.

(5)	All shares were granted prior to fiscal year ended October 25, 2003. There were no shares granted under this plan during fiscal year ended October 30, 2004.

The Company sponsors the Brocade Communications Systems, Inc. 401(k) Plan (the Plan), which qualifies under Section 401(k) of the Internal Revenue Code and is designed to provide retirement benefits for its eligible employees through tax deferred salary deductions.

Through December 31, 2001, employees could contribute from 1 percent to 20 percent of their eligible compensation to the Plan. Effective January 1, 2002, the employee contribution limit was increased to 60 percent of eligible compensation. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Service. The Company matches employee contributions dollar for dollar up to a maximum of $1,500 per year per person. All matching contributions vest immediately. The Company’s matching contributions to the Plan totaled $1.5 million, $1.5 million, and $1.5 million for the years ended October 30, 2004, October 25, 2003, and October 26, 2002, respectively.

Income (loss) before provision for income taxes consisted of the following (in thousands):

The difference between the United States federal statutory rate and the Company’s income tax provision for financial statement purposes consisted of the following:

United States income taxes were not provided for undistributed earnings of certain non-United States subsidiaries taxed at rates lower than United States rates. As of October 30, 2004, the Company had approximately $90.3 million of cumulative net undistributed earnings of foreign subsidiaries. The Company intends to utilize these earnings through expansion of its business operations outside the United States for an indefinite period of time. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company could be subject to additional U.S. income taxes, subject to an adjustment for foreign tax credits, and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in either the balance of fiscal year 2004 or in fiscal year 2005. The company has started an evaluation of the effects of the repatriation provision; however, the Company does not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that the Company is considering for repatriation under this provision is between zero and $61 million.

During the year ended October 30, 2004, the Company had a change in valuation allowance of $26.1 million. The cumulative valuation allowance has been placed against the gross deferred tax assets. The valuation allowance will be reduced in the period in which the Company is able to utilize the deferred tax assets on its tax return, resulting in a reduction in income tax payable. The tax benefit of these credits and loss carryforwards attributable to non variable stock options will be accounted for as a credit to shareholders’ equity rather than a reduction of income tax expense. Included in the valuation allowance is $161.3 million and $161.5 million as of October 30, 2004 and October 25, 2003, respectively, that would be credited to shareholders’ equity associated with stock options.

As of October 30, 2004, the Company had federal net operating loss carryforwards of $381.2 million and state net operating loss carryforwards of $160.3 million. Additionally, the Company has $34.2 million of federal tax credits and $38.9 million of state tax credits. The federal net operating loss and other tax credit carryforwards expire on various dates between 2016 through 2024; the state net operating loss carryforwards expire on various dates between 2007 through 2024. Under the current tax law, net operating loss and credit carryforwards available to offset future income in any given year may be limited by statute or upon the occurrence of certain events, including significant changes in ownership interests.

The Company is organized and operates as one operating segment: the design, development, manufacturing, marketing and selling of infrastructure for storage area networks (SANs). The Chief Executive Officer is the Company’s Chief Operating Decision Maker (CODM), as defined by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” The CODM allocates resources and assesses the performance of the Company based on consolidated revenues and overall profitability.

Revenues are attributed to geographic areas based on the location of the customer to which products are shipped. Domestic revenues include sales to certain OEM customers who take possession of Brocade products domestically and then distribute those products to their international customers. Domestic and international revenues were 65 percent and 35 percent of total revenues, respectively, for the year ended October 30, 2004, 67 percent and 33 percent of total revenues, respectively, for the year ended October 25, 2003, and 70 percent and 30 percent for the year ended October 26, 2002, respectively. To date, service revenue has not exceeded 10 percent of total revenues.

For the year ended October 30, 2004, three customers accounted for 29 percent, 22 percent, and 19 percent of total revenues, respectively. For the year ended October 25, 2003, the same three customers accounted for 30 percent, 20 percent, and 17 percent of total revenues, respectively. For the year ended October 26, 2002, also the same three customers accounted for 29 percent, 19 percent, and 14 percent of total revenues, respectively. The level of sales to any single customer may vary and 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 the Company’s financial condition or results of operations.

Geographic information for the years ended October 30, 2004, October 25, 2003, and October 26, 2002 are presented below (in thousands). Identifiable assets located in foreign countries were not material at October 30, 2004, October 25, 2003, or October 26, 2002.

Net gain on investments of $0.4 million for the year ended October 30, 2004 consisted of gains on the disposition of non-marketable private strategic investments. Net gain on investments of $3.6 million for the year ended October 25, 2003 consisted of a gain on the disposition of private strategic investments of $3.1 million, and a gain of $2.7 million that resulted from the acquisition of a non-publicly traded company in which the Company had a minority equity investment, offset by an impairment charge of $2.2 million that resulted from an other-than-temporary decline in the estimated fair value of a equity investment in a different non-publicly traded company. Net gain on investments for the year ended October 26, 2002, consisted of gross realized gains on sales of investments in debt securities issued by United States government agencies of $7.1 million. The carrying value of the Company’s equity investments in non-publicly traded companies at October 30, 2004 and October 25, 2003 was $0.5 million and zero, respectively.

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

For the years ended October 30, 2004 and October 25, 2003, stock option outstanding of 49.5 million shares and 46.6 million shares, respectively, were antidilutive as the Company had a net loss and, therefore, not included in the computation of diluted earnings per share. For the years ended October 26, 2002, potential common shares in the form of stock options to purchase 51.8 million weighted-average shares of common stock were antidilutive and, therefore, not included in the computation of diluted earnings per share. In addition, for the years ended October 30, 2004 and October 25, 2003, potential common shares resulting from the potential conversion of the Company’s convertible subordinated debt of 8.1 million and 10.7 million weighted-average common shares were antidilutive, respectively, and, therefore, not included in the computation of diluted earnings per share.

Larry W. Sonsini, a director of Brocade, is a member and Chairman and CEO of Wilson Sonsini Goodrich & Rosati, Professional Corporation (WSGR), the Company’s principal outside legal counsel. Aggregate fees billed to the Company by WSGR for legal services rendered, including general corporate counseling, litigation services, merger and acquisition related services, and services related to the Company’s convertible debt offering, during the years ended October 30, 2004, October 25, 2003, and October 26, 2002, were $0.6 million, $1.2 million, and $4.9 million, respectively. The Company believes that the services rendered to the Company by WSGR have been on terms no more favorable than those with unrelated parties.

Mark Leslie was a director of Brocade until May 2002 and served on the Board of Directors of VERITAS Software (Veritas), a company with whom Brocade does business. During the year ended October 26, 2002, total revenues from sales to Veritas were $2.5 million. The Company believes that sales to Veritas were on terms no more favorable than those with unrelated parties.

We reimburse Mr. Gregory L. Reyes, a Director and Advisor of Brocade, and the Company’s former Chairman of the Board and Chief Executive Officer, for expenses incurred by Mr. Reyes in the operation of his private plane when used for Brocade business. During fiscal years 2004 and 2003, we incurred expenses of

approximately $360,000 and $300,000, respectively, for expenses incurred by Mr. Reyes pursuant to this reimbursement agreement. The amount reimbursed to Mr. Reyes is consistent with our employee travel expense reimbursement policy and, we believe, the amount is at or below the market rate charged by commercial airlines for comparable travel arrangements.

The Company also has an agreement with San Jose Sharks, L.P., which is a limited partnership in which Mr. Reyes has a general partnership interest. Under the agreement, Brocade receives marketing and advertising services and use of certain facilities owned by the limited partnership. During fiscal years 2004 and 2003, we incurred expenses of approximately $360,000 and $472,000, respectively, pursuant to this agreement. We entered into this agreement before Mr. Reyes acquired his interest in the limited partnership. We believe that the terms we received under the agreement were no more or less favorable than those with unrelated parties.

During the normal course of business the Company purchases certain equipment from vendors who are also its customers and with whom the Company has contractual arrangements. The equipment purchase by the Company is primarily used for testing purposes in its development labs or otherwise consumed internally. The Company believes that all such transactions are on an arms-length basis and subject to terms no more favorable than those with unrelated parties.

At the meeting of the Board of Directors (the “Board”) on January 18, 2005, the Board appointed Dave House as the Executive Chairman of the Board and L. William Krause as the Lead Director. No compensation arrangements were made. Effective on January 18, 2005, Greg Reyes ceased being the Company’s Chief Executive Officer and Chairman. Mr. Reyes will remain on the Board and will serve as an advisor to the Company. At a meeting of the Board on January 21, 2005, the Board elected Michael Klayko as the Chief Executive Officer of the Company and appointed him as a member of the Board.

On January 24, 2005, the Company announced that its Audit Committee had completed an internal review regarding the Company’s stock option granting process. As a result of the findings of the review, the Company recorded additional stock-based compensation charges. In addition the Company recorded a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits.


(1)	Adjustments reflect stock-based compensation expense associated with stock options subject to variable accounting under APB 25 and changes in the Company’s tax provision as a result of a full valuation allowance applied against deferred tax assets related to stock option tax benefits.

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

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

Based on this evaluation, as of the Evaluation Date, our Chief Executive Officer and Chief Financial Officer have concluded that there existed material weaknesses in our disclosure controls and procedures in fiscal year 2003 and prior years, as detailed below. Our Chief Executive Officer and Chief Financial Officer have further concluded and that those control weaknesses were remedied by the fourth quarter of fiscal year 2003 and that as of October 30, 2004, our disclosure controls and procedures were operating effectively.

As more fully described in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restatement of Consolidated Financial Statements and in Note 3 of the Notes to Consolidated Financial Statements, Brocade announced on January 24, 2005, that its Audit Committee completed an internal review. As a result of the findings of the review, Brocade recorded additional stock-based compensation charges. In addition, Brocade recorded a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits.

Upon completion of the internal review, the Audit Committee determined that the restatement was required because it incorrectly accounted for: (A) grants that were made to new hires on their offer acceptance date, rather than the date of their commencement of employment, during the period May 1999 to July 2000; (B) grants that were made to persons engaged on a part-time basis prior to their new hire full-time employment during the period August 2000 to October 2002; and (C) grants where there was insufficient basis to rely on Brocade’s process and related documentation to support recorded measurement dates used to account for certain stock options granted prior to August 2003.

As a result, Brocade recorded additional stock-based compensation charges relating to many of its stock option grants from the periods 1999 though the third quarter of fiscal 2003. In addition, Brocade recorded a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits. In addition, it was concluded that there were improprieties in connection with the documentation of stock option grants and related employment records of a small number of employees prior to mid 2002, which resulted in immaterial adjustments included in this restatement.

Since the beginning of fiscal year 2003, Brocade has implemented numerous measures in connection with its ongoing effort to improve its control processes and corporate governance, some of which have been


	1. Improvements in Disclosure Controls and Internal Controls over Financial Reporting:


	•	Brocade has improved the documentation of its significant accounting policies, which are reviewed with Brocade’s Audit Committee and Brocade’s independent auditors.

	•	Improvements have been made to the Audit Committee charter and committee functions. The Audit Committee charter was expanded to include in its scope the responsibility to review and approve all new or changes to, significant accounting policies and positions. In addition, Brocade has expanded both the number of Audit Committee meetings from four to eight standing meetings, and the duration of those meetings. This allows a more in-depth review of complex accounting issues.

	•	Brocade periodically meets with its independent auditors to review all significant business issues and associated accounting implications, and any new or changed accounting policies.

	•	Brocade formed a Disclosure Committee composed of representatives from Brocade’s accounting, legal and investor relations departments, and Brocade’s financial management, the minutes of which are reviewed with the Audit Committee, Brocade’s outside counsel and independent auditors.


	•	Brocade implemented cross functional teams composed of members of Brocade’s legal, accounting and human resources departments to develop improvements in the stock option granting process.

	•	Brocade made personnel changes in areas associated with the stock option granting process to increase the levels of experience of the personnel involved.

	•	Brocade formalized guidelines relating to the size and vesting schedule of stock option grants for all new employee and on-going employee grants.

	•	Brocade improved the documentation of the actions of the Compensation Committee and Subcommittee regarding stock option granting.

	•	Brocade increased the frequency of stock option grants, moving to grants on a two to three week routine cycle, and significantly reduced the processing time between grant dates and the delivery of option paperwork to employees.

Brocade continues to implement remedial measures in response to the specific accounting and reporting issues identified by the Audit Committee internal review. These remedial measures include personnel and procedural changes to improve the controls over the financial reporting and the stock option granting process. Subsequent to October 30, 2004, the Company has implemented the following additional internal control improvements over its stock option granting process:


	•	Increased the Compensation Committee of the Board of Directors from one independent member to three independent members.

	•	The Compensation Committee refined and limited delegation of authority to a Subcommittee to grant stock options.

	•	Documented into a formal written policy its stock option granting process.


	•	Created a fixed schedule for new hire grants and recurring non-executive grants on the same day of each month.

	•	Adopted a policy of not granting executive officers options when trading is restricted for executives under the Company’s Insider Trading Policy.

On January 27, 2005, William K O’Brien resigned from the Company’s Board of Directors effective as of such date.

Certain information required by Part III is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2005 Annual Meeting of Stockholders (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Form 10-K.

The information required by this section is incorporated by reference to the information in the section entitled “Election of Directors” in the Proxy Statement. 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 incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. The information required by this Item with respect to the Company’s executive officers is contained in Item 1 of Part I of this Annual Report under the heading “Executive Officers of the Registrant.”

The Board of Directors has adopted a Code of Ethics for Principal Executive and Senior Financial Officers, which is applicable to the Chief Executive Officer, Chief Financial Officer, Controller and any other principal accounting officer. We will provide a copy of the Code of Ethics upon request made by email to investor-relations@brocade.com or in writing to Brocade Communications Systems, Inc., Attention: Investor Relations, 1745 Technology Drive, San Jose, California 95110. Brocade will disclose any amendment to the Code of Ethics or waiver of a provision of the Code of Ethics, including the name of the officer to whom the waiver was granted, on our website at www.brocade.com, on the Investor Relations page.

The information required by this section is incorporated by reference from the information in the section entitled “Executive Compensation and Other Matters” in the Proxy Statement.

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

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.

The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Auditors” in the Proxy Statement.


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


	The following financial statement schedule of Brocade Communications Systems, Inc. for the years ended October 30, 2004, October 25, 2003, and October 26, 2002, is filed as part of this Annual Report and should be read in conjunction with the Consolidated Financial Statements of Brocade Communications Systems, Inc.

	Schedule II — Valuation and Qualifying Accounts Page 90


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


	*	Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.


	#	Confidential treatment granted as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission.

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


	(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-8 (Reg. No. 333-95653) filed on January 28, 2000.

	(3)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 31, 1999, as amended.

	(4)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 29, 2000.

	(5)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 28, 2000.

	(6)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 27, 2001.

	(7)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 28, 2001.

	(8)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 27, 2001.

	(9)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 26, 2002.


(10)	Incorporated by reference from Brocade’s Registration Statement on Form 8-A filed on February 11, 2002.

(11)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 27, 2002.

(12)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 27, 2002.

(13)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 26, 2002.


(14)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 25, 2003.

(15)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 26, 2003.

(16)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 25, 2003.

(17)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 24, 2004.

(18)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 2004.

(19)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2004

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Klayko, and Antonio Canova, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

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 dates indicated:


	*	Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.


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


	(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-8 (Reg. No. 333-95653) filed on January 28, 2000.


	(3)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 31, 1999, as amended.
	(4)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 29, 2000.
	(5)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 28, 2000.
	(6)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 27, 2001.
	(7)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 28, 2001.
	(8)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 27, 2001.
	(9)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 26, 2002.


(10)	Incorporated by reference from Brocade’s Registration Statement on Form 8-A filed on February 11, 2002.
(11)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 27, 2002.
(12)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 27, 2002.
(13)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 26, 2002.
(14)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 25, 2003.
(15)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 26, 2003.
(16)	Incorporated by reference from Brocade’s Annual Report on Form 10-K for the fiscal year ended October 25, 2003.
(17)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 24, 2004.
(18)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 2004.

(19)	Incorporated by reference from Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2004

EX-3.2 2 f04919exv3w2.txt EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF BROCADE COMMUNICATIONS SYSTEMS, INC. A DELAWARE CORPORATION TABLE OF CONTENTS

i ARTICLE IV COMMITTEES................................................................................................ 10 4.1 COMMITTEES OF DIRECTORS............................................................................ 10 4.2 COMMITTEE MINUTES.................................................................................. 11 4.3 MEETINGS AND ACTION OF COMMITTEES.................................................................. 11 ARTICLE V OFFICERS................................................................................................... 11 5.1 OFFICERS........................................................................................... 11 5.2 APPOINTMENT OF OFFICERS............................................................................ 12 5.3 REMOVAL AND RESIGNATION OF OFFICERS................................................................ 12 5.4 CHAIRMAN OF THE BOARD.............................................................................. 12 5.5 CHIEF EXECUTIVE OFFICER............................................................................ 12 5.6 PRESIDENT.......................................................................................... 13 5.7 VICE PRESIDENT..................................................................................... 13 5.8 SECRETARY.......................................................................................... 13 5.9 CHIEF FINANCIAL OFFICER............................................................................ 14 5.10 ASSISTANT SECRETARY................................................................................ 14 5.11 AUTHORITY AND DUTIES OF OFFICERS................................................................... 14 ARTICLE VI INDEMNITY................................................................................................. 14 6.1 THIRD PARTY ACTIONS................................................................................ 14 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION...................................................... 15 6.3 SUCCESSFUL DEFENSE................................................................................. 15 6.4 DETERMINATION OF CONDUCT........................................................................... 15 6.5 PAYMENT OF EXPENSES IN ADVANCE..................................................................... 16 6.6 INDEMNITY NOT EXCLUSIVE............................................................................ 16 6.7 INSURANCE INDEMNIFICATION.......................................................................... 16 6.8 THE CORPORATION.................................................................................... 16 6.9 EMPLOYEE BENEFIT PLANS............................................................................. 17 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES........................................ 17 ARTICLE VII RECORDS AND REPORTS...................................................................................... 17 7.1 MAINTENANCE AND INSPECTION OF RECORDS.............................................................. 17 7.2 INSPECTION BY DIRECTORS............................................................................ 17 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..................................................... 18 ARTICLE VIII GENERAL MATTERS......................................................................................... 18 8.1 CHECKS............................................................................................. 18 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS................................................... 18 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES............................................................. 18 8.4 SPECIAL DESIGNATION ON CERTIFICATES................................................................ 19 8.5 LOST CERTIFICATES.................................................................................. 19 8.6 CONSTRUCTION; DEFINITIONS.......................................................................... 20

ii 8.7 DIVIDENDS.......................................................................................... 20 8.8 FISCAL YEAR........................................................................................ 20 8.9 SEAL............................................................................................... 20 8.10 TRANSFER OF STOCK.................................................................................. 20 8.11 STOCK TRANSFER AGREEMENTS.......................................................................... 20 8.12 REGISTERED STOCKHOLDERS............................................................................ 21 ARTICLE IX AMENDMENTS................................................................................................ 21 ARTICLE X DISSOLUTION................................................................................................ 21 ARTICLE XI CUSTODIAN................................................................................................. 22 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES........................................................ 22 11.2 DUTIES OF CUSTODIAN................................................................................ 22 ARTICLE XII LOANS TO OFFICERS........................................................................................ 22

iii AMENDED AND RESTATED BYLAWS OF BROCADE COMMUNICATIONS SYSTEMS, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the Corporation shall be 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware, 19801. The name of the registered agent of the Corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the Corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the Corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the (i) board of directors, (ii) the chairman of the board, (iii) the president, or (iv) the chief executive officer. If a special meeting is called by any person other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to -1- be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.6 of these Bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS To be properly brought before an annual meeting or special meeting, nominations for the election of director or other business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For such nominations or other business to be considered properly brought before the meeting by a stockholder, such stockholder must have given timely notice and in proper form of his intent to bring such business before such meeting. To be timely, such stockholder's notice must be delivered to or mailed and received by the secretary of the Corporation not less than 90 days prior to the meeting; provided, however, that in the event that less than 100 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations, propose the business, and, as the case may be, the name and address of the person or persons to be nominated or the nature of the business to be proposed; -2- (ii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or introduce the business specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.7 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting, or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. -3- When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provisions of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of the question. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Sections 2.12 and 2.14 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Except as otherwise provided in this Section 2.11, any action required by this chapter to be taken at any annual or special meeting of stockholders of a Corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is -4- signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. Notwithstanding the foregoing, effective upon the listing of the Common Stock of the Corporation on the Nasdaq Stock Market and the registration of any class of securities of the Corporation pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the stockholders of the Corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If the board of directors does not so fix a record date, the fixing of such record date shall be governed by the provisions of Section 213 of the General Corporation Law of Delaware. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.13 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the Corporation, but no such proxy shall be voted or acted upon after 3 years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is -5- irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The stock ledger shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders and of the number of shares held by each such stockholder. 2.15 CONDUCT OF BUSINESS Meetings of stockholders shall be presided over by the chairman of the board, if any, or in his absence by the president, or in his absence by a vice president, or in the absence of the foregoing persons by a chairman designated by the board of directors, or in the absence of such designation by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and conduct of business. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. -6- 3.2 NUMBER The authorized number of directors of the Corporation shall be ten (10). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 CLASSES OF DIRECTORS At such time as a Registration Statement regarding the sale of the Corporation's Common Stock to the public is declared effective by the Securities and Exchange Commission, the Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I Directors shall expire and Class I Directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II Directors shall expire and Class II Directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III Directors shall expire and Class III Directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, Directors shall be elected for a full term of three years to succeed the Directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each Director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the Corporation. Stockholders may remove directors with or without cause. Any vacancy occurring in the board of directors with or without cause may be filled by a majority of the remaining members of the board of directors, although such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders, and each director so elected shall hold office until the expiration of the term of office of the director whom he has replaced. Unless otherwise provided in the certificate of incorporation or these Bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. -7- (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the Corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. -8- Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least 4 days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least 48 hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.11 CONDUCT OF BUSINESS Meetings of the board of directors shall be presided over by the chairman of the board, if any, or in his absence by the chief executive officer, or in their absence by a chairman chosen at the meeting. The secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of any meeting shall determine the order of business and the procedures at the meeting. -9- 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.13 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these Bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.14 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. If at any time a class or series of shares is entitled to elect one or more directors, the provisions of this Article 3.14 shall apply to the vote of that class or series and not to the vote of the outstanding shares as a whole. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the Bylaws of the Corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of -10- incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, (iv) recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (v) amend the Bylaws of the Corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of adjournment), Section 3.11 (conduct of business) and 3.12 (action without a meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the Corporation shall be a chief executive officer, one or more vice presidents, a secretary and a chief financial officer. The Corporation may also have, at the discretion of the board of directors, a chairman of the board, a president, a chief operating officer, one or more executive, senior or assistant vice presidents, assistant secretaries and any such other officers as may -11- be appointed in accordance with the provisions of Section 5.2 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS Except as otherwise provided in this Section 5.2, the officers of the Corporation shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. The board of directors may appoint, or empower an officer to appoint, such officers and agents of the business as the Corporation may require (whether or not such officer or agent is described in this Article V), each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the board of directors may from time to time determine. Any vacancy occurring in any office of the Corporation shall be filled by the board of directors or may be filled by the officer, if any, who appointed such officer. 5.3 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors or, in the case of an officer appointed by another officer, by such other officer. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.4 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these Bylaws. If there is no chief executive officer, then the chairman of the board shall also be the chief executive officer of the Corporation and shall have the powers and duties prescribed in Section 5.5 of these Bylaws. 5.5 CHIEF EXECUTIVE OFFICER The Chief Executive Officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a Chairman of the Board at all meetings of the Board of Directors. He or she shall have the general powers and duties of management usually vested in the chief executive officer of a Corporation, including general supervision, direction and control of the business and supervision of -12- other officers of the Corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. The Chief Executive Officer shall, without limitation, have the authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. 5.6 PRESIDENT Subject to such supervisory powers as may be given by these Bylaws or the Board of Directors to the Chairman of the Board or the Chief Executive Officer, if there be such officers, the president shall have general supervision, direction and control of the business and supervision of other officers of the Corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. In the event a Chief Executive Officer shall not be appointed, the President shall have the duties of such office. 5.7 VICE PRESIDENT In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the chief executive officer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the chief executive officer. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these Bylaws, the chief executive officer or the chairman of the board. 5.8 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. -13- The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these Bylaws. He shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these Bylaws. 5.9 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the Corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the Corporation as may be ordered by the board of directors, shall render to the chief executive officer and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these Bylaws. 5.10 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.11 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, -14- administrative or investigative (other than an action by or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. 6.3 SUCCESSFUL DEFENSE To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 6.4 DETERMINATION OF CONDUCT Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made -15- (1) by the board of Directors or the Executive Committee by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) or if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. 6.5 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VI. 6.6 INDEMNITY NOT EXCLUSIVE The indemnification and advancement of expenses provided or granted pursuant to the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another while holding such office. 6.7 INSURANCE INDEMNIFICATION The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.8 THE CORPORATION For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. -16- 6.9 EMPLOYEE BENEFIT PLANS For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VI. 6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES The indemnification and advanced of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The Corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the Corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his position as a -17- director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the chief executive officer, any vice president, the chief financial officer, the secretary or assistant secretary of this Corporation, or any other person authorized by the board of directors or the chief executive officer or a vice president, is authorized to vote, represent, and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. -18- Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and"or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and"or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and cancelled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. -19- 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a Corporation and a natural person. 8.7 DIVIDENDS The directors of the Corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. The directors of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the Corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The Corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. -20- 8.12 REGISTERED STOCKHOLDERS The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The original or other Bylaws of the Corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the Corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the Corporation that the Corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the Corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the Corporation shall be dissolved. -21- ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the Corporation is insolvent, to be receivers, of and for the Corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the Corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the Corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the Corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the Corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. ARTICLE XII LOANS TO OFFICERS The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiaries, including any officer or employee who is a Director of the Corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the Corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this Bylaw shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. -22- EX-10.77 3 f04919exv10w77.txt EXHIBIT 10.77 EXHIBIT 10.77 [IBM LOGO] 3039 Cornwallis Road RTP, NC 27709 October 6, 2004 Mr. Michael Harrison Brocade Communications Systems, Inc. 1745 Technology Drive San Jose, CA 95110 Subject: Amendment 18 to SOW#1 of the IBM/Brocade Goods Agreement ROC-P-68 This letter (the "Amendment") serves as Amendment Number 18 to SOW#1, including all amendments thereto ("SOW#1") of the Goods Agreement ROC-P-68 (the "Agreement"), which the parties hereto do mutually agree to amend as follows: 1. Section 2.10 (Notice of Product Withdrawal) is deleted in its entirety and replaced with the following: Supplier will provide Buyer with [**] written notice of its intent to withdraw any Product ("End of Life" or "EOL") prior to the last date of manufacture of a Product. Buyer shall provide to Supplier [**]for Products and FRUs [**]from the receipt of Supplier's notice of End of Life. Buyer will provide a [**]in each [**]during the [**]period, as requested by Supplier. Buyer shall provide to Supplier a non-cancelable last-time buy WA for forecasted Products no later than [**]prior to the End of Life date (last date of manufacture or sales/distribution date). Such Product purchases must be scheduled to ship no later than the End of Life date. For delivery requests outside of the Notice Period or order requests after Buyer's last-time buy purchase has been placed, Supplier will review on a case-by-case basis Buyer's request(s). 2. Section 9.4 entitled "TECHNICAL SUPPORT" is deleted in its entirety and replaced with the following: 9.4 TECHNICAL SUPPORT Technical Support services include [**] for Product, documentation and Maintenance and Minor Releases arising out of technical support responsibilities, and all such releases created or made available by Supplier. 9.4.1 LEVEL 1. Supplier will assist Buyer as [**], in performing the following Level 1 support responsibilities: - - create the PMR; - - obtain from Customer a description of the Problem; - - search for any known resolution(s) relevant to the Problem; - - if a resolution to the Problem is known, specify such resolution to Customer; - - pass the PMR to Level 2, and [**] Level 1 actions. 9.4.2 LEVEL 2. Supplier will assist Buyer, as [**] in performing the following Level 2 support responsibilities: - - receive the PMR from Level 1; - - analyze Problem symptoms and gather additional data from Customer as required; - - recreate Problem on the Developer Test System; - - determine if Problem is due to improper installation of the Product by Customer; - - determine if Problem is due to operationally related hardware or software at the Customer location; - - attempt a bypass or circumvention for high impact Problems (i.e., Severity 1 and 2); - - [**] Level 2 actions. 9.4.3 LEVEL 3. Supplier will provide Level 3 support during normal Business Hours, and will make commercially reasonable efforts to have Level 3 support [**]; - - receive the PMR number and supporting documentation and materials from Level 2; - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 1 - - analyze Problem symptoms and diagnose Problem; - - notify Level 2 if additional information, materials or documentation are required; - - attempt to recreate Problem on the [**]; - - assist Level 2 in developing a bypass or circumvention for high impact Problem (i.e., Severity 1 and 2); - - deliver corrections to the Product and/or Product code to Buyer within the applicable Correction Times to fix Problems identified by Buyer; - - confirm resolution of Problem with Customer, and document Level 3 actions through regular communication; and - - answer Backline Support questions from Buyer [**]concerning the operation and use of Products. 9.4.4 LEVEL 4. Supplier will provide Level 4 Support to Buyer as the highest level of escalation support available at [**]for Problems that result from Supplier root cause. Level 4 support shall be available as required according to the severity of the Problem, and at Buyer's and Supplier's agreed upon discretion. If mutually agreed, Supplier will provide off-shift Level 4 support if Buyer indicates such support is required. The Level 4 Support escalation process is required for complex Problems and will provide engineering development assistance from Supplier. Level 4 Support includes but is not limited to the Level 3 activities defined in Section 9.4.3 and the following reengineering activities: - analyzing and reproducing, as necessary, the reported defect to understand root cause - developing a fix or workaround for the reported defect - setting up the test bed of appropriate Supplier hardware and software versions to test the defect fix - testing that the defect fix works with the other current Supplier products/release levels that may be running at the affected customer site(s) - continually retesting that the defect fix still works with each new version of other Supplier products/release levels that may be getting introduced at the affected customer site(s) Supplier root cause is defined as Problems resulting from defects in materials and workmanship and/or errors in conforming to Product Specifications according to Section 1.1 "Specifications" covering hardware, firmware, and software at time of Product shipment or subsequent releases as mutually agreed to by both parties according to Section 6.0 "Engineering Changes". Root cause will be demonstrated by test and problem determination analysis. If Buyer requires Level 4 Support for Problems that are demonstrated by Supplier through root cause analysis not to result from Supplier root cause, Supplier will provide technical support to Buyer at Supplier's then current at Time & Materials rates, [**], and as mutually agreed to by the parties. Brocade shall notify IBM of a planned EOL announcement for any Brocade Product or Software [**]before the published date or the date on which the [**]is planned to be [**]. Any consent by IBM shall not relieve Brocade of any obligations under this Agreement, including breach thereof [**]. 9.4.5 OTHER TECHNICAL SUPPORT RESPONSIBILITIES. Supplier will provide to Buyer the name and phone numbers of Supplier Personnel to contact for all technical support matters related to the Product. Supplier will provide [**]by Buyer to enable Buyer to perform technical support functions for the Product and will keep Buyer informed of any known Problems and their associated solutions. Supplier shall [**]directly in the event IBM [**]Supplier for Product support services. No other support shall be provided unless [**]for these Products. 9.4.6 TECHNICAL SUPPORT TRAINING. Supplier shall make available to Buyer technical training for support of end user implementation of the Product. Buyer shall not use any training materials in a manner [**]from the use of these materials to IBM. Technical training requested by Buyer will be made available by Supplier to Buyer as mutually agreed upon. Buyer acknowledges that the materials distributed by the Supplier during the technical training are protected by copyright, and that Buyer shall have no rights to reproduce such materials without the prior written consent of Supplier, such consent shall not be unreasonably withheld. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 9.4.7 SEVERITY. Upon Buyer sending an incident report to Supplier, Buyer shall assign the incident report a severity level in accordance with the severity level assigned to each defect or Problem in accordance with the table below. Due to varying complexity of Problems, the target defect resolution times listed in this section are goals, and not firm deadlines.
DEFECT SEVERITY SERVICE OBJECTIVE LEVEL DEFINITION RESPONSE TIME TARGET DEFECT RESOLUTION TIME ----- ---------- ------------- ----------------------------- SEVERITY 1 Product or system is not operational Supplier provide Buyer with Supplier will ensure resources will be and/or all data inaccessible or [**] Response to its initial request applied [**] with a goal of providing a lost. Data flow may be stopped or after receiving notification of solution or acceptable work-around within errors occur that significantly Problem from Buyer, such Response [**]. Supplier will provide a [**] plan impact Customer's operation. These time not to exceed [**]. For the within [**] from the date of Problem issues will be regarded as having a purpose of this Agreement a "Response" intake. Critical Situations may require critical impact to the end user's is defined as a telephone call from the Customer, Supplier, and Buyer be at data. Supplier support personnel Supplier acknowledging that an their respective work locations or will require continuous availability incident report has been received and available [**] of Buyer contact until resolution. that an appropriate technical resource has been assigned and is available to work with IBM product field engineering support. SEVERITY 2 Product or system is Provide Buyer with a Response Supplier resources will be applied operational, but has to its initial request within continuously, during Supplier's normal severely restricted [**], and during normal Business Hours, until [**]. Supplier will functionality and/or Business Hours. provide a work-around, fix or patch or degradation that end-user resolve the defect in less than [**] from regards as is impacting his the date of Problem intake. If Supplier business. provides a work-around, fix or patch, the severity level of the Problem will be downgraded. SEVERITY 3 Product or system is Provide Buyer with a Response Supplier provide a work-around, fix, or operational with functional to its initial request within patch or resolve the defect in less than limitations or restrictions [**], and during normal [**] from the date of Problem intake. that end user does not Business Hours. Supplier resources will be applied on an regard as critical to its as available basis. If Supplier provides a overall operations. work-around, fix or patch the severity level of the Problem may be downgraded. SEVERITY 4 Low or no impact Problems Provide Buyer with a Response Supplier will provide a work-around, fix, or questions associated to its initial request within or patch or resolve the defect in less with Product usage, [**], and during normal than [**] from the date of Problem intake. implementation, performance Business Hours. Supplier resources will be applied on an or any other inquiries. as available basis. If Supplier provides a work-around, fix or patch the severity level of the Problem may be downgraded.
Buyer will use [**] to resolve Severity Level 3 and 4 problems prior to contacting Brocade for assistance. Either Buyer or Supplier may require that a certain Problem be managed as a higher Severity Level than as classified. If either party requires such higher Severity Level, then the Problem will be managed as [**] Severity Level. In the event Buyer and Supplier disagree on the severity level of a given defect, Buyer and Supplier agree to promptly review defect reports related to potential Buyer-Customer impact. Buyer agrees to provide data on failures, as available, with specific Buyer platforms, Customer captures, re-configurations with test data and other information that may be needed to accurately classify the defect. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 3. The last paragraph of Section 9.3 (Post Warranty Services), which is entitled "PRODUCT SUPPORT" is deleted in its entirety and replaced with the following: Supplier will continue to provide technical support as defined in Section 9.4, for [**] after the termination of SOW 1 or [**] an End of Life notice provided by Supplier pursuant to Section 2.10, whichever is earlier. 4. The pricing table in Section 2.1 is deleted from Section 2.1 and moved to a newly created exhibit to the Agreement, entitled Pricing Exhibit, and attached as Exhibit A. The Pricing Exhibit may be updated from time to time upon mutual written agreement by authorized representatives of each party. Please have your authorized representative indicate acceptance thereof by signing both copies of the Amendment and returning one copy to the attention of Robert Tice at 3039 Cornwallis Road Research Triangle Park, NC 27709. The effective date of this Amendment shall be the date on the top of this Amendment (the "Effective Date"). The parties acknowledge that they have read this Amendment, understand it, and agree to be bound by its terms and conditions. All capitalized terms not defined herein shall have the meaning set forth in the Goods Agreement or the SOW #1. All other terms and conditions of the Goods Agreement and SOW#1 that are unaffected by the revisions set forth in this Amendment shall remain in full force and effect. Further, the parties agree that this Amendment and the Goods Agreement and SOW#1 are the complete and exclusive statement of the agreement between the parties, superseding all proposals or other prior agreement, oral or written, and all other communications between the parties relating to this subject. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: INTERNATIONAL BUSINESS MACHINES BROCADE COMMUNICATIONS SYSTEMS, INC. CORPORATION By: /s/ WALTER PAWLOWSKI 10/5/04 By: /s/ MICHAEL KLAYKO 10/4/04 -------------------- ------- ------------------ ------- Authorized Signature Date Authorized Signature Date WALTER PAWLOWSKI MICHAEL KLAYKO - ------------------------ ---------------------- Type or Print Name Type or Print Name STORAGE OEM PROCUREMENT MGR. VP WW SALES - ---------------------------- ---------------------- Title & Organization Title & Organization - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 4 EXHIBIT A PRICING
IBM P/N / NUMA-Q P/N BROCADE P/N DESCRIPTION UNIT PRICE - ---------------- ----------- ----------- ---------- [**] [**] 8-Port Fibre Channel [**] Switch Single Power Supply (SW2400) Includes [**]- whole unit switch Product [**] [**] 16 Port Fibre Channel [**] Switch Single Power Supply (SW2800) Includes [**]- whole unit switch Product [**] [**] Silkworm 2000 Power Supply [**] [**] [**] Mainboard, SW 2400 [**] [**] (8-port) [**] [**] Fan Tray, SW 2400 [**] (8-port) [**] [**] Chassis, SW 2400 (8- port) [**] [**] [**] Mainboard, SW 2800 [**] [**] (16-port) [**] [**] Fan Tray, SW 2800 (16-port) [**] [**] [**] Chassis, SW 2800 (16- port) [**] with operator panel / LCD [**] [**] Quick Loop License [**] [**] [**] Fabric Watch License [**] [**] [**] Extended Fabrics [**] [**] [**] Extended Fabrics [**] [**] [**] Remote Switch [**] [**] [**] Remote Switch [**] [**] [**] 8 Port Fibre Channel [**] Switch Single Power [**] Supply (SW3200) [**] Includes [**] (to be [**] included prior to [**] 10/28/03 for [**] availability for Buyer customer shipments) [**] [**] 8 Port Fibre Channel [**] Switch Single Power [**] Supply (SW3200) [**] Includes [**] [**] [**] [**] [**] Full Fabric Upgrade [**] Includes [**] [**] [**] [**]
- ----------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 5 [**] [**] 16 Port Fibre Channel [**] Switch Single Power [**] Supply (SW3800) [**] Includes [**] - whole [**] unit switch Product [**] [**] [**] [**] [**] [**] [**] Fan (SW3800) [**] [**] [**] [**] [**] [**] [**] [**] [**] Power Supply [**] (SW3800) [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] Mainboard FRU [**] (SW3800) [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] 32 Port Fibre Channel [**] Switch Double Power [**] Supply (SW3900) [**] Includes, [**] - whole [**] unit switch Product [**] [**] [**] Fan (SW3900) [**] [**] [**] [**] [**] Power Supply [**] (SW3900) [**] [**] [**] [**] Mainboard FRU [**] (SW3900) [**]

- ----------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 6 [**] [**] [**] [**] [**] Secure Fabric OS [**] (SW3200) [**] [**] Secure Fabric OS [**] (SW3800) [**] [**] 1Gb Secure Fabric OS [**] [**] [**] Secure Fabric OS [**] (SW12000) [**] [**] Performance Bundle [**] ([**]) [**] [**] Performance Bundle [**] [**] [**] [**] 32 Port Fibre Channel [**] Core Switch [**] (SW12000) Includes [**] [**] [**] [**] Rack Mounting Kit [**] 14U, FRU [**] [**] [**] [**] Switch Blade 16 port, [**] 2GB [**] [**] [**] [**] [**] Switch Blade 16 port, [**] 2GB, FRU [**] [**] [**] [**] Chassis Door, Includes [**] Plastic and Metal door [**] Components and IBM [**] Front Badge [**] [**] Control Processor [**] Blade [**] [**] [**] [**] [**] Stiletto Port Blade Slot [**] Filler Panel, [**] SW12000, FRU [**] [**] [**] Power Supply , 180- [**] 264VAC, 1000W, [**] FRU [**] [**] [**] [**] Blower Assembly, [**] FRU [**] [**] [**] [**] Cable Management [**]

- ----------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 7 Pillar, FRU [**] [**] [**] [**] WWN Card [**] [**] [**] [**] [**] Power Plug, Switch [**] and Distribution Panel [**] [**] Chassis FRU, includes [**] [**]. [**] [**] [**] [**] Rear WWN Bezel [**] Assy [**] [**] [**] [**] Cable Management [**] Tray [**] [**] [**] [**] AC Power Cord, FRU [**] [**] [**] [**] [**] AC Power Cord, [**] UK/Ireland, 250V, [**] FRU [**] [**] [**] AC Power Cord, Cont. [**] Europe CEE7/7, FRU [**] [**] [**] [**] AC Power Cord, [**] AUST/INZ, 250V [**] [**] [**] [**] AC Power Cord, Intl [**] IEC [**] [**] [**] [**] Remote Switch [**] software [**] [**] Extended Fabric [**] software [**] [**] Fabric Manager 3.x [**] [**] [**] ISL Trunking [**] (SW3200) [**] [**] ISL Trunking [**] (SW3800)

[**] [**] [**] [**] [**] [**] [**] Fabric Manager 4.x-Enterprise [**] [**] ([**]) [**] [**] Fabric Manager 4.x - 3.0 to 4.x [**] [**] Upgrade to Enterprise ([**]) [**] [**] Fabric Manager 4.x with 10 [**] [**] Domains [**] [**] Fabric Manager 4.x[**] [**] [**] [**] [**] Secure Fabric OS [**] [**] (SW12000/24000) [**] [**] 32 Port Fibre Channel [**] [**] Director (SW24000) Includes [**] [**] [**] [**] Meteor, 16 Port Upgrade [**] [**]

- ----------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 8 Blade [**] [**] Meteor Upgrade kit. Includes: [**] [**] [**] [**] [**] 8 Port Fibre Channel Two [**] [**] Domain Switch Single Power Supply (SW3250), Includes [**] [**] [**] 8 Port Fibre Channel Two [**] [**] Domain Switch Single Power [**] Supply (SW3250), [**] Includes [**] [**] [**]. [**] [**] [**] [**] 16 Port Fibre Channel Four [**] [**] Domain Switch, Two Fixed [**] Power Supplies (SW3850), Includes [**] [**] [**] 16 Port Fibre Channel Four [**] [**] Domain Switch, Two Fixed [**] Power Supplies (SW3850), [**] Includes [**] [**] [**] [**] [**] [**] [**] [**] Secure Fabric OS (SW3850) [**] [**] [**] [**] Secure Fabric OS (SW3250) [**] [**] [**] [**] Meteor FRU Chassis , [**] [**] includes [**] [**] [**] Meteor FRU, Chassis Door. [**] [**] Includes [**] [**] [**] Meteor Switch Blade 16 port, [**] [**] 2Gb, FRU [**] [**] Meteor Control Processor [**] [**] Blade, FRU [**] [**] FRU, Power Supply Filler [**] [**] Panels [**] [**] Extended Fabric [**] [**] [**] [**] Remote Switch [**] [**] [**] [**] Performance Bundle ([**]) [**] [**] [**] [**] Four Domain to Full Fabric [**] [**] Upgrade [**] [**] Extended Fabric [**] [**] [**] [**] Remote Switch [**] [**] [**] [**] Performance Bundle ([**]) [**] [**] [**] [**] Two Domain to Full Fabric [**] [**] [**] [**] [**] [**] 8 port Switch FRU [**] [**] COO - United States [**] [**] [**] 8 port Switch FRU [**] [**] COO - China

- --------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 9 [**] [**] 16 port Switch FRU [**] [**] COO - United States [**] [**] [**] 16 port Switch FRU [**] [**] COO - China [**] [**] 16 active ports, 4g Fiber [**] [**] Channel Switch (SW4100) with two power supplies; includes [**] [**] [**] 16 port 4g switch FRU [**] [**] (SW4100); includes [**] [**] [**] Power Supply FRU (SW4100) [**] [**] [**] [**] Fan FRU (SW4100) [**] [**] [**] [**] Performance Monitoring [**] [**] (SW4100) [**] [**] ISL Trunking (SW4100) [**] [**] [**] [**] Extended Fabric (SW4100) [**] [**] [**] [**] Remote Switch (SW4100) [**] [**] [**] [**] Secure Fabric OS (SW4100) [**] [**] [**] [**] 16-24 port upgrade [**] [**] [**] [**] 24-32 port upgrade [**] [**] [**] [**] 16 to 32 port upgrade (Plant [**] [**] only) [**] [**] 16 to 32 port upgrade (Field [**] [**] only) [**] [**] CUP for 2109-F32 (single [**] [**] switch fabric) [**] [**] CUP for 2109-F32 (in [**] [**] cascaded fabrics) [**] [**] CUP for 2109-M12 (single [**] [**] switch fabric) [**] [**] CUP for 2109-M12 (in [**] [**] cascaded fabrics) [**] [**] CUP for 2109-M14 (single [**] [**] switch fabric) [**] [**] CUP for 2109-M14 (in [**] [**] cascaded fabrics)

- --------------- **For purpose of calculating the fees for the [**] Software Maintenance Support Program as described in Section 9.4, the [**] Software Maintenance Fee per Unit for each part number where it is applicable as follows:
IBM ANNUAL SOFTWARE PART BROCADE PRODUCT PART MAINTENANCE FEE PER NUMBER NUMBER PRODUCT DESCRIPTION UNIT - ------ -------------------- ------------------------------ ------------------- [**] [**] 32 Port Fibre Channel Director [**] (SW24000) Includes [**] [**] [**] Meteor Upgrade kit. [**] Includes: [**]
- --------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 10 [**] [**] 8 Port Fibre Channel Two Domain Switch Single [**] Power Supply (SW3250), Includes [**] [**] [**] 8 Port Fibre Channel Two Domain Switch Single [**] Power Supply (SW3250), Includes [**] [**] [**] 16 Port Fibre Channel Four Domain Switch, Two [**] Fixed Power Supplies (SW3850), Includes [**] [**] [**] [**] 16 Port Fibre Channel Four Domain Switch, Two [**] Fixed Power Supplies (SW3850), Includes [**] [**] [**] [**] Fabric Manager 4.x-Enterprise ([**]) [**] [**] [**] Fabric Manager 4.x-3.0 to 4.x Upgrade to [**] Enterprise ([**]) [**] [**] Fabric Manager 4.x with 10 Domains [**] [**] [**] Fabric Manager 4.x [**] [**] [**] [**] Secure Fabric OS (SW3850) [**] [**] [**] Secure Fabric OS (SW3250) [**] [**] [**] Secure Fabric OS (SW12000/24000) [**] [**] [**] 16 active ports, 4g Fiber Channel Switch [**] (SW4100) with two power supplies; includes [**] [**] [**] Secure Fabric OS (SW4100) [**] [**] [**] CUP for 2109-F32 (single switch fabric) [**] [**] [**] CUP for 2109-F32 (in cascaded fabrics) [**] [**] [**] CUP for 2109-M12 (single switch fabric) [**] [**] [**] CUP for 2109-M12 (in cascaded fabrics) [**] [**] [**] CUP for 2109-M14 (single switch fabric) [**] [**] [**] CUP for 2109-M14 (in cascaded fabrics) [**]

OUT OF WARRANTY REPAIR PRICING: [**] [**] [**] [**] [**] [**] - ------------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 11 EX-10.78 4 f04919exv10w78.txt EXHIBIT 10.78 EXHIBIT 10.78 AMENDMENT NO. 7 PURCHASE AGREEMENT This Amendment No. 7 ("the Amendment") to the Purchase Agreement (the "Agreement") dated January 25, 2000 by and among Brocade Communications Systems, Inc., a corporation organized under the laws of the State of Delaware, U.S.A., and having its principal place of business at 1745 Technology Drive, San Jose, California 95110 ("Brocade-US"), and Brocade Communications Switzerland SarL., a corporation organized under the laws of Geneva, and having its principal place of business at 29-31 Route de l'Aeroport, Case Postale 105 CH-1215 Geneva 15, Switzerland ("Brocade-Switzerland"), (collectively "SUPPLIER") and EMC Corporation, ("EMC"), a Massachusetts corporation, is made this 19th day of July 2004 by and between SUPPLIER and EMC and commences on the date accepted and executed by SUPPLIER ("Effective Date"). [**] WHEREAS, the parties wish to amend the Agreement to show the [**]to EMC for [**] from Brocade, and amend Exhibit F to update the [**]; NOW THEREFORE, IN CONSIDERATION OF THE ABOVE AND THE OTHER RESPECTIVE PROMISES OF THE PARTIES SET FORTH HEREIN, THE PARTIES HERETO AGREE AS FOLLOWS: 1) Exhibit A, [**] is hereby deleted and replaced with the attached Exhibit A [**], and new [**]. 2) Exhibit F, [**], is hereby deleted and replaced with the attached Exhibit F, [**]. 3) No Other Changes. All Other terms and conditions of the Agreement shall remain unchanged. 4) Counterparts. This Amendment may be executed in two or more counterparts, all of which, taken together, shall be regarded as one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 7 to OEM Purchase and License Agreement by their duly authorized representatives. Such execution of the Amendment may be in three counterparts, each of which shall be an original and together which shall constitute one and the same instrument. Executed and agreed to: Executed and agreed to: Brocade Communications Systems, Inc. EMC Corporation ("Supplier") Signature: /s/ MICHAEL KLAYKO Signature: /s/ WILLIAM MONAGLE 2/26/04 ------------------ --------------------------- Name: MICHAEL KLAYKO Name: WILLIAM MONAGLE Title: VP Title: VICE PRESIDENT CORPORATE PROCUREMENT EMC CORPORATION Date: JULY 28, 2004 Date: _____________________________ - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL Brocade Communications Switzerland, SarL. ("Supplier") Signature: /s/ IAN WHITING --------------- Name: Ian Whiting Title: Vice President - EMEA Place: Geneva, Switzerland EMC/BROCADE CONFIDENTIAL EXHIBIT A PRODUCTS AND PRICING EMC/BROCADE CONFIDENTIAL EXHIBIT F [**] 1.0 DEFINITIONS. 1.1 "Backline Support" refers to the escalation point for Frontline Support, for issues that cannot reasonably be resolved by Frontline Support, such as complicated installation or configuration issues, compatibility issues, complicated problem isolation and troubleshooting, and escalation of verified bugs to engineering. Backline Support is provided through telephone and e-mail support during normal SUPPLIER business hours and after-hours support for Severity 1 problems. 1.2 "Feature Release Version" is always a number. It is used to indicate added minor functionality within a Platform Release Version or Major Release Version. 1.3 "Frontline Support" includes EMC's initial direct contact with the end-user, call logging, entitlement verification, problem definition and isolation, determination of whether a solution is contained in the end user documentation, review of symptoms in the Brocade Knowledge Base for known resolutions, problem escalation to SUPPLIER, and closing the case with the end user after problem resolution. 1.4 "Maintenance Release Version" is always a number. It is used to indicate a scheduled (date driven) release of defect fixes and carefully selected RFEs (Requests for Enhancements.). 1.5 "Major Release Version" is always a number. It is used to designate a significant functional change to SUPPLIER software Products (e.g. Fabric Manager and Security). 1.6 "Patch Release Version" is a letter (a-z). A Patch release Version should be considered functionally identical to Maintenance Release Version with the exception of the identified defect fixes. It will consist of one, or a limited number of defect fixes. A patch release is based upon the severity/priority of the defect and must be a critical or high severity defect from a customer point of view as well as from Brocade point of view. - Patch fixes are rolled into the next maintenance, feature or platform release. - Patch fixes are cumulative for that code branch. 1.7 "Platform Release Version" is always a number. It is used to designate a significant functional change to the SUPPLIER operating system software (e.g. Fabric OS 4.0), and generally follows core fabric OS architecture changes, hardware architecture changes or new ASIC support. 1.8 "Product_Version_Code" (string designator) - the letter V is exclusively used by the Fabric OS software product. For all other products, the product code name will be used. To avoid potential issues, all products will be named with lowercase. [ PRODUCT_VERSION_CODE platform or major . feature . maintenance [patch] ] e.g., v4.1.0 | v4.1.3a | fm4.2.0 | api3.0.1 EMC/BROCADE CONFIDENTIAL 1.9 "Software Maintenance" means [**] and [**] 1.10 "Software Support" refers to the provision to EMC by SUPPLIER of certain software updates during the Software Support period. SUPPLIER'S Software Release Versioning Process is set forth in this Section 1.0. For each [**] Release Version or [**] Release Version licensed by EMC for which EMC purchases Software Maintenance, EMC shall be entitled to [**] releases. 2.0 SOFTWARE MAINTENANCE. Software Maintenance. As specified in Exhibit A, the price for each Product unit includes Software Maintenance for a period of [**] commencing on the date of purchase of such Product unit and [**] for [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, EMC [**], renew Software Maintenance for additional [**] at the [**] fee set forth for each Product in Exhibit A. SUPPLIER shall have the right to assign support obligations to the appropriate local SUPPLIER subsidiary. 3.0 SUPPORT LEVEL 3.1 EMC will provide all first-call technical support to its customers as defined above in Section 1.3 as "Frontline Support". SUPPLIER's technical support group will provide [**] except as described herein. All technical support, as described in Sections 1 through 6 of this Exhibit, and Product Support under this Agreement will be provided to EMC, unless specified otherwise. 3.2 EMC shall ensure that its field personnel are trained in the installation, setup, and operational issues involving the Product. The SUPPLIER technical support group will provide technical support to EMC's trained engineering staff [**] resolve installation, setup and operational issues involving the Product. 3.3 SUPPLIER will provide engineering level support to EMC's engineering staff [**] and defined above in Section 1.1 as "Backline Support" to isolate problem cause, make bug fixes to SUPPLIER supplied code, and produce the object code required by EMC to support and [**] the Products. 3.4 SUPPLIER technical support will be available via telephone during normal working days between the hours of 8:00 AM and 5:00 PM, Pacific Time. Support between 5:00 PM and 8:00 AM, Pacific Time, is available via answering service, [**]. Calls placed via the answering service will receive response from a SUPPLIER technical support representative within [**]. 3.5 Technical information including "Tech Tips" is available in the Brocade Knowledge Base located on the [**] 3.6 In the course of its investigations, SUPPLIER's technical support group may require that EMC's personnel be able to obtain onsite network traces, crash dumps or other diagnostic information for use by SUPPLIER's staff to isolate the cause of the problem. EMC will ensure that its support staff has the equipment and the training necessary to obtain this information as follows: - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL From the switch telnet console, the command "supportShow" output which is a script that will provide the output from the following switch commands: [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] Fibre Channel Products: Any fibre analyzer trace, Finisar Analyzer Traces preferred. Equipment List 3.7 In those cases where SUPPLIER personnel are [**] to make direct phone or field contact with a customer of EMC to obtain problem information, EMC [**] 4.0 PROBLEM ESCALATION 4.1 When the SUPPLIER technical support group determines that it is unable to resolve the problem with its own resources, it will escalate the problem. 4.2 In those cases where [**] on-site assistance to install, setup, resolve operational issues or obtain necessary diagnostic information in order to solve a problem, SUPPLIER will provide the services of a field applications engineer or a product development engineer, as determined by SUPPLIER, for that purpose. If it is determined that the cause of the problem is not due to a defect in the SUPPLIER supplied Product, EMC will reimburse SUPPLIER for time and materials at SUPPLIER's then standard rate plus reasonable expenses for transportation, meals and lodging. 4.3 If the SUPPLIER technical support group determines that the problem may be due to a defect in the SUPPLIER supplied Product, the problem will be escalated to SUPPLIER engineering via the normal SUPPLIER System Problem Report ("SPR") process. Priorities are in accordance with those defined in Exhibit C Section 3.0. 5.0 TECHNICAL CONTACTS 5.1 SUPPLIER and EMC will establish contacts to report problems, track status, exchange technical information, track build requirements, make bug fixes and coordinate the transfer of software files to and from a customer account on the [**]. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL 5.1.1 Technical Support Administrator. SUPPLIER will establish the Technical Support Administrator as the central contact point for receiving written problem reports and sending problem resolution status via Email or FAX. All verbal contacts with Technical Support should be made via supplied telephone numbers. 5.1.2 Development Engineering. SUPPLIER will assign Development Engineers as required to resolve all EMC SPRs and provide engineering level support to EMC's engineering staff. 5.2 EMC 5.2.1 Problem Administrator. EMC will establish one person as the counterpart to the SUPPLIER Technical Support Administrator to send problem reports and receive problem status. 5.2.2 Engineering. EMC will designate specific members of their engineering staff who are authorized to have engineering level contact with the designated SUPPLIER Engineer. However, EMC specified contacts are required to send problem reports and receive problem status via the Technical Administrator Support. 6.0 PROBLEM AND STATUS REPORTING 6.1 All problem reports will be submitted in a standard format using the sample form below including the serial number or worldwide name for the affected Product. All reports will be submitted to the SUPPLIER Technical Support Administrator via Email or FAX. PROBLEM REPORT SAMPLE FORM NAME VERSION NO. Date: Enter date of report filing. Project Description: Describe the problem. Provide as much detail as possible. Problem Environment: Describe operating environment where problem occurs including: Protocols in use, network operating system versions, host platforms, applications in use, number of file servers, number of users, frequency of occurrence, environmental factors, etc. Customer Code Version: Enter code versions affected by the problem. Release Requirements: Define if fix is to be delivered in X Release or in future Block Release. Responsible EMC Contact: Provide name and phone number of EMC's Engineering staff involved in the problem. 6.2 The SUPPLIER Technical Support Administrator will log the fact that a problem report was received in the Tech Support Database; and, if the issue is not resolved by Technical Support, enter the details from the problem report into the Engineering SPR Database and notify via Email the designated SUPPLIER Engineering contact that an SPR has been filed. EMC/BROCADE CONFIDENTIAL 6.3 In the event a problem is escalated to SUPPLIER Development Engineering, the SUPPLIER Technical Support Administrator will send a report acknowledgment containing the SPR number assigned to the problem to the designated EMC contact via Email or FAX. 6.4 SUPPLIER will use its Engineering SPR system to record and track the status of all EMC reported problems. 7.0 SOFTWARE MAINTENANCE RELEASES 7.1 As part of the support program, SUPPLIER will provide production quality software maintenance releases as mutually agreed [**] to EMC. Maintenance releases will contain fixes for [**]. At a minimum, SUPPLIER will provide maintenance releases in accordance with the schedule set forth in Exhibit B and also in any quarter in which [**]. 7.2 Maintenance releases will be derived[**] SUPPLIER standard server software. 7.3 The standard versions on which maintenance releases are based may [**]. SUPPLIER will give EMC at least [**], as well as offer EMC [**] SUPPLIER standard releases should they be available. 7.4 Maintenance releases will typically be delivered to EMC for [**] about the time the SUPPLIER [**], but no less than [**]. Maintenance releases will be available for access by EMC in a secured account on [**]. 7.5 SUPPLIER will provide [**] of all code supplied to EMC, however, EMC is responsible for [**] of their code release. 7.6 During the [**] after a maintenance release is made available to EMC, SUPPLIER will correct any [**] problem in [**]. In addition, [**] will be reviewed by EMC and SUPPLIER and SUPPLIER will use commercially reasonable efforts to correct those [**]. 7.7 Should EMC replace any serialized field-replaceable CP(s) (Control Processors) for an End User, EMC shall report to SUPPLIER the serial number(s) of the removed FRU(s) and the replacement FRU(s). EMC shall provide such reports to the Brocade Account Management team. 8.0 EMERGENCY SOFTWARE RELEASES 8.1 Upon mutual agreement of EMC and SUPPLIER, SUPPLIER will provide Emergency Releases to resolve highest impact customer problems, SPR 1 priority, which require resolution prior to the next scheduled Maintenance Release[**]. [**] problems may be deemed as candidates for Emergency Releases as mutually agreed between EMC and SUPPLIER. 8.2 Emergency Releases will be based on [**], and will differ by just the fix required to resolve the critical problem. Emergency Releases will not be guaranteed free of side effects, so their distribution must be very limited. In particular, an Emergency Release will NOT be supplied to SUPPLIER Manufacturing for volume production. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL 8.3 EMC's Emergency Releases will be available for access by EMC in a secured account on the [**]. The response criteria by problem type is as follows: Priority 1: SUPPLIER will respond [**] to a Priority 1 SPR and will provide [**] EMC as soon as possible. SUPPLIER will make [**] provide a [**]fix available on the BBS/FTP Server within [**]. Priority 2: SUPPLIER will use commercially reasonable efforts to make a fix available on the [**] within [**]. 8.4 All Emergency Release fixes will be incorporated in the [**]. 9.0 MAINTENANCE AIDS 9.1 Subject to the terms and conditions of this Agreement, SUPPLIER grants to EMC a personal, non-exclusive, world-wide[**] and non-transferable right to use the Maintenance Aids listed in this Exhibit in connection with Products covered by an EMC warranty or Service Agreement during the term of that warranty or Service Agreement for the sole purpose of assisting EMC in providing warranty and maintenance services on the Products for Customers under the applicable warranty or Service Agreement. "Maintenance Aids" are hardware, software and other aids owned by SUPPLIER and used by SUPPLIER in furnishing maintenance services. 9.2 No title to or ownership of the Maintenance Aids is transferred to EMC, and any references to "sale" or "purchase" of the Maintenance Aids shall be deemed to mean "license on the terms contained in this Agreement." EMC shall reproduce and include SUPPLIER's copyright and other proprietary notices on and in any copies, including but not limited to physical and electronic copies of the Maintenance Aids. Neither EMC or any of its agents, independent contractors or consultants shall modify, enhance, supplement, create derivative works from, reverse assemble, reverse engineer, reverse compile or otherwise reduce the Software to human readable form without SUPPLIER's prior written consent. 9.3 In the event that new releases of the Maintenance Aids or additional Maintenance Aids are developed by SUPPLIER during the term of the Agreement, [**]. At [**], such additional Maintenance Aids will also be licensed to EMC on the terms herein and shall [**] Maintenance Aids under this Exhibit. 9.4 SUPPLIER shall provide EMC with copies of Maintenance Aids documentation in English [**] from SUPPLIER. EMC acknowledges that there may not be documentation available for all Maintenance Aids. Except as provided herein, EMC shall have no right to copy the documentation for the Maintenance Aids. 9.5 SUPPLIER will use reasonable efforts to notify EMC of a planned discontinuance of the Maintenance Aids at [**] of such discontinuance by SUPPLIER. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL 9.6 Upon termination or expiration of the continuing support period under this Agreement, EMC will immediately discontinue use of the Maintenance Aids and return, all copies of the Maintenance Aids to SUPPLIER, [**] of such expiration or termination. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL EMC EXHIBIT A: PRODUCT PRICE SHEET - REVISED 8/11/04 REVISIONS: Q3 PRICE REDUCTIONS EFFECTIVE 7/20/04
BRCD PN# EMC PN# REV EMC MODEL# DESCRIPTION PRICE - ---------------------------------------------------------------------------------------------------------- [**] [**] A02 [**] 2GB, 8 PORT SW3200 ENTRY-FABRIC SWITCH [**] [**] [**] A01 [**] 2GB, 8 PORT SW3200 FULL-FABRIC SWITCH [**] [**] [**] A01 [**] 2GB, 8 PORT SW3250 ENTRY-FABRIC SWITCH (GENERAL) (A)[**] [**] [**] A01 [**] 2GB, 8 PORT SW3250 ENTRY-FABRIC SWITCH (US FED ONLY) (A)[**] [**] [**] A01 [**] 2GB, 8 PORT SW3250 FULL-FABRIC SWITCH (US FED ONLY) [**] [**] [**] AO1 [**] 2GB, 8 PORT SW3250 FULL-FABRIC SWITCH (GENERAL) [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] A01 [**] SW3220 OPTIONAL SOFTWARE, QUICKLOOP [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] SW3220 OPTIONAL SOFTWARE UPGRADE ENTRY-FULL: BUNDLED [**] [**] [**] A01 [**] SW3220 OPTIONAL SOFTWARE UPGRADE ENTRY-FULL: POST SALE [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, SECURE OS [**] [**] [**] A01 [**] SW3252 TWO DOMAIN TO FULL FABRIC UPGRADE LICENSE KEY - POST SALE [**] [**] [**] A01 [**] SW3252 TWO DOMAIN TO FULL FABRIC UPGRADE LICENSE KEY - BUNDLED [**]
Note (A): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for an annual fee of [**]. The above price also [**] for [**]. [**] [**] A08 [**] 2GB, 16 PORT SW3800 FULL-FABRIC SWITCH [**] [**] [**] A01 [**] 2GB, 16 PORT SW3852 ENTRY-FABRIC SWITCH (GENERAL) (B)[**] [**] [**] A01 [**] 2GB, 16 PORT SW3852 ENTRY-FABRIC SWITCH (US FED ONLY) (B)[**] [**] [**] A01 [**] 2GB, 16 PORT SW3250 FULL-FABRIC SWITCH (US FED ONLY) [**] [**] [**] A01 [**] 2GB, 16 PORT SW3250 FULL-FABRIC SWITCH (GENERAL) [**]

[**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [**] [**] 00 [**] SW3800 FRU, POWER SUPPLY [**] [**] [**] 00 [**] SW3800 FRU, FAN [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] A01 [**] SW3800 OPTIONAL SOFTWARE, QUICKLOOP [**] [**] [**] NA [**] SW38XX OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, SECURE OS [**] [**] [**] A01 [**] SW3852 TWO DOMAIN TO FULL FABRIC UPGRADE LICENSE KEY - BUNDLED [**]

Note (B): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, [**]. Fees for Software Maintenance [**]are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**]. The above price also [**]for [**]. [**] [**] A03 [**] 2GB, 32 PORT SWITCH (WEBTOOLS, ZONING) (C)[**] [**] [**] A01 [**] FRU, POWER SUPPLY [**] [**] [**] A01 [**] FRU, FAN [**] [**] [**] A00 [**] FRU, SFP, SWL, 1PK (FINISAR ONLY) [**] [**] [**] A01 [**] FRU, SFP, LWL, 1PK (FINISAR ONLY) [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, SECURE OS [**]

Note (C): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be [**], at EMC's discretion, for [**]. ~~[**] [**] A04 [**] 2GB, 64 PORT ENTERPRISE (WEBTOOLS, ZONING) (D)[**]~~

[**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [**] [**] A01 [**] 2GB, 0 PORT, 2 CP, 2PS CONFIGURED CHASSIS (E)[**] [**] [**] [**] UPGRADE KIT, SW12000 TO 24000 CONSISTS OF 2CPs (F)[**] [**] [**] A01 [**] FRU, SW12000 CHASSIS [**] [**] [**] A01 [**] FRU, DIRECTOR UNIVERSAL CHASSIS [**] [**] [**] A00 [**] FRU, SW12000 PORT CARD WITH OPTICS [**] [**] [**] A01 [**] FRU, SW24000 PORT CARD WITH OPTICS [**] [**] [**] A00 [**] FRU, SW12000 CP [**] [**] [**] A00 [**] FRU, SW24000 CP [**] [**] [**] A00 [**] FRU, POWER SUPPLY [**] [**] [**] NA [**] FRU, POWER CORD, NO AMERICAN [**] [**] [**] NA [**] FRU, POWER CORD, UK/IRE [**] [**] [**] NA [**] FRU, POWER CORD, CONT EU [**] [**] [**] NA [**] FRU, POWER CORD, AUST/NZ [**] [**] [**] NA [**] FRU, POWER CORD, OTHER 230V [**] [**] [**] NA [**] FRU, BROCADE RACKMOUNT KIT [**] [**] [**] A00 [**] FRU, BLOWER [**] [**] [**] NA [**] FRU, WWN BEZEL [**] [**] [**] A00 [**] FRU, WWN CARD [**] [**] [**] NA [**] FRU, CHASSIS DOOR [**] [**] [**] NA [**] FRU, PORT CARD SLOT FILLER [**] [**] [**] NA [**] FRU, POWER SUPPLY SLOT FILLER [**] [**] [**] NA [**] FRU, CABLE MANAGEMENT TRAY [**] [**] [**] NA [**] FRU, BLADE BOX PACKAGING ONLY [**] [**] [**] NA [**] FRU, BLOWER BOX PACKAGING ONLY [**] [**] [**] A03 [**] FRU, EMC CUSTOM DOOR KIT SW12000 [**] [**] [**] A03 [**] FRU, EMC CUSTOM DOOR KIT SW24000 [**] [**] [**] NA [**] OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] NA [**] OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] NA [**] OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] NA [**] OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] NA [**] OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, SECURE OS [**]

Note (D): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, and [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**]. Note (E): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, and [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**]. The above price also [**] for [**]. Note (F): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, and [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**]. The above price also [**] for [**]. ROUTER ~~[**] [**] A01 [**] 16 PORT SILKWORM MULTI-PROTOCOL ROUTER, 2PS, 16 SWL SFP, SOFTWARE UPDATES, 2YR (G)[**]~~

[**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [**] [**] A00 [**] ROUTER FAN FRU [**] [**] [**] A00 [**] ROUTER POWER SUPPLY FRU [**] [**] [**] NA [**] XPATH FCIP [**] [**] [**] NA [**] XPATH FIBRE CHANNEL ROUTING SERVICE [**] [**] [**] NA [**] ROUTER/FCIP BUNDLE [**] [**] [**] A01 ROUTER RAILKIT [**]

Note (G): The [**] the purchase of Software Maintenance for an [**], commencing on the date of purchase, and [**]. Fees for Software Maintenance during [**] non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**]as follows: [**] FABRIC MANAGER [**] [**] NA [**] FM 4.0 BASE [**] [**] [**] NA [**] FM 4.0 STANDARD [**] [**] [**] NA [**] FM 4.0 ENTERPRISE [**] [**] [**] NA [**] FM 3.0 UPGRADE [**] [**] [**] NA [**] FM 4.0 BASE TO STANDARD UPGRADE [**] [**] [**] NA [**] FM 4.0 BASE TO ENTERPRISE UPGRADE [**] [**] [**] NA [**] FM 4.0 STANDARD TO ENTERPRISE UPGRADE [**]

Note: The [**] the purchase of Software Maintenance for [**], commencing on the date of purchase, [**]. Fees for Software Maintenance during [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**] as follows: [**]. [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.79 5 f04919exv10w79.txt EXHIBIT 10.79 EXHIBIT 10.79 AMENDMENT NO. 8 PURCHASE AGREEMENT This Amendment No. 8 ("the Amendment") to the Purchase Agreement (the "Agreement") dated January 25, 2000 by and among Brocade Communications Systems, Inc., a corporation organized under the laws of the State of Delaware, U.S.A., and having its principal place of business at 1745 Technology Drive, San Jose, California 95110 ("Brocade-US"), and Brocade Communications Switzerland SarL, a corporation organized under the laws of Geneva, and having its principal place of business at 29-31 Route de l'Aeroport, Case Postale 105 CH-1215 Geneva 15, Switzerland ("Brocade-Switzerland"), (collectively "SUPPLIER") and EMC Corporation, ("EMC"), a Massachusetts corporation, is made this 19th day of July 2004 by and between SUPPLIER and EMC and commences on the last date accepted and executed by SUPPLIER ("Effective Date"). [**] WHEREAS, the parties wish to amend the Agreement [**]; NOW THEREFORE, in consideration of the above and the other respective promises of the parties set forth herein, the parties hereto agree as follows: 1) Exhibit A, [**] is hereby deleted and replaced with the attached Exhibit A [**]. 2) No Other Changes. All Other terms and conditions of the Agreement shall remain unchanged. 3) Counterparts. This Amendment may be executed in two or more counterparts, all of which, taken together, shall be regarded as one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 8 to OEM Purchase and License Agreement by their duly authorized representatives. Such execution of the Amendment may be in three counterparts, each of which shall be an original and together which shall constitute one and the same instrument. Executed and agreed to: Executed and agreed to: BROCADE COMMUNICATIONS SYSTEMS, INC. EMC CORPORATION ("Supplier") ("EMC") Signature: /s/ MICHAEL KLAYKO Signature: WILLIAM MONAGLE 10/13/04 ------------------ --------------- Name: MICHAEL KLAYKO Name: WILLIAM MONAGLE Title: VP Title: VICE PRESIDENT CORPORATE PROCUREMENT EMC CORPORATION Date: 11/1/04 Date: _________________________ BROCADE COMMUNICATIONS SWITZERLAND, SARL. - ---------- [**]Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EMC/BROCADE CONFIDENTIAL ("Supplier") Signature: /s/ IAN WHITING --------------- Name: Ian Whiting Title: Vice President - EMEA Place: Geneva, Switzerland EMC/BROCADE CONFIDENTIAL EXHIBIT A PRODUCTS AND PRICING EMC/BROCADE CONFIDENTIAL EMC EXHIBIT A: PRODUCT PRICE SHEET - REVISED 9/22/04 REVISIONS: Q3 PRICE REDUCTIONS EFFECTIVE 10/1/04
BRCD PN# EMC PN# REV EMC MODEL# DESCRIPTION PRICE - -------- ------- ---- ---------- ---------------------------------------------------------------- -------- [**] [**] A02 [**] 2GB, 8 PORT SW3200 ENTRY-FABRIC SWITCH [**] [**] [**] A01 [**] 2GB, 8 PORT SW3200 FULL-FABRIC SWITCH [**] [**] [**] A01 [**] 2GB, 8 PORT SW3250 ENTRY-FABRIC SWITCH (GENERAL) (A) [**] [**] [**] A01 [**] 2GB, 8 PORT SW3250 ENTRY-FABRIC SWITCH (US FED ONLY) (A) [**] [**] [**] A01 [**] 2GB, 8 PORT 3250-VL2E EZSWITCH (GENERAL) (A) [**] [**] [**] A01 [**] 2GB, 8 PORT 3250-VL2E EZSWITCH (US FED ONLY) (A) [**] [**] [**] A01 [**] 2GB, 8 PORT SW3250 FULL-FABRIC SWITCH (US FED ONLY) [**] [**] [**] AO1 [**] 2GB, 8 PORT SW3250 FULL-FABRIC SWITCH (GENERAL) [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] A01 [**] SW3220 OPTIONAL SOFTWARE, QUICKLOOP [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] SW3220 OPTIONAL SOFTWARE UPGRADE ENTRY-FULL: BUNDLED [**] [**] [**] A01 [**] SW3220 OPTIONAL SOFTWARE UPGRADE ENTRY-FULL: POST SALE [**] [**] [**] A01 [**] SW32X0 OPTIONAL SOFTWARE, SECURE OS [**] [**] [**] A01 [**] SW3252 TWO DOMAIN TO FULL FABRIC UPGRADE LICENSE KEY - POST SALE [**] [**] [**] A01 [**] SW3252 TWO DOMAIN TO FULL FABRIC UPGRADE LICENSE KEY - BUNDLED [**]
Note (A): The [**] Software Maintenance is [**]. The above price includes the purchase of Software Maintenance for an [**], commencing on the date of purchase, and [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**]. The above price also [**]for [**]. [**] [**] A08 [**] 2GB, 16 PORT SW3800 FULL-FABRIC SWITCH [**] [**] [**] [**] [**] [**] (B) [**] [**] [**] [**] [**] [**] (B) [**]

[**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] 00 [**] SW3800 FRU, POWER SUPPLY [**] [**] [**] 00 [**] SW3800 FRU, FAN [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] A01 [**] SW3800 OPTIONAL SOFTWARE, QUICKLOOP [**] [**] [**] NA [**] SW38XX OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] SW38XX OPTIONAL SOFTWARE, SECURE OS [**] [**] [**] A01 [**] SW3852 TWO DOMAIN TO FULL FABRIC UPGRADE LICENSE KEY - BUNDLED [**]

Note (B): The [**] Software Maintenance is [**] . The above price includes the purchase of Software Maintenance for an [**] , commencing on the date of purchase, [**] . Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**] , at EMC's discretion, for [**] . The above price also [**] for [**] . [**] [**] [**] [**] [**] (C) [**] [**] [**] A01 [**] FRU, POWER SUPPLY [**] [**] [**] A01 [**] FRU, FAN [**] [**] [**] A00 [**] FRU, SFP, SWL, 1PK (FINISAR ONLY) [**] [**] [**] A01 [**] FRU, SFP, LWL, 1PK (FINISAR ONLY) [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, SECURE OS [**]

[**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Note (C): The [**] Software Maintenance is [**] . The above price includes the purchase of Software Maintenance for an [**] , commencing on the date of purchase, and [**]. Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**] , at EMC's discretion, for [**] . [**] [**] A04 [**] 2GB, 64 PORT ENTERPRISE (WEBTOOLS, ZONING) (D) [**] [**] [**] [**] [**] [**] (E) [**] [**] [**] [**] UPGRADE KIT, SW12000 TO 24000 CONSISTS OF 2CPs (F) [**] [**] [**] A01 [**] FRU, SW12000 CHASSIS [**] [**] [**] A01 [**] FRU, DIRECTOR UNIVERSAL CHASSIS [**] [**] [**] A00 [**] FRU, SW12000 PORT CARD WITH OPTICS [**] [**] [**] [**] [**] [**] [**] [**] [**] A00 [**] FRU, SW12000 CP [**] [**] [**] A00 [**] FRU, SW24000 CP [**] [**] [**] A00 [**] FRU, POWER SUPPLY [**] [**] [**] NA [**] FRU, POWER CORD, NO AMERICAN [**] [**] [**] NA [**] FRU, POWER CORD, UK/IRE [**] [**] [**] NA [**] FRU, POWER CORD, CONT EU [**] [**] [**] NA [**] FRU, POWER CORD, AUST/NZ [**] [**] [**] NA [**] FRU, POWER CORD, OTHER 230V [**] [**] [**] NA [**] FRU, BROCADE RACKMOUNT KIT [**] [**] [**] A00 [**] FRU, BLOWER [**] [**] [**] NA [**] FRU, WWN BEZEL [**] [**] [**] A00 [**] FRU, WWN CARD [**] [**] [**] NA [**] FRU, CHASSIS DOOR [**] [**] [**] NA [**] FRU, PORT CARD SLOT FILLER [**] [**] [**] NA [**] FRU, POWER SUPPLY SLOT FILLER [**] [**] [**] NA [**] FRU, CABLE MANAGEMENT TRAY [**] [**] [**] NA [**] FRU, BLADE BOX PACKAGING ONLY [**] [**] [**] NA [**] FRU, BLOWER BOX PACKAGING ONLY [**] [**] [**] A03 [**] FRU, EMC CUSTOM DOOR KIT SW12000 [**] [**] [**] A03 [**] FRU, EMC CUSTOM DOOR KIT SW24000 [**] [**] [**] NA [**] OPTIONAL SOFTWARE, TRUNKING [**] [**] [**] NA [**] OPTIONAL SOFTWARE, FABRIC WATCH [**] [**] [**] NA [**] OPTIONAL SOFTWARE, EXTENDED FABRIC [**] [**] [**] NA [**] OPTIONAL SOFTWARE, PERFORMANCE MONITOR [**] [**] [**] NA [**] OPTIONAL SOFTWARE, EMC BUNDLE (TRK, FWH, EXF, PRF) [**] [**] [**] A01 [**] OPTIONAL SOFTWARE, SECURE OS [**]

Note (D): The [**] Software Maintenance is [**] . The above price includes the purchase of Software Maintenance for an [**] , commencing on the date of purchase, and [**] . Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**] , at EMC's discretion, for [**] . Note (E): The [**] Software Maintenance is [**] . The above price includes the purchase of Software Maintenance for an [**] , commencing on the date of purchase, and [**] . Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**] , at EMC's discretion, for [**] . The above price also [**] for [**] . [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Note (F): The [**] Software Maintenance is [**] . The above price includes the purchase of Software Maintenance for an [**] , commencing on the date of purchase, and [**] . Fees for Software Maintenance [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**] , at EMC's discretion, for [**] . The above price also [**] for [**] . ROUTER [**] [**] A01 [**] 16 PORT SILKWORM MULTI-PROTOCOL ROUTER, 2PS, 16 SWL SFP, SOFTWARE UPDATES, 2YR (G) [**] [**] [**] A00 [**] ROUTER FAN FRU [**] [**] [**] A00 [**] ROUTER POWER SUPPLY FRU [**] [**] [**] NA [**] XPATH FCIP [**] [**] [**] NA [**] XPATH FIBRE CHANNEL ROUTING SERVICE [**] [**] [**] NA [**] ROUTER/FCIP BUNDLE [**] [**] [**] A01 ROUTER RAILKIT [**]

Note (G): The [**] the purchase of Software Maintenance for an [**] , commencing on the date of purchase, and [**] . Fees for Software Maintenance during [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**] as follows: [**] FABRIC MANAGER [**] [**] NA [**] FM 4.0 BASE [**] [**] [**] NA [**] FM 4.0 STANDARD [**] [**] [**] NA [**] FM 4.0 ENTERPRISE [**] [**] [**] NA [**] FM 3.0 UPGRADE [**] [**] [**] NA [**] FM 4.0 BASE TO STANDARD UPGRADE [**] [**] [**] NA [**] FM 4.0 BASE TO ENTERPRISE UPGRADE [**] [**] [**] NA [**] FM 4.0 STANDARD TO ENTERPRISE UPGRADE [**]

Note: The [**] the purchase of Software Maintenance for an [**], commencing on the date of purchase, and [**]. Fees for Software Maintenance during [**] are non-refundable. Thereafter, Software Maintenance may be renewed [**], at EMC's discretion, for [**] as follows: [**]. [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.80 6 f04919exv10w80.txt EXHIBIT 10.80 EXHIBIT 10.80 OEM PURCHASE AGREEMENT FIRST AMENDMENT This FIRST Amendment ("Amendment") effective as of the 1st day of April 2004 , (the "Effective Date") amends the OEM Purchase Agreement (the "Agreement") dated December 16, 2002, by and between HEWLETT-PACKARD COMPANY, a Delaware corporation having its principal place of business at 3000 Hanover Street, Palo Alto, California 94304 ("HP") and BROCADE COMMUNICATIONS SYSTEMS, INC. a Delaware corporation having its principal place of business at 1745 Technology Drive, San Jose, California 95110, and BROCADE COMMUNICATIONS SYSTEMS SWITZERLAND SARL., a corporation organized under the laws of Geneva, and having its principal place of business at 29 Route de l'Aeroport Case Postale 105, CH-1215 Geneva 15, Switzerland (collectively "Supplier"). RECITALS WHEREAS, HP and Supplier entered into an OEM Purchase Agreement ("OEM Purchase Agreement") with an effective date of December 16, 2002 which specified the terms and conditions under which Supplier sells, licenses and supports certain OEM Products identified therein; WHEREAS, HP and Supplier desire to enter into this Amendment to amend certain provisions of the Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, HP and Supplier agree as follows: 1. DEFINITIONS. Terms used in this Amendment that are not defined herein shall have the meaning given thereto in the Agreement. 2. CONFIRMATION AND RATIFICATION. Except as expressly amended herein all unmodified and remaining terms and conditions of the Agreement shall remain in full force and effect. All capitalized terms not defined in this Amendment shall have the meaning set forth in the Agreement. In the event a conflict between the Agreement and this Amendment, the terms of this Amendment shall govern. 3. AMENDMENTS . HP and Supplier hereby agree that the Agreement is hereby amended as follows: 3.1. Add new Exhibit [**] that defines the current process by which Brocade ships and HP receives software license upgrades for installation in Brocade's Fibre Channel switches. 4. COUNTERPARTS. This Amendment may be executed in counterparts, each of which will be deemed an original, but both of which together will constitute one and the same instrument. The parties agree that facsimile signatures of the parties will be binding. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. IN WITNESS WHEREOF, HP and Supplier have entered into this Amendment as of the Effective Date as provided above. AGREED: BROCADE COMMUNICATIONS HEWLETT-PACKARD COMPANY SYSTEMS INC. ("SUPPLIER") ("HP") By: /s/ MICHAEL KLAYKO By: /s/ RICHARD GENTILINI ------------------ --------------------- Name: MICHAEL KLAYKO Name: RICHARD GENTILINI Title: VP 11/2/04 Title: DIRECTOR, SWD PROCUREMENT BROCADE COMMUNICATIONS SWITZERLAND, SARL. ("SUPPLIER") By: /s/ IAN WHITING --------------- Name: IAN WHITING Title: VICE PRESIDENT EMEA EXHIBIT L OF FIRST AMENDMENT BROCADE SOFTWARE LICENSE REDEMPTION PRINT ON DEMAND PROCESS The following is a detail of the current Print-on-Demand process. DEFINITIONS: ENTITLEMENT CERTIFICATE - A document that is created by [**], which contains the REGISTRATION NUMBER, an HP part number, and a description of the software license. HP - The [**]. LICENSE KEY - A string of characters that can be applied to a unique switch to enable a license feature or set of features, that have been purchased by HP, along with the corresponding switch. A License Key is only valid on a unique switch and cannot be directly transferred between switches. A License Key can be reinstalled on the switch but will only enable the same feature. This is provided by Brocade to [**] when a customer presents a REGISTRATION NUMBER for REDEMPTION TO [**]. [**] - Third party supplier who manages HP customers' license redemptions. Tracks License Key detail as it moves from Brocade to HP, as well as when the customer redeems their license. PAPER PACK - The final product that is manufactured by HP, which contains the ENTITLEMENT CERTIFICATE, a software license agreement, and instructions to the customer on how to redeem the Brocade software license. Consists of two pieces of paper, folded in half and enclosed in a cardboard envelope. [**] - Process that HP uses to convert an ENTITLEMENT CERTIFICATE to a PAPER PACK. REDEMPTION - Customer presents an ENTITLEMENT CERTIFICATE to [**] to activate a Brocade software license feature. REGIONS - HP stocking locations where inventory is kept. [**]. REGISTRATION NUMBER - A unique number that [**]creates to correspond with each unique TRANSACTION KEY. This is the only information that HP or customers see when Brocade software is purchased from HP, and is the first string of numbers that is used to initiate a REDEMPTION of a Brocade software license. REPAIR KEY - A TRANSACTION KEY provided to HP/[**] [**]to be used only by HP service personnel to transfer an after market license from a defective Brocade switch to a field replaced switch. Brocade has the right to periodically audit the use of the repair licenses. During the course of such audit, if Brocade finds that a REPAIR KEY is used on switches that are not part of a defective switch replacement, Brocade will [**]. The charge will be based on the current contractual price for a Transaction Key. TRANSACTION KEY - A unique serial number that is provided by Brocade to HP whenever HP purchases a software feature license for a Brocade product. A Transaction Key can be provided either in paper form or electronically and entitles HP to obtain a License Key for a single or a set of licensed features on a specific - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. class of switch. A single Transaction Key can only be applied for a single switch (designated by its WWN). A Transaction Key is submitted to a "web site application" with a switch serial number and WWN. This operation generates a license key, which is then installed to the switch. A Transaction Key can only be used once and will no longer be valid once a License Key has been issued in exchange. PROCESS FLOW: 1. HP provides Brocade with a purchase order for invoicing purposes for each part number. 2. [**] places [**] order with Brocade for Transaction Keys, based on HP [**]previously established. 3. Brocade electronically sends Transaction Keys to [**]. 4. [**] creates a corresponding Registration Number for each Transaction Key and stores in a database that tracks the details of the movement of that key as it routes through [**]. 5. HP places an order with [**]for an Entitlement Certificate. 6. [**] creates and sends Entitlement Certificates to HP. [**]. [**] batches the Entitlement Certificates for [**] and sends them to Brocade. [**]. 7. HP manufactures a Paper Pack, which contains the Entitlement Certificate, a software license agreement, and instructions for Redemption of the software license. 8. Customer contacts [**] to redeem software license, using the Entitlement Certificate with a Registration Number they have received in the Paper Pack. 9. [**] cross references the Registration Number to the Transaction Key number and asks Brocade for a License Key. [**] provides Brocade with the worldwide name and serial number of the switch, so that the license can be associated with a specific switch. 10. Brocade will make available to [**] a License Key redemption code on its website. [**] redeems the License Key via the Brocade website for processing to the customer. - ---------- [**]Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. ATTACHMENT A TO EXHIBIT L BUSINESS AND TECHNICAL SUPPORT CONTACTS THE FOLLOWING PERSONS ARE DESIGNATED TO SERVE AS BUSINESS SUPPORT CONTACTS: SUPPLIER: HP: - -------- --- NAME: [**] NAME: [**] HP Account Manager Commodity Manager ADDRESS: Brocade Communications ADDRESS: Hewlett-Packard Company 1745 Technology Drive 8000 Foothills Blvd. San Jose, CA 95110 Roseville, Ca 95747 PHONE: 408-333-[**] PHONE: 916-[**] FAX: 408-487-[**] FAX: 916-[**] EMAIL:[**] EMAIL: [**] SUPPLIER: NAME: [**] HP/Brocade Account Manager ADDRESS: [**] [**] [**] PHONE: 801-434-[**] EMAIL: [**] THE FOLLOWING PERSONS ARE DESIGNATED AS TECHNICAL SUPPORT CONTACTS: SUPPLIER: HP: - -------- --- NAME: [**] NAME: [**] Brocade Customer Support Total Customer Experience Support ADDRESS: Brocade Communications ADDRESS: Hewlett-Packard Company 1745 Technology Drive 8000 Foothills Blvd. San Jose, CA 95110 Roseville, Ca 95747 PHONE: 800-ATFIBRE PHONE: 916-[**] EMAIL: support@brocade.com EMAIL: [**] - ---------- [**]Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.81 7 f04919exv10w81.txt EXHIBIT 10.81 EXHIBIT 10.81 OEM PURCHASE AGREEMENT SECOND AMENDMENT This Second Amendment ("Amendment") effective as of the 25th day of October 2004 amends the OEM Purchase Agreement dated December 16, 2002 ("Agreement") by and between Hewlett-Packard Company a Delaware Corporation having a place of Business located at 20555 SH 249 Houston, Texas 77070, ("HP") and Brocade Communications Systems, Inc., a Delaware corporation having its principal place of business located at 1745 Technology Drive, San Jose, California 95110 ("Brocade"). RECITALS WHEREAS, HP and Brocade have entered into the Agreement pursuant to which HP agreed to purchase and Brocade agreed to sell OEM Products in accordance with the terms and conditions set forth therein; and WHEREAS, HP and Brocade desire to add an additional product to the Agreement pursuant to the attached Exhibit so that HP may offer such OEM Products for sale to HP customers. AGREEMENTS NOW THEREFOR, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, HP and Brocade agree as follows: 1. Definitions Terms used in this Amendment that are not defined herein shall have the same meaning given thereto in the Agreement. 2. Confirmation and Ratification Except as expressly amended herein, all unmodified and remaining terms and conditions of the Agreement shall remain in full force and effect. All capitalized terms not defined in this Amendment shall have the same meaning as set forth in the Agreement. In the event of a conflict between the Agreement and the Amendment, the terms of the Amendment shall govern. 3. Amendments HP and Brocade hereby agree that the Agreement is hereby amended to include the following items: Exhibit A-2-A is added to Exhibit A of the Agreement. Section 10 of Exhibit A-2-A is added to Exhibit C of the Agreement. The parties have caused this Amendment to be executed by their duly authorized representatives as indicated below. HEWLETT-PACKARD COMPANY BROCADE COMMUNICATIONS SYSTEMS, INC. By: /s/ RICHARD GENTILINI By: /s/ MICHAEL KLAYKO --------------------- ------------------ Name: RICHARD GENTILINI Name: MICHAEL KLAYKO Title: DIRECTOR, NSS PROCUREMENT Title: VP, WW SALES Date: 10-27-04 Date: OCTOBER 26, 2004 EXHIBIT A-2-A PRODUCT ADDENDUM HP CONFIGUATION SPECIFICATIONS (Product Addendum with [**] to be attached) - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. PRODUCT ADDENDUM A-2-A TO EXHIBIT A-2 OF OEM PURCHASE AGREEMENT This Product Addendum by and between Hewlett-Packard Company ("HP"), and Brocade Communications Systems, Inc. ("Brocade") is issued pursuant to Exhibit A-2 of the OEM Procurement Agreement between the parties dated December 16, 2002 ("Agreement") and is incorporated therein by reference. 1. SCOPE. This Product Addendum sets forth the work efforts between HP and Brocade for the Brocade SAN Switch for HP BladeSystem p-Class henceforth referred to as ("SAN Switch") that incorporates the functionality and commands as defined in HP's [**] (Attachment 1) [**]. 2. DEFINITIONS. Capitalized terms used but not defined herein shall have the meaning assigned to them in the OEM Agreement. The following definitions shall apply to this Product Addendum. 2.1 "General Availability" means, with respect to a particular product, the date on which the product is initially introduced into the stream of commerce for revenue by both companies. 2.2 "Milestone" means each of the various tasks to be accomplished by Brocade and HP as set forth in Section 5, Deliverables, Schedule and Milestones, below. 2.3 "Qualification Plan" means Qualification Plan for the SAN Switch. The Qualification Plan will be developed by the parties according to the timeline indicated in the [**] and based on the outline of Attachment 3 to the [**]. 2.4 "Specification" as referred to in this document means the [**]Brocade Technical Specification(s) for SAN Switch that may be updated from time to time. 2.5 [**], added hereto as Attachment 1 and shall include the [**]of the OEM Product. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. HP/Brocade Confidential 3. PROJECT MANAGEMENT. Brocade and HP shall each assign a Project Manager who will act as the primary point of contact for purposes of this Product Addendum. The parties' Project Managers are: Brocade: HP: [**][**] [**] [**] [**] [**] [**] Each party may change their designated Project Manager by providing written notice to the other. 4. RESPONSIBILITIES. 4.1 Brocade shall: 4.1.1 Produce a fibre channel SAN Switch kit. 4.1.2 Modify existing revision of Brocade's fabric operating system software to operate with the SAN Switch in the environment as defined in the [**]. 4.1.3 [**]necessary components to develop and manufacture SAN Switch units. 4.1.4 Conduct appropriate qualifications before delivery as specified in the [**]. 4.1.5 Assemble and deliver the complete product solution. 4.2 HP shall: 4.2.1 [**] deliver requirements for the SAN Switch product. 4.2.2 [**]. 4.2.3 Assist Brocade in the identification [**] of parts and components to be used in the SAN Switch product. 4.2.4 Assist Brocade with technical issues related to BladeSystems products. 4.3 Both parties shall provide their respective deliverables to the other party in accordance with the Schedule and as further described in Section 5. 5. DELIVERABLES, SCHEDULE, AND MILESTONES. 5.1 Brocade Deliverables: 5.1.1 SAN Switch assembly kit as defined in the [**] - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. HP/Brocade Confidential 5.1.2 Prototype units and any additional deliverables as described in Attachment #2 to the [**]. 5.1.3 Other deliverables as specified in the [**]. 5.2 HP Deliverables: 5.2.1 Licensed Materials as specified in the MLA. 5.2.2 Deliverables as specified in the [**]. 5.3 Schedule and Milestones. The Schedule of Milestones ("Schedule"), target dates, and associated deliverables is set forth in the [**]. Brocade and HP understand and agree that adherence to the Schedule is a material term of this Product Addendum. The parties recognize that unforeseen factors may necessitate changes to the Schedule, and such changes will be made with the mutual agreement of the Project Managers for each party and executed in writing by the parties. 6. COMPATIBILITY REQUIREMENTS. Compatibility Requirements shall be defined [**]. 7. PERFORMANCE CRITERIA, ACCEPTANCE. 7.1 Acceptance testing shall commence as set forth in the [**], Schedule and Milestones. Acceptance testing shall be conducted in accordance with the procedures and criteria set forth in the Qualification Plan. The OEM Product shall be deemed accepted after successful completion of the acceptance testing and a determination by the parties that the OEM Product complies with the [**] requirements set forth in the [**] and the Qualification Plan. 7.2 In the event that the OEM Product fails to meet the acceptance criteria, Brocade agrees to make commercially reasonable changes to the OEM Product to correct identified errors or non-compliance. The corrected OEM Product shall be delivered within [**] after determination that the OEM Product has not been accepted, unless the parties mutually agree to a different time period. If Brocade fails to make such changes or perform such changes within the required time period, or the OEM - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. HP/Brocade Confidential Product still is not accepted, then HP may [**] written notice to Brocade. 8. INTELLECTUAL PROPERTY RIGHTS. 8.1 License Grants to HP. License Grants to HP related to the SAN Switch are described in Section 13 of the Agreement. 8.2 License Grant License grants made to Brocade by HP, pursuant to HP deliverables in the [**], (if any) shall be as provided in the Materials License Agreement with an effective date of August 29, 2004 and Transmittal #2 to the Materials License Agreement both of which shall be incorporated herein by reference. 9. FEES. 9.1 In the event HP cancels the program for any reason, HP agrees to pay Brocade cancellation fees [**], not to exceed $[**]. The calculation for determination of the fees is based on the [**]. Once a schedule has been provided to HP and a POR date has been agreed to, the [**] POR to GA will be divided in to [**] to establish the [**]. Fees will begin at [**] and [**], based on the [**]. No monies are due to Brocade should [**]. 10.0 COSTS. Production Costs Model Cost ----- ---- VL2 [**] Full Fabric [**] Power Pack [**] Note: The definitions for VL2, Full Fabric and Power Pack shall be as described in the [**]. These units include [**] and [**]described above. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. HP/Brocade Confidential Cost of the [**] (estimated at approximately [**]), plus [**] of the [**] cost to [**], will be added to the Full Fabric and Power Pack models above. The [**]in all three models will be the currently HP-Brocade supported [**]without specialized branding (standard Brocade [**]stock). If in the event HP determines additional requirements are that HP labeled [**] must be used, HP agrees that Brocade will be able to source them via [**]at a cost of [**] or less, per [**]. If the cost to [**] is more than [**], HP agrees to accept increase to material cost that [**] Pre-Production Costs Qualification Units - [**] "Alpha" units provided by Brocade to HP at [**]. Any quantity in excess of [**]units will be provided per Attachment 2 of the [**]. 11.0 QOQ COST REDUCTIONS Shall be determined by the current process as described in the OEM Agreement dated December 2002. 12.0 WARRANTY, MAINTENANCE AND SUPPORT: Shall be as described in the current OEM Agreement as of December 2002. 13.0 TERM AND TERMINATION. 13.1 Term. The term of this Product Addendum shall commence on the Effective Date and shall continue in effect until HP General Availability, unless earlier terminated in accordance with Section 10 of the Master Agreement. 13.2 Effect of Termination. Unless this Product Addendum is terminated [**], all licenses granted to HP hereunder as of the date of such termination shall [**]this Product Addendum. Notwithstanding, Termination as defined in Section 24 of the OEM Agreement shall remain in effect and will apply to this Product Addendum. - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. HP/Brocade Confidential 14.0 SIGNATURES. The parties have caused this Product Addendum to be executed by their duly authorized representatives and made effective as of the date of the last signature below (the "Effective Date"). HEWLETT-PACKARD COMPANY BROCADE COMMUNICATIONS SYSTEMS, INC. By: /s/ RICHARD GENTILINI By: /s/ MICHAEL KLAYKO --------------------- ------------------ Name: RICHARD GENTILINI Name: MICHAEL KLAYKO Title: DIRECTOR, NSS PROCUREMENT Title: VP, WW SALES Date: 10-27-04 Date: OCTOBER 26, 2004 HP/Brocade Confidential ATTACHMENT 1 TO PRODUCT ADDENDUM NO. 1 TO OEM PURCHASE AGREEMENT [**] - ---------- [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. HP/Brocade Confidential APPENDIX A QUALIFICATION PLAN HP/Brocade Confidential [**] - -------------- [**] This attachment to Exhibit 10.81 has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to this attachment. EX-10.82 8 f04919exv10w82.txt EXHIBIT 10.82 EXHIBIT 10.82 [BROCADE LOGO] BROCADE SENIOR LEADERSHIP PLAN Revised: January 18, 2005 PURPOSE The Brocade Senior Leadership Plan is designed to link incentive compensation with Company performance. TIMING Performance against Company objectives is measured on six-month cycles (Plan Periods), which run concurrently with the first and second halves of Brocade's fiscal year. Payout of earned cash bonuses if any occurs on an annual basis. ELIGIBILITY Regular full-time and part-time VP level employees are eligible to participate in the Senior Leadership Plan Program. Participants must be regular (full-time or part-time) employees at the end of the 12-month Plan Period to be eligible to receive a Senior Leadership Plan Payout. PARTICIPANT PERFORMANCE As each Plan Period begins, participants must complete a VP Performance Contract. Performance contracts should be tied to company and departmental goals as outlined in the BOD package (company priorities and initiatives). All goals must be tied to overall company objectives and have defined measurements. Before Performance Contracts are final, they are reviewed and approved by Finance, HR, and CEO. At the end of each Plan Period, performance against goals is first assessed by the Participant and then reviewed and assessed by Finance and the VP's manager. The Compensation Committee reviews and approves all Section 16B Officers' performance and bonus payouts annually. The CEO reviews and approves all other VP cash bonus payouts. COMPANY PERFORMANCE & SENIOR LEADERSHIP PLAN FUNDING Each Plan Period, Brocade will set a target Operating Margin for the company to achieve during the Plan Period (Target OM). At the end of each Plan Period, Brocade will fund the Senior Leadership Plan based on the actual Operating Margin achieved by Brocade during the Plan Period (Actual OM) relative to the Target OM (Actual Contribution). The Actual OM will be communicated following the end of each Plan Period. PARTICIPANT INCENTIVE TARGET A Participant's Incentive Target is determined by the Participant's pay grade at the end of the 12-month Plan Period, unless otherwise indicated in writing by Brocade.
PARTICIPANT ANNUAL INCENTIVE PAY GRADE TARGET --------- ------ ~~X 75% A&B 50% C&D 40%~~
Brocade Confidential Page 1 of 3 SENIOR LEADERSHIP PLAN PAYOUTS On an annual basis the Compensation Committee reviews and approves Section 16B Officers' performance and cash bonus payouts. The CEO reviews and approves all other VP cash bonuses. Program payouts are made within eight weeks following the conclusion of the 12-month Plan Period. Payouts will be pro-rated for Participants who are hired or transferred into the Senior Leadership Plan. For each Participant, the cash bonus payout is calculated based on the following formula (less applicable taxes and deductions): Bonus Payout = (Actual Funding) x (Individual VP Goal Points Earned for the year) x (Annual Incentive Target) x Annual Salary
REVENUE OPERATING INDIVIDUAL PARTICIPANT (NET SELL IN) MARGIN GOALS TOTAL - ----------- ------------- --------- ---------- ----- ~~CEO 50% 50% 100% VP's 50% 40% 10% 100%~~
Bonuses will be calculated using the salary as of the last day of the plan period. Participants must be regular (full-time or part-time) employees at the end of the Plan Period to be eligible to receive a Payout. Departmental budgets are communicated at the beginning of each fiscal year and may be updated quarterly throughout the year by the CEO and CFO. Adherence to the individual's departmental budget is a gate for the individual to qualify for the Senior Leadership Plan bonus. Failure to adhere to the agreed upon budget, disqualifies the individual from a bonus payout. ADMINISTRATION PROCEDURES Compensation Committee Approval The Compensation Committee reserves the right to decrease or eliminate bonus otherwise indicated. New Hires and Promotions Participants new to the company or promoted into the Senior Leadership Plan must complete a VP, Performance Contract within 60 days of beginning in new position. Grade/Salary Factor Payout will be based on the Participant's salary and pay grade on the last day of the Plan Period. Bonuses will be pro-rated if Participant received a cash bonus on another bonus program. Terminations: Anyone who is not on the payroll as of the end of the 12-month plan period is not eligible to receive a cash bonus payout. Leaves of Absences, Disability or Death: In the event of the Participant death, disability time off, or leave of absence, Payouts will be made on a pro-rated basis, based on the number of days the Participant was actively working at Brocade. If the Participant is on a legally protected leave of absence (e.g. Family Medical Leave or Military Leave), the Participant's eligibility for participation in Plan may be extended beyond the time above, in accordance with the laws governing the legally protected leave. In the event of death, any cash bonus payments will be paid to the Participant's primary beneficiary as designated in the Participant's Brocade life insurance plan documentation, if any. Performance Improvement Plan/Disciplinary Situations (Development Needed): If a Participant, at anytime prior to the cash bonus payout 12-month Plan Period is subject to a performance improvement plan, discipline or demotion, Brocade may, in its sole discretion, may reduce or eliminate the Cash Payment that the Participant would otherwise have been eligible to receive. If, at the time prior to the Payout for a 12-Month Plan Period, it is determined that a Participant may be subject to corrective action, discipline or demotion, then Brocade may withhold the entire Cash Bonus Payout, or a portion thereof, until after a final decision on such corrective action has been made. If a Participant is given a performance rating of Development Needed, the Participant will not be eligible to receive a BIP Payout. Only the VP of Human Resources or CEO may approve Brocade Confidential Page 2 of 3 exceptions to this policy. Other Provisions: Participation in the Senior Leadership Plan does not constitute an agreement (express or implied) between the Participant and Brocade that the Participant will be employed by Brocade for any specific period of time, nor is there any agreement for continuing or long-term employment. Terms and conditions regarding the Senior Leadership Plan and any participation therein, including but not limited to Senior Leadership Plan eligibility, Senior Leadership Plan funding, and performance and payout criteria and determinations, are subject to change by Brocade at any time in its sole discretion. Brocade and its Board of Directors retains the absolute right to interpret, revise, modify or terminate the Senior Leadership Plan at any time in its sole discretion. Brocade Confidential Page 3 of 3 EX-10.83 9 f04919exv10w83.txt EXHIBIT 10.83 EXHIBIT 10.83 Attached is the employment offer letter originally given to Gregory L. Reyes by Brocade Communications Systems, Inc. (the "Company") in connection with his initial employment. Subsequent to such time, the Company has agreed with Mr. Reyes that Mr. Reyes will be a strategic advisor to the Board of Directors and to the Chief Executive Officer. BROCADE COMMUNICATIONS SYSTEMS, INC. 1901 GUADALUPE PARKWAY SAN JOSE, CA 95131 (408)487-8000 June 25,1998 Mr. Greg Reyes 14742 Via De Marcos Saratoga, CA 95070 Dear Greg: On behalf of Brocade Communications Systems, I am pleased to offer you the position of President and Chief Executive Officer, reporting to the Board of Directors. In addition to our role of CEO, you'll also be elected to serve as a Director. Your annual salary will be $200,000. In addition, you will receive the Company's standard employee benefit package. You will also be eligible for an annual bonus equal to up to one half of your salary upon achievement of specific milestones. This bonus will be paid quarterly commencing with the quarter ended October 31,1998. The milestones will be proposed by you in January of each year (or within 45 days of your start date in the first year), and will be negotiated and approved by the Board of Directors. In addition, Brocade is offering you a nonstatutory stock option to purchase 1,535,662 shares of Brocade Common Stock, subject to Board approval. (The number of fully diluted shares outstanding as of this date is approximately 22,750,560). The exercise price of the option will be equal to the fair market value of Brocade's Common Stock on the date the Board grants your stock option. Your option will commence vesting upon your start of employment and is contingent on continued employment. After the first year of employment, 1/4 of the shares will vest and thereafter, 1/36 of the remaining shares will vest each month. This grant will be immediately exercisable subject to the execution of a Stock Repurchase Agreement that provides for a repurchase right which lapses according to the vesting schedule. If you leave the Company, the terms and conditions of this repurchase right are specified in the Company's Stock Repurchase Agreement. Furthermore, Brocade will offer you a full-recourse note to facilitate your participation in such a stock purchase. This note will be offered at the lowest legal interest rate, with principal and interest payable upon the earlier of (a) one year after the first to occur of an IPO, merger, sale of substantially all of the Company's assets or a liquidation event, (b) two (2) years after termination or (c) seven (7) years after the date of the note. Should Brocade undergo a change of control, fifty percent of your unvested options shall be accelerated. In addition, in the event of a change of control, should your employment end as a result of termination (a) other than "for cause," or (b) as a result of "constructive termination," Mr. Greg Reyes June 25,1998 Page 2 the balance of your unvested shares shall become vested and you will also receive a lump sum severance equal to one year of your targeted earnings (base salary plus incentive compensation). Should your job, after ninety days of employment, be terminated involuntarily (other than in connection with a change of control) for any reason other than "for cause," your salary, benefits, and a stock option vesting will continue for six months beyond the date of termination. This offer of employment is contingent upon your execution and return of this offer letter. You will also be asked to sign a Non-Disclosure Agreement and a Proprietary Information Agreement as part of your new hire orientation. For purposes of federal immigration law (Immigration Reform and Control Act of 1986) you are required to provide documentary evidence of your eligibility for employment in the United States. Further, your employment with Brocade is "at will" and may be terminated by either the employee or employer at any time, for any reason. Nothing in this offer is to be construed as a contract of employment for any specific length of time. Except for the Non-Disclosure Agreement and the Proprietary Information Agreement and Stock Option/Stock Repurchase Agreement and any rights in employee benefits generally offered to employees of Brocade, this offer represents the entire agreement related to your employment with Brocade and supersedes all prior or contemporaneous oral or written communications and representations. Greg, we are pleased to welcome you to Brocade Communications Systems. Please signify your acceptance of our offer by signing below and returning this letter to me, no later than June 30th. Sincerely, BROCADE COMMUNICATIONS SYSTEMS, INC. /s/ Neal Dempsey - ------------------------------------------ Neal Dempsey, Director Acknowledged receipt and accepted offer: /s/ Greg Reyes Greg Reyes - ------------------------------------------ ------------------- Name, Signature Name, Printed 6-29-98 - -------------- Today's Date 7-13-98 - -------------- Start Date EX-10.84 10 f04919exv10w84.txt EXHIBIT 10.84 EXHIBIT 10.84 Attached is the employment offer letter originally given to Antonio Canova by Brocade Communications Systems, Inc. (the "Company") in connection with his initial employment. Subsequent to such time, the Company has agreed with Mr. Canova that Mr. Canova's title will be Chief Financial Officer and Vice President, Administration, his base salary will be $300,000, and his target bonus for fiscal year 2005 will be $150,000. [BROCADE LOGO] BROCADE November 13, 2000 Antonio Canova 20436 Kilbride Court Saratoga, CA 95070 Dear Antonio, On behalf of Brocade Communications Systems, Inc., I am pleased to offer you the position of Vice-President, Finance, reporting to myself. Your base salary will be $8,750.00 semi-monthly, plus benefits. If annualized, this amount equals $210,000.00 You will also be eligible for quarterly bonuses tied to achieving your MBOs, which amount to 40% of your annual salary per year, at target. To the extent that Brocade exceeds its quarterly plans for revenue and operating income you are eligible to participate in a Bonus accelerators up to additional 40% of your base salary. Brocade is also offering you a stock option on 180,000 (one hundred eighty thousand) shares of Common Stock. The exercise price of the option will be equal to the fair market value of Brocade's Common Stock on the grant date, which will be the first date of your employment with Brocade. Vesting of this option will commence upon your start of employment and is contingent on continued employment. After the first six months of employment, 1/8 of the shares will vest and thereafter, 1/48 of the shares will vest on a monthly basis. The terms and conditions of this vesting are specified in the stock option agreement. In the event of a change in control one-fourth of your remaining unvested initial option grant will vest Thereafter, the same number of options shares will vest each month as before the change of control, except as noted below. All of your unvested initial option will vest if, within one year after a Change in Control, you are subject to a Constructive Termination (as defined below). For purposes of this letter a "a Change in Control" shall mean the closing of (i) a consolidation or merger of the Company with or into any other corporation or corporations in which the holders of the Company's outstanding shares immediately before such consolidation or merger do not, immediately after such consolidation or merger, retain stock representing a majority of the voting power of the surviving corporation of such consolidation or merger, or (ii) a sale of all or substantially all of the assets of the Company. Constructive termination is defined as (I) a material reduction of your duties, authority or responsibilities, (ii) any reduction in your title, (iii) a reduction in your salary or bonus, as in effect immediately before the Change in Control, or (iv) the relocation of your principal place of employment, if the distance between your new office and you office immediately before the relocation is more than 35 miles. This offer of employment is contingent upon you completing, signing, and returning to us this offer letter and the Employee Invention Assignment and Confidentiality Agreement. BROCADE COMMUNICATION SYSTEMS, INC. 1745 Technology Drive, San Jose, CA 95110 T 408.4B7.BOOO F 40B.487.8101 For purposes of federal immigration law (Immigration Reform and Control Act of 1986) you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation, as listed on the enclosed I-9 Form, with you on your first day. Your employment with Brocade is "at will" and may be terminated by either the employee or employer at any time, for any reason. Nothing in this offer is to be construed as a contract of employment for any specific length of time. Except for the Employee Invention Assignment and Confidentiality Agreement, and any rights in employee benefits generally offered to employees of Brocade, this offer represents the entire agreement related to your employment with Brocade and supersedes all prior or contemporaneous oral or written communications and representations. Tony, I am pleased to welcome you to Brocade, and excited about building a great company with you. If you have any questions regarding your offer please contact me at (408) 487-8127; or Stephanie Jensen, our Vice President of Human Resources, at (408) 501-8639. Please signify your acceptance of this offer by signing below faxing a copy of your signed offer letter and Employee Invention Assignment and Confidentiality Agreement to (408) 392-5060. Subsequently, please forward your original documents back to the Brocade, to the attention of Stephanie Jensen, as soon as possible. To accelerate your on-boarding with Brocade, we extend to you the opportunity to join us on a part-time basis, in which you'll receive pay up to 4 hours a week for time worked, prior to joining us as a full-time employee. By signing below, you certify that you are not in breach of any agreements with, or any other obligations to, any current or former employer. Sincerely, BROCADE COMMUNICATIONS SYSTEMS, INC. /s/ Michael Byrd -------------------------------- Michael Byrd CFO and Vice president, Finance Acknowledged receipt and accepted offer: /s/ Antonio Canova ------------------------------- Antonio Canova I'd like to join Brocade initially on a part-time basis, 4 hours per week, on: 11/13/00 I'll join Brocade as a full-time employee on: December 11, 2000 On your first day of employment, whether it's in a part-time or full-time capacity, please bring the appropriate documentation to Ivette Navarro in Human Resources. You'll need to provide the documentation, listed on the enclosed I-9 Form, the Employee Invention Assignment and Confidentiality Agreement and W-4 form. The I-9 documentation must be provided to us within 3 (three) business days of your date of hire. We invite you to New Hire Orientation on your first Monday of full-time employment, from 9:00 am until approximately 12:00. Orientation is held at 1745 Technology Drive, Concourse 6 Building. EX-10.85 11 f04919exv10w85.txt EXHIBIT 10.85 EXHIBIT 10.85 Attached is the employment offer letter originally given to Mike Klayko by Brocade Communications Systems, Inc. (the "Company") in connection with his initial employment. Subsequent to such time, the Company has agreed with Mr. Klayko that Mr. Klayko's title will be Chief Executive Officer, his base salary will be $520,000, and his target bonus for fiscal year 2005 will be $390,000. [BROCADE LOGO] BROCADE November 1, 2002 Michael Klayko Dear Michael, As you know, Brocade Communication Systems, Inc. ("Brocade") and Rhapsody Networks, Inc. ("Rhapsody") have executed an Agreement and Plan of Reorganization (the "Merger Agreement") in which Brocade is to acquire Rhapsody (the "Merger"). The closing of the Merger is currently scheduled to occur in early 2003 (the "Closing Date"). On behalf of Brocade, I am pleased to offer you the position of Vice President. This offer is contingent on the closing of the Merger and is subject to your starting date of no later than the Closing Date. Brocade is offering you an annual salary of $200,000, less applicable withholding, in accordance with Brocade's normal payroll procedures. You will also be eligible to participate in Brocade's Management By Objectives ("MBO") Plan, at a rate of 40% of your annual salary, which provides for the payment of cash bonuses tied to meeting established performance objectives and project milestones. Please note that the MBO plan for Brocade's 2003 fiscal year will be tied to the achievement of product delivery milestones as determined by Brocade following the Closing Date. As an employee, you will Be entitled to participate in the employee benefit plans currently and hereafter maintained by Brocade of general applicability of other employees of Brocade. Brocade reserves the right to cancel or change the benefit plans and programs it offers to its employees at anytime. Pursuant to the terms of the Merger, Brocade has agreed to convert your existing restricted stock awards and options to purchase shares of Rhapsody common stock into restricted stock awards and options to purchase shares of Brocade common stock. You agree to be bound by the terms and conditions of the lockup provisions applicable to your existing Rhapsody shares, options and restricted stock awards as set forth in the Merger Agreement. In addition, Brocade will recommend to its Board that you be granted a stock option to acquire 250,000 shares of Brocade Common Stock as soon as practicable following the Closing Date. The exercise price of each share subject to the option will be equal to the fair market value of Brocade's Common Stock on the grant date. Vesting of this option will commence upon your start of employment and will be contingent on your continued service to Brocade. After your first year of employment 25% of the shares will vest and thereafter, 1/48 of the shares will vest on a monthly basis. Notwithstanding the foregoing, an additional 25% of the shares subject to the option will vest one year after the date of grant upon successful completion of agreed upon product deliverables during 2003 as determined by Brocade in its reasonable discretion so that, if such performance goals are met, 50% of the shares subject to the option will vest one year after the date of grant and 1/48 of the shares will vest on monthly basis thereafter. You agree to execute all agreements necessary to effectuate this grant. The option grant shall be subject to the terms and conditions of Brocade's Stock Option Plan and Stock Option Agreement, both of which are incorporated herein by reference. If your employment with Brocade terminates other than voluntarily or for "Cause" (as defined below) within twelve (12 months of the Closing Date, and you sign and do not revoke a standard release of claims with Brocade, you shall be entitled to receive continuing payments of severance pay (less applicable withholding taxes) at a rate equal to your base salary rate as then in effect, for a period of twelve (12) months from the date of such termination, to be paid periodically in accordance with Brocade's normal payroll policies. BROCADE COMMUNICATIONS SYSTEMS, INC. 1745 Technology Drive, San Jose, CA 95110 T 408.487.8000 F 408.487.8101 For purposes of federal immigration law (Immigration Reform and Control Act of 1986), you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation, as listed on the enclosed 1-9 Form, with you on your first day. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. Please signify your acceptance of this offer by signing, below faxing a copy of your signed offer letter, employment application, and background release forms to (408) 392-5060 no later than 6pm, Monday, November 4th, 2002. Subsequently, please forward your original documents to the attention of Stephanie Jensen, as soon as possible. Sincerely, Brocade Communications Group, Inc. /s/ Stephanie Jensen ---------------------------------- Stephanie Jensen Vice President, Human Resources I agree and accept employment with Brocade on the terms set forth in this agreement. /s/ Michael Klayko 11.4.02 ---------------------------------- -------------- Michael Klayko Date We strive to ensure that our employees in the field receive prompt service; Erin Wilkinson from Proview will be providing, you Benefits Enrollment information by email. You may contact her with any benefit questions at (800) 835-0960 x 258. In addition, if you have any Human Resources questions, please feel free to send an email to HRHelp@brocade.com. [BROCADE LOGO] BROCADE Dear Michael Klayko: In the event that (i) a Change of Control (as defined below) occurs and you are subject to a Constructive Termination (as defined below) within one year after the Change in Control; or (ii) your employment is terminated for any reason other than for Cause (as defined below), you shall receive 50% vesting acceleration of your remaining unvested initial option grant, 6 months continued base salary, and 6 months (or less, if you and your covered dependents become covered by the plans of another employer) of company - subsidized COBRA such that you pay no more than a similarly situated active employee, in exchange for a signed Separation Release and Agreement For the purposes of this letter: "Change of Control" shall mean the closing of (i) a consolidation or merger of the Company with or into any other corporation or corporations in which the holders of the Company's outstanding shares immediately before such consolidation or merger, retain stock representing a majority of the voting power of the surviving corporation of such consolidation or merger, or (ii) a sale of all or substantially all of the assets of the Company. "Constructive Termination" is defined as (i) a material reduction of your duties, authority or responsibilities, (ii) any reduction in your title, (iii) a reduction in your salary or bonus, as in effect immediately before the Change of Control, or (iv) the relocation is more than 50 miles. "Cause" shall mean (i) unauthorized use or disclosure of the confidential information or trade secrets of the Company which is materially injurious to the Company; (ii) any breach of this letter agreement, the Employment, Confidential Information, Invention Assignment and Arbitration Agreement between you and the Company, or any other agreement between you and the Company, if the breach is materially injurious to the Company, (iii) conviction of, or a plea of "guilty" or "no contest" to a felony under the laws of the United States or any state, (iv) willful misconduct which is materially injurious to the Company; or (V) gross negligence in the performance of duties assigned to you. Sincerely /s/ Greg Reyes ------------------------------------ Greg Reyes Chief Executive Officer Brocade Communications Systems, Inc. /S/ Michael Klayko ------------------------------------ Date: 2/3/2003 I agree and accept the terms set forth in this Change of Control with Brocade Communications Systems, Inc. BROCADE COMMUNICATIONS SYSTEMS, INC. 1745 Technology Drive, San Jose, CA 95110 www.brocade.com T 408.333.8000 F 408.333.8101 EX-10.86 12 f04919exv10w86.txt EXHIBIT 10.86 EXHIBIT 10.86 Attached is the employment offer letter originally given to Don Jaworski by Brocade Communications Systems, Inc. (the "Company") in connection with his initial employment. Subsequent to such time, the Company has agreed with Mr. Jaworski that his base salary will be $375,000, and his target bonus for fiscal year 2005 will be $187,500. COPY [BROCADE LOGO] BROCADE April 11,2003 Don Jaworskl 609 Arboleda Drive Los Altos, CA 94024 Dear Don, On behalf of Brocade Communications Systems, Inc. ("Brocade"), I am pleased to offer you the position of Vice President, Engineering, reporting to myself. Brocade is offering you a semi-monthly salary of $12,500.00 (which would equal $300,000.00 annually), less applicable withholding, in accordance with Brocade's normal payroll procedures. You are eligible to participate in the Brocade Incentive Program ("BIP") at a rate of 50% of your annual salary paid annually, if you and Brocade meet the established annual performance objectives. Brocade retains the right to change or amend the BIP at any time. As an employee, you are also eligible to receive certain employee benefits; the details of these employee benefits are attached. In addition, if you decide to join us, Brocade is offering you a one-time stock option of 550,000 (five hundred fifty thousand) shares of Common Stock, subject to Committee approval of the Board of Directors. The exercise price of the option will be equal to the fair market value of Brocade's Common Stock on the grant date. Vesting of this option will commence upon your start of employment and is contingent on continued employment. After the first year of employment, 1/4th of the shares will vest; the remaining shares will vest monthly over the following three years, at a rate of 1/48th of the entire option each month. You agree to execute all agreements necessary to effectuate this grant. The option grant shall be subject to the terms and conditions of Brocade's Stock Option Plan and Stock Option Agreement. In addition, you will participate in our ongoing stock option program. In 2004, Brocade will award you 25% stock option refresh, subject to Committee approval of the Board of Directors. In the event that Brocade terminates your employment for any reason other than for Cause (as defined below), you will be eligible for 6 months separation package equal to 6 months base salary, and 6 months COBRA benefit coverage reimbursement, in exchange for a signed Separation Release and Agreement. For purposes of this letter "Cause" shall mean (i) unauthorized use or disclosure of the confidential information or trade secrets of the Company which is materially injurious to the Company; (ii) any breach of this letter agreement, the Employment, Confidential Information, Invention Assignment and Arbitration Agreement between you and the Company, or any other agreement between you and the Company, if the breach is materially injurious to the Company, (iii) conviction of, or a plea of "guilty" or "no contest" to, a felony under the lays of the United States or any state, (iv) willful misconduct which is materially injurious to the Company or (v) gross negligence in the performance of duties assigned to you. In the event of a Change in Control (as defined below), if you are subject to a Constructive Termination (as defined below) within one year after the Change in Control, instead of the six month separation package defined above, you shall receive 12 months severance equal to the sum of your base salary, BIP bonus at target (1x) and 12 months of vesting of your remaining unvested initial stock option grants. All tax in respect of such cash severance payment shall be payable by you and the Company shall not be required to gross up such a payment. Please note, this benefit is not available for any voluntary termination of employment by you except for a constructive termination under this paragraph. For purposes of this letter a "a Change in Control" shall mean the closing of (i) a consolidation or merger of the Company with or into any other corporation or corporations in which the holders of the Company's outstanding shares immediately before such consolidation or merger do not, immediately after such consolidation or merger, retain stock representing a majority of the voting power of the surviving corporation of such consolidation or merger, or (ii) a sale of all or substantially all of the assets of the Company. BROCADE COMMUNICATIONS SYSTEMS, INC. 1745 Technology Drive, San Jose, CA 95110 T-408.487.8000 F 408.487.8101 Constructive termination is defined as (i) a material reduction of your duties, authority or responsibilities (ii) any reduction in your title, (iii) a change in your reporting relationship (iv) a reduction in your salary or bonus, as in effect immediately before the Change in Control, or (v) the relocation of your principal place of employment, if the distance between your new office and you office immediately before the relocation is more than 35 miles. Brocade reserves the right to conduct background investigations and/or reference checks on all of its potential employees. Your offer of employment, therefore, is contingent upon a clearance of such a background investigation and/or reference check, if any. We also ask that, If you have not already done so, you disclose to Brocade any and all agreements relating to your prior employment that may affect your eligibility to be employed by Brocade or limit the manner in which you may be employed. It is Brocade's understanding that any such agreements will not prevent you from performing the duties of your position and you represent that such is the case. Moreover, you agree that, during the term of your employment with Brocade, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which Brocade is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your obligations to Brocade. Similarly, you agree not to bring any third party confidential information to Brocade, including that of your former employer, and that in performing your duties for Brocade you will not in any way utilize any such information. As a Brocade employee, you will be expected to abide by Brocade rules and standards, as outlined in Brocade Employee Handbook. As a condition of your employment, you will also be required to sign and comply with an Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at Brocade, and non-disclosure of proprietary information. The Agreement also provides that in the event of any dispute or claim relating to or arising out of our employment relationship, you and Brocade agree that all such disputes shall be fully and finally resolved by binding arbitration. However, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of Brocade's trade secrets or proprietary information. Your employment with Brocade is "at will" and may be terminated by either the employee or employer at any time, for any reason. Nothing in this offer is to be construed as a contract of employment for any specific length of time. Except for the employee Invention Assignment and Confidentiality Agreement, and any rights in employee benefits generally offered to employees of Brocade, this offer represents the entire agreement related to your employment with Brocade and supersedes all prior or contemporaneous oral or written Communications and representations. This letter, along with any agreements relating to proprietary rights between you and Brocade, set forth the terms of your employment with Brocade and supersede any prior representations or agreements, whether written or oral. This letter including, but not limited to, its at will employment provision, may not be modified or amended except by a written agreement, signed by Brocade Vice President of Human Resources and yourself. This offer, if not accepted, will expire in 3 (three) business days. As a new Brocade employee, you will be expected to attend New Employee Orientation on your first Monday of full-time employment, from 9:00 am until approximately 12:00. Orientation will be held at 1745 Technology Drive, Concourse 6 Building. For purposes of federal immigration law (Immigration Reform and Control Act of 1986), you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation as listed on the enclosed I-9 Form, with you on your first day. Such documentation must be provided to us within 3 (three business days of your date of hire, or our employment relationship with you may be terminated. Please signify your acceptance of this offer by signing below faxing a copy of your signed offer letter, employment application, and background release forms to (408) 333-5060 no later than April 15, 2003. Subsequently, please forward your original documents to the attention of Theresa Uchida, as soon as possible. Sincerely, BROCADE COMMUNICATIONS SYSTEMS, INC. /s/ Greg Reyes -------------------------------------- Greg Reyes CEO, Chairman of the Board I agree and accept employment with Brocade Communications Systems, Inc. on the terms set forth in this agreement. /s/ Don Jaworski 4-11-03 ---------------------------------- ---------------- Don Jaworski Date I will begin my employment on ______________(insert your start date). EX-10.87 13 f04919exv10w87.txt EXHIBIT 10.87 EXHIBIT 10.87 Attached is the employment offer letter originally given to James LaLonde by Brocade Communications Systems, Inc. (the "Company") in connection with his initial employment. Subsequent to such time, the Company agreed with Mr. LaLonde that Mr. LaLonde's title was Vice President, Worldwide Field Sales, his base salary was $200,000, and his incentive target for fiscal year 2004 was $250,000. On May 12, 2004, the Company entered into a Settlement Agreement and Release, which is attached. Mr. LaLonde is no longer employed by the Company. [BROCADE LOGO(R)] BROCADE March 31,2003 James LaLonde The Waterfront 17th floor Tower III Flat F Hong Kong Re: Transfer of Employment to Brocade Communications Systems, Inc. ("Brocade USA") Dear James, We are writing this letter to you, in conjunction with Brocade Hong Kong Limited ("Brocade HK"), to inform you that Brocade HK will transfer your employment to Brocade Communications Systems, Inc. ("Brocade USA") effective April 1, 2003, in accordance with your promotion to Vice President, International Sales, and the compensation and relocation details provided to you by Greg Reyes on December 13,2002. This purpose of this letter is to inform you that your employment with Brocade HK will terminate on March 31, 2003. Brocade Communications Systems, Inc. ("Brocade USA") joins in this letter to offer you employment with it, effective. April 1, 2003. Your compensation will remain the same, less applicable withholding, in accordance with Brocade's normal US payroll procedures. As a US employee, you are also eligible to receive certain employee benefits; the details of these employee benefits are attached. You agree that, during the term of your employment with Brocade US, you will not engage in any other employment, occupation,consulting or other business activity directly related to the business in which Brocade US is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your obligations to Brocade US. As a Brocade US employee, you will be expected to abide by Brocade US rules and standards, as outlined in Brocade US Employee Handbook. As a condition of your employment, you will also be required to sign and comply with an Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at Brocade US, and non-disclosure of proprietary information. The Agreement also provides that in the event of any dispute or claim relating to or arising out of our employment relationship, you and Brocade US agree that all such disputes shall be fully and finally resolved by binding arbitration. However, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of Brocade US's trade secrets or proprietary information. Your employment with Brocade US is "at will" and may be terminated by either the employee or employer at any time, for any reason. Nothing in this offer is to be construed as a contract of employment for any specific length of time. Except for the Employee Invention Assignment and Confidentiality Agreement, and any rights in employee benefits generally offered to employees of Brocade US, this offer represents the entire agreement related to your employment with Brocade US and supersedes all prior or contemporaneous oral or written Communications and representations. This letter, along with any agreements relating to proprietary rights between you and Brocade US, set forth the terms of your employment with Brocade US and supersede any prior representations or agreements, whether written or oral. This letter including, but not limited to, its at-will employment provision, may not be modified or amended except by a written agreement, signed by Brocade US Vice President of Human Resources and yourself. BROCADE COMMUNICATIONS SYSTEMS, INC. 1745 Technology Drive, San Jose, CA 95110 T.408.487.8000 F 408.487.8101 For purposes of federal immigration law (Immigration Reform and Control Act of 1986), you are required to provide documentary evidence of your eligibility for employment in the United States. Please bring the appropriate documentation, as listed on the enclosed 1-9 Form, with you on your first day. Such documentation must be provided to us within 3 (three) business days of your date of transfer, or our employment relationship with you may be terminated. Sincerely, BROCADE COMMUNICATIONS SYSTEMS, INC. By: /S/ Stephanie Jensen -------------------- Stephanie Jensen VP, Human Resources I acknowledge receipt of the original of this letter terminating my employment as stated above and confirm that I will accept the offer of new employment with Brocade Communications Systems, Inc. In consideration of Brocade Communications Systems, Inc. having procured the offer of employment on terms the same as my present employment, I hereby release Brocade HK from any claim whatsoever which I may have against it in relation to the termination of my employment and transfer to Brocade Communications Systems, Inc. other than in respect of accrued and outstanding salary (if any) for the current month of employment. By: /S/ James LaLonde ----------------- James LaLonde Enclosures: Copy of December 13,2002 International Sales VP position compensation, transfer, and relocation details Brocade Employee Invention Assignment and Confidentiality Agreement 1-9 Form W-4 Form EDD - Employee Withholding Allowance Certificate Direct Deposit Authorization Form US Benefit Packet Information [BROCADE LOGO] SEPARATION AGREEMENT AND RELEASE This Separation Agreement and Release ("Agreement") is made by and between Brocade Communications Systems, Inc. ("Brocade" or the "Company"), and James LaLonde ("Employee"). WHEREAS, Employee is employed by the Company; WHEREAS, the Company and Employee have entered into an employee invention assignment and confidentiality agreement (the "Confidentiality Agreement"); WHEREAS, Employee has entered into the stock option agreements, identified on the Personnel Option Status Schedule attached hereto, granting Employee the option to purchase shares of the Company's common stock subject to the terms and conditions of the Company's stock option plans (the "Stock Plans") and the respective stock option agreements (the "Option Agreements"); WHEREAS, the Company and Employee have decided to terminate Employee's employment; WHEREAS, the Parties, and each of them, wish to resolve any and all disputed claims, complaints, grievances, charges, actions, petitions and demands that Employee has or may have against the Company as defined, herein, including, but not limited to, any and all claims arising from or in any way related to Employee's employment relationship, or termination of his employment, with the Company; NOW THEREFORE, in consideration of the mutual promises made herein, the Company and Employee (collectively referred to as "the Parties") hereby agree as follows: 1. Release from Regular Duties and Termination. (a) Employee is released from his regular duties as Vice President, Worldwide Field Sales effective as of April 30, 2004 (the "Release Date"). (b) For purposes of this Agreement, Employee's employment with the Company shall terminate on the earlier of (i) October 31, 2004, or (ii) the termination of Employee's employment as provided in Section 2(a) or 2(b) below (such earlier date, the "Termination Date"). 2. Consideration. As consideration for this Agreement, the Company will provide the following benefits to Employee: (a) During the period commencing on the Release Date and ending on the Termination Date (the "Transition Period"), (i) Employee shall transition his regular duties to personnel identified by the Company, (ii) shall complete the "Advisory Project" as detailed in the attached Exhibit A, (iii) the Company shall pay to Employee a semi-monthly total gross compensation amount of $22,500, less applicable withholding, in accordance with Brocade's normal payroll procedures, and (iv) Employee shall continue to receive medical, dental and vision health insurance benefits. Employee shall not be entitled to any sales commissions or bonus for activities during the term of this Agreement. If Employee moves his household possessions back to Japan before the end of the Transition Period, and to the extent moving expenses are not reimbursed by a new employer, Company shall, upon delivery of documentation verifying the expense, reimburse reasonable moving expenses for household items in an amount not to exceed $65,000. Notwithstanding the foregoing, Employee acknowledges and agrees that in the event that Employee violates any terms of this Agreement during the Transition Period, (i) Employee's employment with Company shall be immediately terminated; (ii) all benefits under this Agreement immediately end (e.g., base salary, medical, dental and vision health insurance benefits, vesting of stock options, reimbursement of moving expenses); and (iii) Employee shall refund a dollar amount equal to the strike price of stock options that vested during the Transition Period and the closing price of Brocade stock on the date of the breach. (b) Subject to the terms of Section 2(a), the Parties agree that Employee's stock options will continue to vest until the Termination Date; provided, however, that the exercise of any stock options shall continue to be subject to the terms and conditions of the Stock Plans and Option Agreements, as applicable. (d) Subject to the terms of Section 2(a) above and subject to Employee's right to continue his health insurance under COBRA, Employee's health insurance benefits will cease at the end of the month in which the Termination Date occurs. Employee's participation in all other benefits incident to his employment with the Company will cease on the Termination Date. 3. Confidential Information. (a) Employee shall continue to maintain the confidentiality of all confidential and proprietary information of the Company and shall not disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any Confidential Information of the Company. "Confidential Information" means any Company proprietary information, technical data, trade secrets or know-how, including, but not limited to, research, product plans, products, services, customer lists and customers (including, but not limited to, customers of the Company on whom Employee called or with whom Employee became acquainted during the term of his employment), markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business information disclosed to him by the Company either directly or indirectly in writing, orally or by drawings or observation of parts or equipment. Employee further understands that Confidential Information does not include any of the foregoing items which have become publicly known and made generally available through no wrongful act of his or of others who were under confidentiality obligations as to the item or items involved or improvements or new versions thereof. (b) Employee shall return, and shall not utilize other than for company business, all the Company property, including, but not limited to, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, computer source code or other documents, or reproductions of any of the aforementioned items, and confidential and proprietary information in his possession to the Company on the Release Date. (c) Employee represents that he has complied with all the terms of the Confidentiality Agreement, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by him (solely or jointly with others) covered by the Confidentiality Agreement. Employee further represents and agrees that he will abide by his obligation under the Confidentiality Agreement to assist the Company in the preparation of assignments of intellectual property rights created while Employee was employed by the Company. -2- (d) Employee agrees to keep confidential the fact that his role with the company has changed until after the Brocade earnings release in May, currently anticipated to be on May 19. The only individuals that you can speak with about this are Greg Reyes and Mike Vescuso. 4. Noncompetition. In consideration of Employee's unique access to the Company's strategic plans, customer lists, contact lists, product plans and technical information regarding existing products, Employee agrees that during the Transition Period, Employee will not, directly or indirectly, accept employment with or provide any consulting, advisory or similar services to McData Corporation, Cisco Systems, Hewlett-Packard Company, IBM Corporation, Dell Inc. or EMC Corporation. 5. Payment. Employee acknowledges and represents that the Company will have paid all salary, wages, bonuses, accrued vacation, and any and all other benefits due to Employee upon receipt of the payments and benefits earned during the term of this Agreement pursuant to Section 2 above. 6. Release of Claims. Employee agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Employee by the Company. Employee, on behalf of himself, and his respective heirs, family members, executors and assigns, hereby fully and forever releases the Company and its past, present and future officers, agents, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, parents, predecessor and successor corporations, and assigns, from, and agrees not to sue or otherwise institute or cause to be instituted any legal or administrative proceedings concerning any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that he may possess arising from any omissions, acts or facts that have occurred up until and including the Termination Date including, without limitation, (a) any and all claims relating to or arising from Employee's employment relationship with the Company and the termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law; (c) any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, The Worker Adjustment and Retraining Notification Act, the California Fair Employment and Housing Act, the California Warn Act and Labor Code section 201, ET SEQ. and section 970, ET SEQ. and all amendments to each such Act as well as the regulations issued thereunder; (e) any and all claims for violation of the federal, or any state, constitution; -3- (f) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; (g) any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment of any of the proceeds received by Employee as a result of this Agreement; and (h) any and all claims for attorneys' fees and costs. Employee agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. Employee acknowledges and agrees that any breach of this paragraph shall constitute a material breach of this Agreement and in the case of a breach by Employee, shall entitle the Company immediately to recover the consideration discussed in paragraph 2 above. Employee shall also be responsible to the Company for all costs, attorneys' fees and any and all damages incurred by the Company (a) enforcing the obligation, including the bringing of any suit to recover the monetary consideration, and (b) defending against a claim or suit brought or pursued by Employee in violation of this provision. 7. Civil Code Section 1542. Employee represents that he is not aware of any claims against the Company other than the claims that are released by this Agreement. Employee acknowledges that he has been advised by legal counsel and is familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIS MUST HAVE MATERIALLY AFFECTED HIS SEPARATION WITH THE DEBTOR. Employee, being aware of said code section, agrees to expressly waive any rights he may have thereunder, as well as under any other statute or common law principles of similar effect. 8. No Pending or Future Lawsuits. Employee represents that he has no lawsuits, claims, or actions pending in his name, or on behalf of any other person or entity, against the Company or any other person or entity referred to herein. Employee also represents that he does not intend to bring any claims on his own behalf or on behalf of any other person or entity against the Company or any other person or entity referred to herein. 9. Application for Employment. Employee agrees that he shall not seek, apply for or accept reemployment with the Company. Employee understands and agrees that, as a condition of this Agreement, he shall not be automatically entitled to any employment with the Company, its subsidiaries, or any successor, and he hereby waives any right, or alleged right, of employment or re-employment with the Company. 10. Confidentiality. Employee agrees to use his best efforts to maintain in confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as "Separation Information"). Employee agrees to take every reasonable precaution to prevent disclosure of any Separation Information to third parties, other than Employee's legal counsel, if any, and agrees that there will be no publicity, directly or indirectly, concerning any Separation Information. Employee agrees to take every precaution to disclose Separation -4- Information only to those attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Separation Information. The Parties agree that if the Company proves that Employee breached this Confidentiality provision, it shall be entitled to an award of its costs spent enforcing this provision, including all reasonable attorneys' fees associated with the enforcement action, without regard to whether the Company can establish actual damages from the breach by Employee. 11. No Cooperation. Employee agrees he will not act in any manner that might damage the business of the Company. Employee agrees that he will not counsel or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against the Company and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company, unless under a subpoena or other court order to do so. Employee further agrees both to immediately notify the Company upon receipt of any court order, subpoena, or any legal discovery device that seeks or might require the disclosure of production of the existence or terms of this Agreement, and to furnish, within (3) three business days of its receipt, a copy of such subpoena or legal discovery device to the Company. 12. Non-Disparagement. Employee agrees that Employee will refrain from making any incorrect or disparaging statements about the Company, its products or services, its officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns. In response to inquiries from prospective employers regarding Employee, the Company's Human Resources Department will provide no other information other than Employee's dates of employment and positions held with the Company. With Employee's express written consent, the Company will confirm Employee's final annual base salary rate. 13. Non-Solicitation. Employee agrees that for a period of one year following the Termination Date Employee will not directly or indirectly solicit, induce, recruit or encourage any employee of the Company to terminate his or her employment with the Company, or take away or hire such employees, or attempt to solicit, induce, recruit, encourage, take away or hire employees of the Company, either for himself or any other person or entity. Employee further agrees that Employee will refrain from tortuously interfering with the contracts and relationships of the Company and its officers, directors, employees, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns. 14. No Admission of Liability. Employee understands and acknowledges that this Agreement constitutes a compromise and separation of disputed claims. No action taken by the Company, either previously or in connection with this Agreement shall be deemed or construed to be (a) an admission of the truth or falsity of any claims heretofore made or (b) an acknowledgment or admission by the Company of any fault or liability whatsoever to Employee or to any third party. 15. Attorneys' Fees. In the event that either Party brings an action to enforce or effect its rights under this Agreement, the prevailing party shall be entitled to recover its costs and expenses, including the costs of mediation, arbitration, litigation, court fees, plus reasonable attorneys' fees, incurred in the connection with such an action. 16. No Knowledge of Wrongdoing. Employee represents that he has no knowledge of any wrongdoing involving improper or false claims against a federal or state governmental agency, or any other wrongdoing that involves Employee or other present or former Company employees. -5- 17. Tax Consequences. The Company makes no representation or warranties with respect tot the tax consequences of the payment of any sums to Employee under the terms of this Agreement. Employee agrees and understands that he is responsible for payment, if any, of local, state and/or federal taxes on the sums paid hereunder by the Company and any penalties or assessments thereon. Employee further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of Employee's failure to pay federal or state taxes or damages sustained by the Company by reason of any such claims, including reasonable attorneys' fees. 18. Indemnification. Employee agrees to indemnify and hold harmless the Company from and against any and all loss, costs, damages or expenses, including, without limitation, attorneys' fees or expenses incurred by the Company arising out of the breach of this Agreement by Employee, or from any false misrepresentation made herein by Employee, or from any action or proceeding which may be commenced, prosecuted or threatened by Employee or for Employee's benefit, upon Employee's initiative, or with Employee's aid or approval, contrary to the provisions of this Agreement. Employee further aggress that in any such action or proceeding, this Agreement may be pled by the Company as a complete defense, or may be asserted by way of counterclaim or cross-claim. 19. Arbitration. The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, including any potential claims of harassment, discrimination or wrongful termination shall be subject to binding arbitration, to the extent permitted by law, in Santa Clara, California, before the American Arbitration Association under its National Rules for the Resolution of Employment Disputes. THE PARTIES AGREE AND HEREBY WAIVE THEIR RIGHTS TO A JURY TRIAL AS TO MATTERS ARISING OUT OF THE TERMS OF THIS AGREEMENT AND ANY MATTERS HEREIN RELEASED TO THE EXTENT PERMITTED BY LAW. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award, provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by either of the Parties. The Parties further agree that the prevailing party in any arbitration shall be entitled to recover from the other party all legal costs and attorneys fees associated with the dispute. 20. Authority. The Parties represent and warrant that they have the capacity to act on their own behalf of all who might claim through each of them to bind such parties to the terms and conditions of this Agreement. The Parties warrant and represent that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or courses of action released herein. 21. No Representations. Employee represents that he has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 22. Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 23. Entire Agreement. This Agreement, the Option Agreements, the Stock Plan and the Confidentiality Agreement represent the entire agreement and understanding between the Company and, and supersede and replace any and all prior agreements and understandings concerning Employee's relationship with the Company and his compensation by the Company. -6- 24. No Oral Modification. This Agreement may only be amended in writing signed by Employee and the (i) Chief Executive Officer or (ii) Vice President, Human Resources of the Company. 25. Governing Law. This Agreement shall be deemed to have been executed and delivered within the State of California, and it shall be construed, interpreted, governed, and enforced in accordance with the laws of the State of California, without regard to choice of law principles. 26. Effective Date. Employee has ten (10) days from the Release Date to consider this Agreement, and to return an executed copy to the Company. The date of receipt by the Chief Executive Officer or the Vice President, Human Resources of Company will be the effective date of this Agreement. 27. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 28. Successors and Assigns. This Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. 29. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They understand the terms and consequences of this Agreement and of the releases it contains; and (c) They are fully aware of the legal and binding effect of this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. Brocade Communications Systems, Inc. Dated: May 12, 2004 By /s/ Gregory L. Reyes ------------------------------------------- Gregory L. Reyes CEO and Chairman of the Board James LaLonde, an individual Dated: May 12, 2004 /s/ James LaLonde ------------------------------------------- -7- EXHIBIT A: Advisory Project - James Lalonde During this period, James will report to the VP HR who will monitor the process of providing coaching and support to the new WW sales leader to ensure an effective transition and smooth assimilation of the field sales force structure and function. James will assist with transition and implementation of Ops Excellence initiative in Q3/Q4 `04. Key areas of focus include: o Review and monitor plans to minimize revenue risk as we implement POR for Field Sales o Review and monitor cross-functional interlock with OEM Sales and Marketing POR's to ensure that plan execution is integrated across the three functions o Review and monitor field communication plans to make sure that field sales management, regional OEMs, and end user customers receive detailed communication checklists to minimize confusion or concern with the transition of field sales relationships o Cooperate with the new WW sales leader to transfer your knowledge of field employees, regional OEM and customer relationships and contacts during the transition period. o Quarterly check points in Q3 and Q4 with the VP of HR to monitor and evaluate the quality of the coaching and support. o Two weeks before the end of Q4 James will prepare a white paper for me detailing what actions have been completed and what actions are still outstanding relative to the Field sales Ops Excellence transition and execution actions, as well as any open field employee or customer issues. -8- EX-10.88 14 f04919exv10w88.txt EXHIBIT 10.88 EXHIBIT 10.88 CHANGE OF CONTROL ARRANGEMENT WITH TEJINDER GREWAL Brocade Communications Systems, Inc. (the "Company") has entered into an agreement with Mr. Tejinder Grewal which covers an option to purchase 350,000 shares and provides the following: In the event that (i) a Change of Control (as defined below) occurs and you are subject to a Constructive Termination (as defined below) within one year after the Change in Control; or (ii) your employment is terminated for any reason other than for Cause as (defined below), you shall receive 50% vesting acceleration of your remaining unvested initial option grant, 6 months continued base salary and 6 months (or less, if you and your covered dependents become covered by the plans of another employer) of company-subsidized COBRA such that you pay no more premiums than a similarly situated active employee, in exchange for a signed Separation Release and Agreement. For purposes of this provision: "Change of Control" shall mean the closing of (i) a consolidation or merger of the Company with or into any other corporation or corporations in which the holders of the Company's outstanding shares immediately before such consolidation or merger, retain stock representing a majority of the voting power of the surviving corporation of such consolidation or merger, or (ii) a sale of all or substantially all of the assets of the Company. "Constructive Termination" is defined as (i) a material reduction of your duties, authority or responsibilities, (ii) any reduction in your title, (iii) a reduction in your salary or bonus, as in effect immediately before the Change of Control, or (iv) the relocation is more than 50 miles. "Cause" shall mean (i) unauthorized use or disclosure of the confidential information or trade secrets of the Company which is materially injurious to the Company; (ii) any breach of this letter agreement, the Employment, Confidential Information, Invention Assignment and Arbitration Agreement between you and the Company, or any other agreement between you and the Company, if the breach is materially injurious to the Company, (iii) conviction of, or a plea of "guilty" or "no contest" to a felony under the laws of the United States or any state, (iv) willful misconduct which is materially injurious to the Company; or (v) gross negligence in the performance of duties assigned to you. EX-10.89 15 f04919exv10w89.txt EXHIBIT 10.89 EXHIBIT 10.89 CHANGE OF CONTROL ARRANGEMENT WITH PAUL BONDERSON Brocade Communications Systems, Inc. (the "Company") has entered into an agreement with Mr. Bonderson, with respect to options to purchase 423,555 shares, which provides the following: In the event that Participant is Terminated without "Cause" (as defined below), or if Participant's employment is terminated as a result of "Certain Reasons" (as defined below) other than for Cause, at any time during the first year following the closing of (i) a consolidation or merger of the Company with or into any other corporation or corporations in which the holders of the Company's outstanding shares immediately before such consolidation or merger do not, immediately after such consolidation or merger, retain stock representing a majority of the voting power of the surviving corporation of such consolidation or merger; or (ii) a sale of all or substantially all of the assets of the Company, then on the Termination Date all Unvested Shares shall become Vested Shares. The number of Shares that are Vested Shares or Unvested Shares will be proportionally adjusted to reflect and stock dividend, stock split, reverse stock split or recapitalization of the Common Stock of the Company occurring after the Date of Grant. If application of the vesting percentage causes a fractional Share, such Share shall be rounded down to a whole Share. For the purpose of the Option Agreement "Cause" shall mean Participant's (i) failure to perform such assigned duties and responsibilities as shall be consistent with the duties and responsibilities of an employee of the Company in a similar job position after receipt of a written notice of specific deficiencies consistent with the Company's performance review policies in effect at such time and a reasonable period not to exceed thirty days for Participant to cure any such deficiencies; (ii) engaging in gross negligence or willful misconduct which is or is likely to be materially injurious to the Company; (iii) committing a felony, an act of fraud against, or the misappropriation of property belonging to the Company; or, (iv) breaching in any material respect the terms of any employment agreement or any confidentiality or proprietary information agreement between participant and the Company; a majority vote of the board of directors of the Company authorizes a for Cause termination after the occurrence of (i), (ii), (iii) or (iv) as set forth above. For the purpose of this Option Agreement "Certain Reason" shall mean (i) a reduction in cash compensation (exclusive of bonuses) or a material reduction in benefits, except as part of a salary or benefit reduction program by the Company that is applicable generally to employees of participant's level, (ii) assignment to a position materially not commensurate with Participant's training and abilities, or (iii) relocation of Participant's workplace to any place more than fifty miles from Santa Clara, California, provided, in each case, that the Participant has given the Company written notice of Participant's intention to terminate for Certain Reason, citing the Certain Reasons, and the Company has not cured the Certain Reasons within thirty days after receipt of the letter. EX-12.1 16 f04919exv12w1.txt EXHIBIT 12.1 . . . Exhibit 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges (in thousands, except ratios)
Fiscal Year Ended ---------------------------------------------------------------------- October 30, October 25, October 26, October 27, October 28, 2004 2003 2002 2001 2000 -------- --------- -------- -------- --------- Restated(1) Restated(1) Restated(1) Restated(1) Earnings (loss) from continuing operations before taxes $(17,945) $(134,519) $131,620 $743,240 $(950,417) Fixed charges from continuing operations Interest expense and amortization of debt discount and issuance costs on all indebtedness 10,677 13,339 11,427 -- 45 Interest included in rent 3,722 7,579 6,679 5,507 1,381 -------- --------- -------- -------- --------- Total fixed charges from continuing operations 14,399 20,917 18,106 5,507 1,426 -------- --------- -------- -------- --------- Earnings (loss) before taxes and fixed charges $ (3,546) $(113,602) $149,726 $748,747 $(948,991) ======== ========= ======== ======== ========= Ratio of earnings to fixed charges (2) -- -- 8.3x 136.0x -- Coverage deficiency (3) $ 17,945 $ 134,519 $ -- $ -- $ 950,417 -------- --------- -------- -------- ---------
(1) On January 24, 2005, the Company announced that its Audit Committee completed an internal review regarding the stock option granting process. As a result of certain findings of the review, the Company restated certain of its historical financial statements to record additional stock-based compensation charges relating to many of its stock option grants made during the period 1999 through the third quarter of fiscal year 2003. In addition the Company recorded a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits. See Note 3, "Restatement of Consolidated Financial Statements," of the Notes to Consolidated Financial Statements. (2) The ratio of earnings to fixed charges was computed by dividing earnings (loss) from continuing operations before taxes by fixed charges from continuing operations for the periods indicated. Fixed charges from continuing operations include (i) interest expense and amortization of debt discount and issuance costs on all indebtedness, and (ii) one-third of all rental expense, which the Company considers to be a reasonable approximation of the interest factor included in rental expense. (3) Earnings were inadequate to cover fixed charges. For the year ended October 30, 2004, the Company needed additional earnings of $17.9 million to achieve a ratio of earnings to fixed charges of 1.0x. EX-21.1 17 f04919exv21w1.txt EXHIBIT 21.1 EXHIBIT 21.1 BROCADE COMMUNICATIONS SYSTEMS, INC. INTERNATIONAL SUBSIDIARIES BROCADE COMMUNICATIONS SYSTEMS PROPRIETARY LTD. (AUSTRALIA) BROCADE COMMUNICATIONS SYSTEMS AUSTRIA GMBH (AUSTRIA) BROCADE COMMUNICATIONS SYSTEMS BELGIUM S.P.R.L (BELGIUM) BROCADE COMMUNICATIONS CANADA CORP. (CANADA) CHINA WFOE BROCADE COMMUNICATIONS SYSTEMS CHINA HK LTD. (CHINA) HOLDING COMPANY FOR REP OFFICES BROCADE COMMUNICATIONS SYSTEMS CHINA HK LTD. BEIJING REP. OFFICE (CHINA) BROCADE COMMUNICATIONS SYSTEMS CHINA HK LTD. GUANGZHOU REP. OFFICE (CHINA) BROCADE COMMUNICATIONS SYSTEMS CHINA HK LTD. SHANGHAI REP. OFFICE (CHINA) BROCADE COMMUNICATIONS DENMARK APS (DENMARK) BROCADE COMMUNICATIONS FRANCE SAS (FRANCE) BROCADE COMMUNICATIONS GMBH (GERMANY) BROCADE COMMUNICATIONS SYSTEMS HK LTD. (HONG KONG) BROCADE COMMUNICATIONS SYSTEMS PRIVATE LIMITED (INDIA) BROCADE COMMUNICATIONS ITALY SRL (ITALY) BROCADE COMMUNICATIONS SYSTEMS K.K. (JAPAN) BROCADE KOREA LTD. (KOREA) BROCADE COMMUNICATIONS LUXEMBOURG SARL (LUXEMBOURG) BROCADE COMMUNICATIONS SYSTEMS NETHERLANDS B.V. (THE NETHERLANDS) BROCADE COMMUNICATIONS SINGAPORE PTE. LTD. (SINGAPORE) BROCADE COMMUNICATIONS SPAIN, S.L. (SPAIN) BROCADE COMMUNICATIONS SWITZERLAND SARL (SWITZERLAND) BROCADE COMMUNICATIONS SERVICES SWITZERLAND SARL (SWITZERLAND) BROCADE COMMUNICATIONS SYSTEMS TAIWAN LTD. (TAIWAN) BROCADE COMMUNICATIONS SYSTEMS UK LTD. (UNITED KINGDOM) EX-23.1 18 f04919exv23w1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF KPMG LLP The Board of Directors Brocade Communications Systems, Inc. We hereby consent to the incorporation by reference into Brocade Communications Systems, Inc.'s previously filed Registration Statements on Form S-8 (Nos. 333-117897, 333-103571, 333-85187, 333-95653, 333-39126, 333-53734, 333-64260, 333-72480, and 333-100797) and Form S-3 (No. 333-84698) of our report dated January 27, 2005 with respect to the consolidated balance sheets of Brocade Communications Systems, Inc. and subsidiaries as of October 30, 2004 and October 25, 2003, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 30, 2004, and related financial statement schedule, which report appears in this annual report on Form 10-K of Brocade Communications Systems, Inc. for the year ended October 30, 2004. Our report indicates that the consolidated balance sheet of Brocade Communications Systems, Inc. and subsidiaries as of October 25, 2003, and the related consolidated statements of operations, stockholders equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended, October 25, 2003 have been restated. /s/ KPMG LLP Mountain View, California January 27, 2005 EX-31.1 19 f04919exv31w1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Michael Klayko, certify that: 1. I have reviewed this quarterly report on Form 10-K of Brocade Communications Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 31, 2005 By: /s/ Michael Klayko ----------------------------- Michael Klayko Chief Executive Officer (Principal Executive Officer) - -------------------------------------------------------------------------------- EX-31.2 20 f04919exv31w2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Antonio Canova, certify that: 1. I have reviewed this quarterly report on Form 10-K of Brocade Communications Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 31, 2005 By: /s/ Antonio Canova ---------------------------------------------- Antonio Canova Vice President, Administration and Chief Financial Officer (Principal Financial and Accounting Officer) - -------------------------------------------------------------------------------- EX-32.1 21 f04919exv32w1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael Klayko, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Brocade Communications Systems, Inc. on Form 10-K for the fiscal year ended October 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Brocade Communications Systems, Inc. By: /s/ Michael Klayko ------------------------------ Michael Klayko Chief Executive Officer I, Antonio Canova, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Brocade Communications Systems, Inc. on Form 10-K for the fiscal quarter ended October 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Brocade Communications Systems, Inc. By: /s/ Antonio Canova ------------------------------ Antonio Canova Vice President, Administration and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the fiscal year ended October 30, 2004

OR

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

		For the transition period from to


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


						Total Number of		Approximate Dollar
						Shares Purchased		Value of Shares that
		Total Number				as Part of Publicly		May Yet Be
		of Shares		Average Price		Announced		Purchased Under
		Purchased(1)		Paid per Share		Program		the Program(2)

August 1, 2004 — August 28, 2004			3	$	0.01		—	$	100,000
August 29, 2004 — September 25, 2004			62	$	0.62		—		100,000
September 26, 2004 — October 30, 2004			—		—		—		100,000

	Total		65	$	0.59		—	$	100,000



			Fiscal Year Ended

			October 30,			October 25,			October 26,			October 27,			October 31,
			2004(2)			2003(3)			2002			2001(4)			2000

						Restated(1)			Restated(1)			Unaudited(9)			Unaudited(9)

			(In thousands, except per share amounts)
Statement of Operations Data:
Net revenues			$	596,265		$	525,277		$	562,369		$	513,030		$	329,045
Cost of revenues				261,099			241,154			219,641			115,441			274,840

	Gross margin			335,166			284,123			342,728			397,589			54,205

Operating expenses:
	Research and development			149,490			145,705			113,160			(176,793	)		427,542
	Sales and marketing			101,311			115,103			107,881			(130,804	)		390,493
	General and administrative			24,431			21,300			7,434			(96,909	)		190,849
	Settlement of an acquisition-related claim			6,943			—			—			—			—
	Amortization of deferred stock compensation			537			649			969			1,082			1,120
	Restructuring costs			8,966			20,828			—			—			—
	In-process research and development			—			134,898			—			—			—
	Lease termination charge, facilities lease losses and other, net			75,591			—			—			49,888			—

		Total operating expenses		367,269			438,483			229,444			(353,536	)		1,010,004

Income (loss) from operations				(32,103	)		(154,360	)		113,284			751,125			(955,799	)
Interest and other income, net				18,786			18,424			22,668			8,207			5,427
Interest expense				(10,677	)		(13,339	)		(11,427	)		—			(45	)
Gain on repurchases of convertible subordinated debt				5,613			11,118			—			—			—
Gain (loss) on investments, net				436			3,638			7,095			(16,092	)		—

Income (loss) before provision for income taxes				(17,945	)		(134,519	)		131,620			743,240			(950,417	)
Income tax provision				14,070			11,852			5,343			9,506			114

Net income (loss)			$	(32,015	)	$	(146,371	)	$	126,277		$	733,734		$	(950,531	)

Net income (loss) per share — basic			$	(0.12	)	$	(0.58	)	$	0.55		$	3.32		$	(4.58	)

Net income (loss) per share — diluted			$	(0.12	)	$	(0.58	)	$	0.52		$	3.02		$	(4.58	)

Shares used in per share calculation — basic				260,446			250,610			231,591			221,051			207,454

Shares used in per share calculation — diluted				260,446			250,610			242,962			243,162			207,454

Balance Sheet Data:
Cash, cash equivalents and investments			$	736,908		$	835,565		$	888,388		$	255,148		$	155,039
Working capital				434,162			355,644			534,866			237,682			218,418
Total assets				987,382			1,063,174			1,171,367			448,488			324,929
Non-current liabilities associated with lease losses				16,799			16,518			22,602			30,896			—
Convertible subordinated debt and capital lease obligations				352,279			442,950			550,000			—			—
Total stockholders’ equity				445,652			447,878			446,344			310,565			262,792


		First			Second			Third		Fourth
		Quarter(5)			Quarter(6)			Quarter(7)		Quarter(8)

		Restated(1)			Restated(1)			Restated(1)

		(In thousands, except per share and stock price amounts)
Quarterly Data:
Fiscal Year Ended October 30, 2004
Net revenues		$	145,040		$	145,579		$	150,040	$	155,606
Gross margin		$	79,383		$	80,811		$	85,979	$	88,993
Income (loss) from operations		$	(67,478	)	$	(5,752	)	$	19,080	$	22,047
Net income (loss)		$	(68,809	)	$	2,345		$	14,065	$	20,384
Per share amounts:
	Basic	$	(0.27	)	$	0.01		$	0.05	$	0.08
	Diluted	$	(0.27	)	$	0.01		$	0.05	$	0.08
Shares used in computing per share amounts:
	Basic		257,796			259,625			261,481		263,242
	Diluted		257,796			263,607			263,540		265,467
Bid prices:
	High	$	7.95		$	7.44		$	6.14	$	6.80
	Low	$	5.49		$	5.35		$	4.41	$	4.04
Fiscal Year Ended October 25, 2003
Net revenues		$	123,116		$	130,946		$	133,458	$	137,757
Gross margin		$	66,368		$	70,601		$	72,158	$	74,996
Income (loss) from operations		$	(10,897	)	$	(149,416	)	$	1,419	$	4,534
Net income (loss)		$	(7,014	)	$	(146,832	)	$	1,407	$	6,068
Per share amounts:
	Basic	$	(0.03	)	$	(0.58	)	$	0.01	$	0.02
	Diluted	$	(0.03	)	$	(0.58	)	$	0.01	$	0.02
Shares used in computing per share amounts:
	Basic		234,898			254,687			255,873		256,983
	Diluted		234,898			254,687			259,444		260,369
Bid prices:
	High	$	7.47		$	5.86		$	7.30	$	6.45
	Low	$	4.14		$	3.66		$	5.14	$	5.22


		Page

PART I
Item 1.	Business		2
Item 2.	Properties		22
Item 3.	Legal Proceedings		22
Item 4.	Submission of Matters to a Vote of Security Holders		22
PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		22
Item 6.	Selected Financial Data		23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		40
Item 8.	Financial Statements and Supplementary Data		42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		83
Item 9A.	Controls and Procedures		83
Item 9B.	Other Information		85
PART III
Item 10.	Directors and Executive Officers of the Registrant		85
Item 11.	Executive Compensation		85
Item 12.	Security Ownership of Certain Beneficial Owners and Management		85
Item 13.	Certain Relationships and Related Transactions		85
Item 14.	Principal Accountant Fees and Services		85
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		86
Signatures			92
EXHIBIT 3.2
EXHIBIT 10.77
EXHIBIT 10.78
EXHIBIT 10.79
EXHIBIT 10.80
EXHIBIT 10.81
EXHIBIT 10.82
EXHIBIT 10.83
EXHIBIT 10.84
EXHIBIT 10.85
EXHIBIT 10.86
EXHIBIT 10.87
EXHIBIT 10.88
EXHIBIT 10.89
EXHIBIT 12.1
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


	*As we introduce new products, we must manage the transition between our new products and our older products and achieve market acceptance of these new products.*


	We cannot be certain that we will benefit fully from the substantial investments we have made and continue to make in our recently introduced Silkworm Fabric Application Platform product family.


	*Increased market competition may lead to reduced sales, margins, profits and market share.*


	We depend on OEM partners for a majority of our revenues, and the loss of any of these OEM partners or a decrease in the levels of their purchases could significantly reduce our revenues and negatively affect our financial results.


	*The prices of our products have declined in the past, and we expect the price of our products to continue to decline, which would reduce our revenues, gross margins and profitability.*


	*Our future revenue growth depends on our ability to rapidly develop new and enhanced products that achieve widespread market acceptance.*


	The loss of our third-party contract manufacturers, the failure to accurately forecast demand for our products or the failure to successfully manage the production of our products could negatively affect our ability to manufacture and sell our products.


	*We may be subject to an investigation by the SEC or litigation in connection with our recent audit committee internal review and related restatement.*


	*If we lose key personnel or are unable to hire additional qualified personnel, our business may be harmed.*


Item 1.	*Business*


	*Storage Networking Switches*


	*SAN Management Operating System*


	*Intelligent Fabric Application Platforms*


	*Our quarterly and annual revenues and operating results may fluctuate in future periods due to a number of factors, which could adversely affect the trading price of our stock.*


	*Our revenues may be affected by changes in IT spending levels.*


	*Our business may be subject to seasonal fluctuations and uneven sales patterns in the future.*


	*We are dependent on sole source and limited source suppliers for certain key components.*


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


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


	*If our assumptions regarding our revenues and margins do not materialize, our future profitability could be adversely affected.*


	*Changes in financial accounting standards or practices may cause adverse unexpected fluctuations and affect our reported business and financial results.*


	*Our future operating expenses may be adversely affected by changes in our stock prices.*


	*International political instability and concerns about other international crises may increase our cost of doing business and disrupt our business.*


	*We plan to continue to increase our international sales activities, which will subject us to additional business risks.*


	*Undetected software or hardware errors could increase our costs and reduce our revenues.*


	*We may be unable to protect our intellectual property, which would negatively affect our ability to compete.*


	*Others may bring infringement claims, which could be time-consuming and expensive to defend, against us.*


	We believe that we currently have adequate internal controls but we are still exposed to potential risks resulting from new requirements that we evaluate disclosure controls under Section 404 of the Sarbanes-Oxley Act of 2002.


	*Our products must comply with evolving industry standards and government regulations.*


	Provisions in our charter documents, customer agreements, Delaware law, our convertible subordinated debt, and our stockholder rights plan could prevent or delay a change in control of Brocade, which could hinder stockholders’ ability to receive a premium for our stock.


	*We expect to experience volatility in our stock price, which could negatively affect stockholders’ investments.*


	*Business interruptions could adversely affect our business.*


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