united states district court mario saldana-harlow,...

UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF CALIFORNIA

MARIO SALDANA-HARLOW, Individually andOn Behalf of All Others Similarly Situated, CIVIL ACTION NO .

Plaintiff,

vs .

BROCADE COMMUNICATION SYSTEMS,INC., GREGORY L. REYES and ANTONIOCANOVA,

CLASS ACTION COMPLAINT

JURY TRIAL DEMANDED

Defendants

Plaintiff, Mario Saldana-Harlow ("Plaintiff'), individually and on behalf of all other person s

similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the

following based upon personal knowledge as to himself and his own acts, and information and belie f

as to all other matters, based upon , inter alia , the investigation conducted by and through his

attorneys, which included, among other things, a review of the defendants' public documents ,

conference calls and announcements made by defendants, United States Securities and Exchang e

Commission ("SEC") filings, wire and press releases published by and regarding Brocade

Communications Systems (`Brocade" or the "Company") securities analysts' reports and advisorie s

about the Company, and information readily obtainable on the Internet . Plaintiff believes that

substantial evidentiary support will exist for the allegations set forth herein after a reasonabl e

opportunity for discovery .

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NATURE OF THE ACTION

1 . This is a federal class action on behalf of persons who purchased the securities o f

Brocade between February 21, 2001 and May 15, 2005, inclusive (the "Class Period"), seeking to

pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act") .

JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) o f

the Exchange Act, (15 U .S.C. §§ 78j (b) and 78t(a)), and Rule lOb-5 promulgated thereunder (1 7

C.F.R. §240.10b-5) .

3. This Court has jurisdiction over the subject matter of this action pursuant to §27 o f

the Exchange Act (15 U .S.C . §78aa) and 28 U .S.C. § 1331 .

4. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 1 5

U.S .C. § 7Saa and 28 U .S.C . § 1391(b) . Many of the acts and transactions alleged herein, including

the preparation and dissemination of materially false and misleading information, occurred in

substantial part in this Judicial District . Additionally, the Company maintains a principal executive

office in this Judicial District .

5 . In connection with the acts, conduct and other wrongs alleged in this complaint ,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce ,

including but not limited to, the United States mails, interstate telephone communications and th e

facilities of the national securities exchange.

PARTIES

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6. Plaintiff, Mario Saldana-Harlow, as set forth in the accompanying certification ,

incorporated by reference herein, purchased Able securities at artificially inflated prices during th e

Class Period and has been damaged thereby .

7. Defendant Brocade is a Delaware corporation with its principal executive office s

located at 1745 Technology Drive, San Jose, CA 95110 .

8 . Defendant Defendant Gregory L. Reyes ("Reyes") was, from 1998 to January 24 ,

2005, Brocade's Chief Executive Officer . Additionally, defendant Reyes was, at all relevant times ,

the Company's Director .

9 . Antonio Canova ("Canova') was, at all relevant times , Brocade's Chief Financial

Officer and Vice President and Administration.

10. Defendants Reyes, and Canova are collectively referred to hereinafter as th e

"Individual Defendants ." During the Class Period, each of the individual defendants, as senio r

executive officers and/or directors of Brocade was privy to non-public information concerning it s

business, finances, products, markets and present and future business prospects via access to interna l

corporate documents, conversations and connections with other corporate officers and employees,

attendance at management and Board of Directors meetings and committees thereof and via reports

and other information provided to them in connection therewith. Because of their possession of such

information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts

specified herein had not been disclosed to, and were being concealed from, the investing public .

11 . Because of the Individual Defendants ' positions with the Company, they had access

to the adverse undisclosed information about the Company's business, operations, operational trends ,

financial statements, markets and present and future business prospects via access to interna l

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corporate documents (including the Company's operating plans, budgets and forecasts and reports

of actual operations compared thereto), conversations and connections with other corporate officers

and employees, attendance at management and Board of Directors meetings and committees thereof

and via reports and other information provided to them in connection therewith .

12. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company's

public filings, press releases and other publications as alleged herein are the collective actions of th e

narrowly defined group of defendants identified above. Each of the above officers of Able, by virtue

of his or her high-level position with the Company, directly participated in the management of the

Company, was directly involved in the day-to-day operations of the Company at the highest levels

and was privy to confidential proprietary information concerning the Company and its business,

operations, growth, financial statements, and financial condition, as alleged herein. Said defendants

were involved in drafting, producing, reviewing and/or disseminating the false and misleading

statements and information alleged herein, were aware, or recklessly disregarded, that the false and

misleading statements were being issued regarding the Company, and approved or ratified these

statements, in violation of the federal securities laws .

13. As officers and controlling persons of a publicly held company whose securities wer e

and are registered with the SEC pursuant to the Exchange Act, and was traded on the NASDAQ and

governed by the provisions of the federal securities laws, the Individual Defendants each had a duty

to disseminate accurate and truthful information promptly with respect to the Company's financial

condition and performance, growth, operations, financial statements, business, markets,

management, earnings and present and future business prospects, and to correct any previously-

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issued statements that had become materially misleading or untrue, so that the market price of the

Company's publicly-traded securities would be based upon truthful and accurate information . The

Individual Defendants' misrepresentations and omissions during the Class Period violated these

specific requirements and obligations .

14. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained

of herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature . Because of

their Board membership and/or executive and managerial positions with Brocade, each of the

Individual Defendants had access to the adverse undisclosed information about Able financial

condition and performance as particularized herein and knew (or recklessly disregarded) that these

adverse facts rendered the positive representations made by or about Brocade and its business issued

or adopted by the Company materially false and misleading .

15 . The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various SE C

filings, press releases and other public statements pertaining to the Company during the Class Period .

Each Individual Defendant was provided with copies of the documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected . Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and is therefore

primarily liable for the representations contained therein .

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16. Each of the defendants is liable as a participant in a fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of Brocade securities by disseminating

materially false and misleading statements and/or concealing material adverse facts . The scheme

(i) deceived the investing public regarding Brocade business, operations, management and th e

intrinsic value of Brocade securities ; and (ii) caused Plaintiff and other members of the Class to

purchase Brocade securities at artificially inflated prices .

PLAINTIFF'S CLASS ACTION ALLEGATION S

17. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased the securitie s

of Brocade between Februa ry 21, 2001 and May 15, 2005 , or the Class Period, and who were

damaged thereby. Excluded from the Class are defendants, the officers and directors of the

Company, at all relevant times, members of their immediate families and their legal representatives ,

heirs , successors or assigns and any entity in which defendants have or had a controlling interest .

18. The members of the Class are so numerous that joinder of all members is imprac-

ticable. Throughout the Class Period, Brocade's securities were actively traded on the NASDAQ .

While the exact number of Class members is unknown to Plaintiff at this time and can only b e

asce rtained through appropriate discovery, Plaintiffbelieves that there are hundreds or thousands o f

members in the proposed Class . Record owners and other members of the Class may be identifie d

from records maintained by Brocade or its transfer agent and may be notified of the pendency of thi s

action by mail, using the form of notice similar to that customarily used in securities class actions .

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19 . Plaintiffs claims are typical of the claims of the members of the Class, as al l

members of the Class are similarly affected by defendants ' wrongful conduct in violation of federal

law that is complained of herein .

20. Plaintiff will fairly and adequately protect the interests of the members of the Clas s

and has retained counsel competent and experienced in class and securities litigation .

21 . Common questions of law and fact exist as to all members of the Class an d

predominate over any questions solely affecting individual members of the Class . Among the

questions of law and fact common to the Class are :

(a) whether the federal securities laws were violated by defendants' acts as alleged

herein ;

(b) whether statements made by defendants to the investing public during the Clas s

Periodmisrepresented material facts about the business , operations and management of Brocade; and

(c) to what extent the members of the Class have sustained damages and the proper

measure of damages .

22. A class action is superior to all other available methods for the fair and efficien t

adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action .

SUBSTANTIVE ALLEGATIONS

Background

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23. Brocade designs , develops, markets, sells and supports data storage networking

products and services . It offers a line of intelligent storage networking switches and storage area

networking ("SAN") management operating system that enables companies to implement highly

available, sc alable, manageable and secure environments for data storage applications . The Brocade

SilkWorm family of SAN switches is designed to help companies reduce the cost and complexity

of managing business information within a data storage environment . Brocade products are installed

worldwide at companies , institutions and other entities of all sizes , ranging from large enterprises

to small businesses . Brocade products and services are marketed, sold and supported worldwide to

end users through distribution partners, including original equipment m anufacturers ("OEMs")

value-added distributors , systems integrators and value-added resellers ("VARs") .

Materially False And MisleadingStatements Issued During The Class Period

24. On February 21, 2001, the Company issued a press release entitled "Brocade

Announces Record Revenue and Earnings for First Quarter of Fiscal 2001 ." Therein, the Compnay,

in relevant part, stated:

Brocade Communications Systems, Inc ., the leading provider ofStorage Area Networking infrastructure, reported today recordrevenue and earnings for the first quarter of fiscal 2001 (Q1 01) . ForQ1 01, net revenues were $165 .0 million, as compared to the $42 .7million reported in the first quarter of fiscal 2000 (Q1 00) and the$132 .1 million reported in the fourth quarter of fiscal 2000 (Q4 00) .During Q1 01, deferred revenue increased by $7 .1 million to $9.1million .

Net income for Q1 01 was $32 .5 million as compared to the $7 .3million reported in Q1 00 and the $27 .2 million reported in Q4 00 .Diluted net income per share for Q 101 was $0 .13 as compared to the$0.03 reported in Q1 00 and the $0 .11 reported in Q4 00 .

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Operating income as a percentage of net revenues in Q 10 1 increasedto 26.9 percent of revenues, up from 26 .6 percent in Q4 00 . This isthe seventh consecutive quarter that operating income, as apercentage of revenues, has increased .

In Q1 01 Brocade generated $56 .0 million in cash after purchasing$26.1 million in capital equipment and making $6 .4 million inminority investments. Total cash at the end of Q1 01 was $211 .0million .

For QI 01, accounts receivable days sales outstanding was 53 daysand the annualized return on equity when excluding deferred taxassets and unrealized gains on marketable equity securities was 49percent .

Greg Reyes, Brocade President and CEO, commented on the quarter :"We are very pleased with our financial results for the quarter, whichdemonstrate our continued focus and execution in providing theworld's leading networking infrastructure for storage area networks .In every industry, in every sector across the globe, companies arerelying on Brocade SAN infrastructure to network their servers andstorage, keep pace with exponential growth in data storagerequirements, and deliver a platform to reduce the cost of managing,administering, and moving business-critical data ."

Reyes concluded, "We are pleased that we have executed on all frontsduring the first quarter of 2001 and we believe that our businessfundamentals and competitive position in the SAN infrastructuremarket have never been stronger . The future of storage areanetworking is about building large heterogeneous, block-data storagenetworks that can scale to meet customers' future SAN requirementsof limitless SAN scalability, continuous information availability,enterprise level manageability, and end-to-end interoperability . As theSAN market expands, Brocade will continue to deliver best- in-classproducts to allow our global customers to put in place a networkingfoundation for their storage environments that meets their storageneeds today and scales to support the future SAN requirements oftomorrow."

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25. On March 31, 2001, Brocade filed its quarterly report with the SEC on Form 10-Q .

The Company's Form 10-Q reaffirmed the Company's previously announced financial results . With

respect to the presentation of its financial results the Company stated :

In the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to present a fair statement offinancial position as of January 27, 2001, results of operations for thethree-month periods ended January 27, 2001 and January 29, 2000,and cash flows for the three-month periods ended January 27, 2001and January 29, 2000, have been made .

26. On April 20, 2001, the Company issued a press release entitled "Brocade Announces

Preliminary Q2 01 Financial Results." Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc . announced today preliminaryresults for the second quarter of fiscal 2001 . Brocade expects to reporttotal net revenue for the second quarter of fiscal 2001 (Q2 01) thatwill be approximately 30 percent less than the net revenue reportedin the first quarter of fiscal 2001 (Q1 01) . Diluted net income pershare for Q2 01 is expected to be in the range of $0 .05-$0.06 pershare. During the second quarter, Brocade expects that gross marginswill remain in the 60 percent range and will continue at those levelsfor the next several quarters . Additionally, Brocade expects thatDSOs will be within the target range of 50 to 60 days .

Brocade will host a live a conference call today at 6 :00 am PacificTime to discuss the preliminary financial results . To listen to the call,dial (719) 457-2650, or connect via the Brocade web site atwww.brocade .com. A replay of the conference call will be availablefollowing the call. Details on the replay are available atwww.brocade .com. Brocade plans to announce complete secondquarter results on May 15, 2001 at 1 :00 pm Pacific Time.

"We are sober about the affect that the economy has had on theenterprise technology marketplace and on our short-term businessoutlook . We are committed to doing what is right for the business andwill continue to invest in engineering resources and quota-carryingsales personnel at a rate that will continue to outpace our competitors .We believe that our long-term prospects and competitive position indelivering the world's leading intelligent platform for networkingstorage have never been stronger . As enterprise capital spending

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continues to thaw, we are well positioned for growth in the latter partof fiscal 2001 and we expect our year-overyear revenue growth willbe approximately 58 percent," said Greg Reyes, Brocade Presidentand CEO.

27. On May 15, 2001, the Company issued a press release entitled "Brocade Announce s

Second Quarter Fiscal 2001 Financial Results ." Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc . reported today financialresults for the second quarter of fiscal 2001 (Q2 01) . For Q2 01, netrevenues were $115 .2 million as compared to the $62 .1 millionreported in the second quarter of fiscal 2000 (Q2 00) .

Net income for Q2 01 was $12 .0 million as compared to the $13 .3million reported in Q2 00. Diluted net income per share for Q2 01was $0 .05 as compared to the $0.06 reported in Q2 00 . During thesecond quarter, gross margins remained at 60 percent.

In Q2 01, Brocade generated $6 .1 million in cash after purchasing$16.9 million in capital equipment and making $10 .6 million inminority investments. Total cash at the end of Q2 01 was $217 .1million. Brocade exited the quarter with $5 .7 million in deferredrevenue. The majority of the deferred revenue was related toinventory held by Brocade master resellers that has not sold throughto the end customer.

For Q2 01, accounts receivable days sales outstanding was 58 daysand continues to remain within the Brocade target range . Inventory atthe end of the second quarter was $8 .4 million, and annualizedinventory turns were 22 times .

Greg Reyes, Brocade Chairman and CEO, commented on the quarter :

"Considering the current difficult economic environment fortechnology companies, the second quarter was a period of significantachievement for Brocade . We are pleased that we met theexpectations that we set out in April, and we believe that the secondquarter was the low water mark for our business. We are now seeingsigns that IT budgets may be thawing as companies reprioritizeprojects based on Return On Investment (ROt) . Storage AreaNetworks (SANs) remain at the top of the priority list . Using BrocadeSAN infrastructure, companies can dramatically reduce the cost o f

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managing their data while keeping pace with ever-increasinginformation storage requirements ."

28 . On June 12, Brocade filed its quarterly report with the SEC on Form 10-Q . The

Company's Form 10-Q was signed by defendant Canova and reaffirmed the Company's previously

announced financial results. With respect to the presentation of its financial results the Company

stated:

In the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to present a fair statement offinancial position as of April 28, 2001, results of operations for thethree and six-month periods ended April 28, 2001 and April 29, 2000,and cash flows for the six-month periods ended April 28, 2001 andApril 29, 2000, have been made .

29 . On August 15, 2001, the Company issued a press release entitled "Brocade Exceeds

Revenue Estimates for the Third Quarter of Fiscal 2001 ." Therein, the Company, in relevant part ,

stated :

Brocade Communications Systems, Inc . reported today financialresults for the third quarter of fiscal 2001 (Q3 01 ) . For Q3 01, netrevenues were $ 116.3 million, a $24.2 million increase from the$92.1 million repo rted in the third quarter of fiscal 2000 (Q3 00) anda $1 .1 million increase from the second quarter of fiscal 2001 (Q201) .Brocade exited the quarter with $13 .4 million in deferred revenue,an increase of $7 .7 million over the $5 .7 million reported in Q2 01 .

Net income for Q3 01 was $12 .0 million as compared to the $20.1million reported in Q3 00 and the $12 .0 million reported in Q2 01 .Diluted net income per share for Q3 01 was $0 .05 as compared to the$0.08 reported in Q3 00 and the $0 .05 reported in Q2 01 . During thethird quarter, gross margins remained at 60 percent, an improvementover the 58.6 percent reported in Q3 00 and consistent with Q2 01 .

In Q3 01, Brocade generated $23 .8 million in cash after investing$20.6 million in capital equipment . Total cash at the end of Q3 01was $241 .0 million .

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For Q3 01, accounts receivable days sales outstanding was 57 daysand continues to remain within the Brocade target range . Inventory atthe end of the third quarter was $8 .0 million, and annualizedinventory turns were 23 times .

Greg Reyes, Brocade Chairman and CEO, commented on the quarter :"We are pleased with our results for the third quarter, whichdemonstrate our ability to manage well through a challengingeconomic environment . As the amount of data that companies needto store, move, administer, and manage continues to grow at anexponential rate, companies are challenged to keep pace with thisdata growth within tight IT budgets . With IT projects beingprioritized on their Return On Investment (ROI) and their effect onthe business bottom line, companies are turning to Storage AreaNetworks (SANs) to dramatically reduce the cost of managing theirdata, optimize their investments in compute, storage, and personnelresources, and achieve a rapid ROL Using Brocade SANinfrastructure, companies can now cost-effectively connect serversand storage subsystems, scale them independently of one another,consolidate and share server and storage resources, and centralize andsimplify the labor- intensive aspects of data management . "

Reyes continued, "We continue to be mindful about the effect that theeconomy is having on IT budgets. However, we believe that we areuniquely positioned to take advantage of the massive marketopportunity as companies seek to get more out of their compute,storage, and personnel resources by networking storage andexpanding initial SAN deployments into heterogeneous, enterprisestorage networks . We are also at the beginning of a new product cyclethat will continue to raise the bar for the competition, and we arecontinuing to invest in all aspects of our business to position forgrowth in 2002 . We believe that the powerful combination of our newhardware and software products-including the Brocade SilkWorm®12000 Core Fabric Switch-will further accelerate Brocade'sleadership position as the storage infrastructure of choice ."

30 . On September 9, 2001 , Brocade filed its quarterly reportwith the SEC on Form 10-Q .

The Company's Form 10-Q was signed by defendant Canova and reaffirmed the Company' s

previously announced financial results . With respect to the presentation of its financial results th e

Company stated :

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In the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to present a fair statement offinancial position as of July 28, 2001, results of operations for thethree and nine-month periods ended July 28, 2001 and July 29, 2000,and cash flows for the nine-month periods ended July 28, 2001 andJuly 29, 2000, have been made .

31 . On November 28, 2001, the Company issued a press release entitled "Brocade

Announces Record Revenue for Fiscal Year 2001 ; Storage Networking Leader Reports Annual

Revenue Growth of 56 Percent." Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc . reported today financialresults for the fourth quarter ended October 27, 2001 (Q4 01) . In Q401, net revenue was $116 .5 million, as compared to the $116 .3million reported in the third quarter of fiscal 2001 (Q3 01) . For fiscalyear 2001 (FY 01), revenue was a record $513 .0 million, an increaseof $184.0 million, or 56 percent, from fiscal year 2000 (FY 00) .Brocade exited Q4 01 with $12 .6 million in deferred revenue.

Diluted pro forma net income per share for Q4 01 was $0.05,consistent with the diluted net income per share reported in Q3 01 .Pro forma net income for Q4 01 was $10 .9 million as compared to netincome of $12 .0 million reported in Q3 01 . For FY 01, pro forma netincome was $67.4 million and pro forma diluted net income per sharewas $0 .28, as compared to net income of $67 .9 million and dilutednet income per share of $0 .28, respectively, reported in FY 00 . Thesepro forma results exclude charges of $77 .1 million related to purchasecommitments, facilities lease losses and asset impairments, and thewrite-down of private minority equity investments .

These results compare to net revenue of $132 . 1 million reported inthe fourth quarter of fiscal 2000 (Q4 00) and net income and dilutednet income per share of $27.2 million and $0.11, respectively .

During the fourth quarter, pro forma gross margins remained at 60 .0percent, a slight improvement over the 59.8 percent gross marginsreported in Q4 00 and consistent with Q3 01 gross margins . Grossmargins on a pro forma basis for FY 01 were 60 .0 percent, ascompared to 58 .2 percent gross margins for FY 00 .

In Q4 01 Brocade generated $ 14.2 million in cash after purchasingapproximately $ 18.7 million in capital equipment . For FY 01 ,

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Brocade generated more than $ 100 million in cash, after investing$82 .3 million in capital equipment . Brocade's total cash b alance atthe end of Q4 01 was a record $255 . 1 million .

For Q4 01, accounts receivable days sales outstanding was 54 days,down from the 57 days achieved during Q3 01 . Inventory at the endof the fourth quarter was $10 .3 million and represented annualizedinventory turns of 18 times on a pro forma basis .

Greg Reyes, Brocade Chairman and CEO, commented on the quarter,"We are very pleased with our results for 2001 and our ability tomanage and optimize our business model in a challenging economicenvironment. We believe that our investments in 2001, including oursignificant investment in research and development, will allow us totake full advantage of the next phase in the market's evolution andposition us for resumed growth in 2002 . "

Reyes continued, "In today's cost-conscious business environment,the value proposition for Brocade storage area networks has neverbeen more relevant-helping companies optimize capital assets,increase productivity of personnel, and significantly reduce the totalcost of ownership of storage environments . As we move into fiscalyear 2002, we believe that we are incredibly well positioned tocontinue to expand our leadership position as the world's leadingprovider of storage area networking infrastructure ."

During the fourth quarter, Brocade further expanded its marketleadership position with the introduction and general availability ofthe SilkWorm 3800 Enterprise Fabric Switch . The SilkWorm 3800,based on Brocade's next- generation architecture, is the industry'sfirst 2 Gigabit per second (Gbit/sec) Fabric Switch designed to meetthe levels of manageability, availability, scalability and securityrequired for today's storage applications . As further validation of theproduct's importance to the SAN market, the SilkWorm 3800 wasawarded Best of Comdex 2001 award earlier this month, recognizedas the most innovative and noteworthy networking hardware productof the year .

Expanding on the capabilities of Brocade's existing product family,the next generation architecture is also the foundation of otherupcoming 2 Gbit/sec products from Brocade, inc luding theSilkWorm 12000 128 port Core Fabric Switch. Based on a commonset of advanced fabric services and fully forward and backwardcompatible with the installed base of more than 1,200,000 Brocad e

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fabric ports, the SilkWorm 3800 is available today from nearly allBrocade primary OEM and channel partners and the SilkWorm 12000is expected to be in volume production in the first calendar quarter of2002 .

Reyes concluded, "We believe that our industry- first, next generation2 Gbit/sec architecture will accelerate the market transition to 2Gbit/sec technologies and further solidify Brocade's leadershipposition as the world's storage networking infrastructure of choice.With the SilkWorm 3800, Brocade enables anew level ofintelligencein storage networking, making SANs easier to manage, more highlyavailable and scalable, and more secure than ever before. Throughthis intelligent platform, our partners can deliver advancedcapabilities to their customers through high performance SANmanagement applications that further reduce the total cost ofownership for storage environments ."

32. On January 24, 2002, the Company filed its annual repo rt with the SEC on Form 10-

K. The Company' s Form 10-K was signed by Reyes and Canova and reaffirmed the Company' s

previously announced fin ancial results. Additionally, the Company's Form 10-K contained the

following clean audit opinion from Brocade ' s accountants , Arthur Andersen LLP ("Arthur

Andersen") :

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of BrocadeCommunications Systems, Inc. as of October 28, 2000 and October31, 1999 and the results of its operations and its cash flows for eachof the three years ended October 28, 2000, and October 31, 1999 and1998, in conformity with generally accepted accounting principles .

33 . On February 13, 2002, the Company issued a press release entitled "Brocade Reports

Financial Results for the First Quarter of Fiscal Year 2002 ." Therein, the Company, in relevant part ,

stated :

Brocade Communications Systems, Inc . reported today financialresults for the first fiscal quarter of 2002 (Q1 02), which endedJanuary 26, 2002. In Q1 02, net revenue was $123 .1 million, gros s

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margins were 60 percent, net income was $11 .7 million, and dilutednet income per share was $0 .05. Quarterly sequential revenue growthfor Q1 02 was nearly six percent .

Brocade exited Q1 02 with $ 13 .9 million in deferred revenue, anincrease of $1 .3 million over deferred revenue at the end of the fourthfiscal quarter of 2001 (Q4 01) .

In Q1 02 Brocade generated $568 .7 million in cash including $537 .6million received from the issuance of convertible subordinated debt .Excluding the net proceeds from the convertible debt offering, cashincreased $3 1 .1 million after purchasing $24.5 million in capitalequipment. Brocade's total cash, cash equivalents and short-terminvestments were $823.9 million at the end of Q1 02 .

For Q1 02, accounts receivable days sales outstanding were 54 days,consistent with Q4 01 . Inventory at the end of Q1 02 was $9 .2million, down from the $10.3 million at the end of Q4 01 .

Greg Reyes, Brocade Chairman and CEO, commented on the quarter,"We are extremely pleased with our results for the first fiscal quarterof 2002 . In today's business environment, the value proposition forBrocade Storage Area Networks (SANs) has never been morerelevant-helping companies optimize capital assets, increasepersonnel productivity, and significantly reduce the total cost ofownership of storage environments. As companies rapidly migrate to2 Gigabit per second (Gbit/sec) SAN infrastructure and expand SANsover a common storage networking platform, Brocade is uniquelypositioned to capitalize on these dynamics with our industry- first,intelligent 2 Gbit/sec architecture ."

Reyes added, "We achieved every development milestone during thequarter, including those for the SilkWorm(R) 12000, our softwareproducts, and our new entry- level product. The SilkWorm 12000remains on track for volume shipments in the first calendar quarter of2002 . During the first quarter, we also continued to optimize ourworld-class supply chain, increase our demand generationcapabilities, and expand our international operations . As a result, webelieve that Brocade is now the lowest cost manufacturer in the SANinfrastructure market . In addition, with a presence in more thanfourteen countries, during the first quarter we increased ourworldwide field sales force by nearly one-third, greatly expanding thedemand generation resources for our OEM and channel partners

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worldwide. We believe that with these continued investments,combined with our industry- first intelligent 2 Gbit/sec architecture,we are extremely well positioned for growth in the latter half of2002 . "

34. On March 12, 2002, Brocade filed its quarterly report with the SEC on Form 10-Q .



Company stated :

In the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to present a fair statement offinancial position as of January 26, 2002, results of operations, andcash flows for the three months ended January 26, 2002, and January27, 2001, have been made .

35 . On May 14, 2002, the Company issued a press release entitled "Brocade Release s

Statement Regarding Second Quarter Financial Results ." Therein, the Company, in relevant part ,

stated :

Brocade Communications Systems, Inc . announced today that, due toa clerical error, a financial webcast held today contained internalpreliminary Question and Answer session preparation notes for the

company's upcoming Financial Results conference call for the secondfiscal quarter, ended April 27, 2002 (Q2 02) . The communicationcontained the following information that the company had expected

to disclose during its financial conference call to be held onWednesday, May 15 :

- Forward- looking guidance that revenue for the third quarter offiscal 2002 will be in the range of $145 to $ 150 million .

- Strong software revenue growth experienced during Q2 02 resultedin the establishment of an increased target of 15 percent for software

as a percentage of total revenue exiting the fourth quarter of 2002 .

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- An achievement of net revenue of $12 million related to sales of theSilk Worm 12000 Core Fabric Switch for Q2 02 . The communication

did not include any other material information about revenues o rearnings for the second quarter.

36. On May 15, 2002, the Company issued a press release entitled "Brocade Reports

Financial Results for the Second Fiscal Quarter of 2002; And More Than 9 Percent Quarter

Sequential Revenue Growth ." Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc . reported today financialresults for the second fiscal quarter ended April 27, 2002 (Q2 02). InQ2 02, net revenues were $135 .0 million, which is an increase ofmore than 17 percent from the $115 .2 million reported in the secondfiscal quarter of 2001 (Q2 01), and an increase of more than 9 percentfrom the $123 .1 million reported in the first fiscal quarter of 2002(Q1 02). Brocade exited Q2 02 with $16 .1 million in deferredrevenue, which is an increase of $2 .2 million from Q1 02 .

Net income for Q2 02 was $14 .0 million, which is an increase ofnearly 17 percent from the $12 .0 million reported in Q2 01 and anearly 20 percent increase from the $11 .7 million reported in Q 1 02 .Diluted net income per share for Q2 02 was $0 .06, an increase fromthe $0.05 reported in Q102 and $0 .05 for Q2 01 . During Q2 02, grossmargins were 60.2 percent .

In Q2 02 cash and investments increased by $23 . 8 million, afterpurchasing approximately $17.8 million in capital equipment . Totalcash and investments at the end of Q2 02 were a record $847.7million . For Q2 02, accounts receivable days sales outstanding were53 days, an improvement of 1 day over that reported in Q1 02.Inventory at the end of Q2 02 was $5 .5 million.

Greg Reyes, Brocade Chairm an and CEO , commented on the quarter,"We are extremely pleased with our results for the second fiscalquarter of 2002 . In today's business environment, the valueproposition for Brocade Storage Area Networks (SANS) resonatesmore powerfully than ever before with end users ; allowing companiesto optimize asset utilization , increase productivity, and signi ficantlyreduce the total cost of ownership of their storage environments . Ascompanies continue to expand their SAN deployments over acommon storage networking platform , the SAN architectural decision

-19-

is now becoming a strategic business decision to support storage andserver consolidation, deliver secure, efficient data backup and assurehigh data availability and business continuity . "

Reyes continued, "With more than 1 .6 million Brocade SAN portsdeployed worldwide, Brocade is uniquely positioned to expand ourmarket leadership position as the intelligent storage networkingplatform of choice . We believe that our continued investments in ourbusiness, combined with our product leadership and vision, strongOEM and industry partnerships, and unrelenting focus on execution,uniquely position Brocade to capitalize on the expanding marketopportunity for intelligent storage area networking infrastructure ."

37. On May 30, 2002, Brocade filed its quarterly report with the SEC on Form 10-Q . The

Company's Form i 0-Q was signed by defendant Canova and reaffirmed the Company's previousl y

announced financial results . With respect to the presentation of its financial results the Company

stated:

In the opinion of management, all adjustments (which include onlynormal recurring adjustments) necessary to present a fair statement offinancial position as of April 27, 2002, results of operations, and cashflows for the three and six month periods ended April 27, 2002, andApril 28, 2001, have been made.

38 . On August 14, 2002, the Company issued a press release entitled "Brocade Reports

Third Quarter 2002 Financial Results ; Achieves 30 Percent Revenue Growth and 52 Percent Net

Income Growth ." Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc . reported financial resultstoday for the third fiscal quarter ended July 27, 2002 (Q3 02) . In Q302, net revenues were $151 .2 million, an increase of 30 percent overthe $116.3 million reported in the third fiscal quarter of 2001 (Q3 01),and an increase of 12 percent over the $135 .0 million reported in thesecond fiscal quarter of 2002 (Q2 02) . Brocade exited Q3 02 with$18.3 million in deferred revenue, an increase of $2 .2 million fromQ2 02 .

Net income for Q3 02 was $18 .3 million, an increase of 52 percentfrom the $12 .0 million reported in Q3 01 and a 31 percent increas e

-20-

from the $14.0 million reported in Q2 02 . Diluted net income pershare for Q3 02 was $0.08, an increase from the $0 .05 reported in Q301 and the $0.06 reported in Q2 02.

During Q3 02 cash, cash equivalents, and investments increased by$34.6 million from Q2 02 . Total cash, cash equivalents, andinvestments at the end of Q3 02 were $882 .3 million. For Q3 02, dayssales outstanding were 53 days, consistent with that reported in Q202 . Net inventory at the end of Q3 02 was $7 .1 million .

Greg Reyes, Brocade Chairman and CEO, commented on the quarter,We are extremely pleased with our results for the third fiscal quarterof 2002 . In today's business environment, the value proposition forBrocade Storage Area Networks (SANs) resonates more powerfullythan ever, allowing companies to optimize asset utilization, increaseproductivity, and significantly reduce the total cost of ownership oftheir storage environments . As companies continue to expand theirSAN deployments utilizing a common storage networkingarchitecture, SANs are emerging as the critical building block toenable storage and server consolidation ; secure, efficient data backup ;and lower cost high availability and business continuity .

Reyes continued, Our vision and product leadership, strong OEM andindustry partnerships, and unrelenting focus on execution, combinedwith our installed base of more than 1 .8 million Brocade FibreChannel ports, uniquely position Brocade to capitalize on theexpanding market opportunity for intelligent SAN infrastructure .

39. On November 5, 2002, the Company announced its planned stock- for-stock

acquisition of Rhapsody Networks, Inc ., wherein the Company proposed to issue some 20 millio n

shares of Brocade stock in exchange for Rhapsody . The Company completed the acquisition o f

Rhapsody issuing stock valued at $129 . 3 million.

40. On November 21, 2002, the Company issued a press release entitled "Brocade

Announces Q4 and Fiscal 2002 Financial Results ; Storage Networking Leader Achieves 31 Percen t

Year over Year Revenue Growth in Q4 02 ; Reports Record Revenue for Fiscal 2002 of $562 . 4

Million." Therein, the Company, in relevant part, stated :

-21-

Brocade Communications Systems, Inc . announced today financialresults for its fourth quarter ended October 26 , 2002 (Q4 02). For Q402, net revenue was $153 .1 million, an increase of 31 percent from$116.5 million reported in the fourth quarter of fiscal 2001 (Q4 01) .This compares to $151 .2 million reported in the third quarter of fiscal2002 (Q3 02). For fiscal 2002 (FY 02), revenue was a record $562 .4million, an increase of 10 percent from $513 .0 million reported infiscal 2001 (FY 01) .

Net income for Q4 02 was $15.7 million, or $0.07 per share. Thiscompares to a net loss of $53 .7 million for Q4 01 or $0 .24 per share .For FY 02, net income was $59 .7 million or $0.25 per share, ascompared to net income of $2 .8 million or $0.01 per share, reportedin FY 01 .

Deferred revenue at the end of Q4 02 was $22 .4 million, an increaseof $4.1 million from $18 .3 million at the end of Q3 02 . During Q4 02,gross margins were 58.5 percent .

During Q4 02 Brocade generated $20 .6 million in cash flow fromoperations. For the year, cash flow from operations was $110 .6million. Excluding the proceeds from the convertible debt offering,cash and investments balances grew by $95 .6 million for FY 02 .

"As the storage networking market leader, we are pleased with ourprogress in expanding our leadership position in fiscal 2002 . In achallenging economic environment we grew revenue and marketshare, expanded our intelligent platform for networking storage,increased our installed base to more than 2 million ports, strengthenedour OEM relationships worldwide, and helped accelerate time tomarket for our broad ecosystem of partners," said Greg Reyes,Brocade Chairman and CEO .

Brocade also announced today that it has realigned the organizationand reduced its expense structure . Brocade expects these and otheractions to result in a cost savings of more than $8 million in the firstquarter of fiscal 2003. These actions include aligning the organizationto better serve customers and streamlining management levels,resulting in a flatter, more efficient organization. These actionsresulted in a workforce reduction of approximately 12 percent . Totalemployees worldwide is now approximately 1200 .

Reyes continued, "Aligning the company required some difficultdecisions, but we believe that we made the right decisions for th e

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business . With the expense reduction plan that we have implemented,and the strategic investments that we continue to make in ourbusiness, we believe that we are well positioned as the economyrecovers. Our technology and market leadership, large installed base,storage networking expertise, and the industry's broadest ecosystemof application partners are a powerful combination that will uniquelyposition Brocade to lead the next phase of the evolution ofthe storagenetworking market."

41 . On January 22, 2003, the Company fi led its annual report with the SEC on Form 10-

K. The Company's Form 10-K was signed by defendant Reyes and Canova and reaffirmed th e

Company's previously announced financial results . Additionally, the Company's Form 10- K

contained the following clean audit opinion from Brocade ' s accountants , KPMG LLP ("KPMG") :

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position ofBrocade Communications Systems, Inc . and subsidiaries as ofOctober 26 , 2002, and the results of their operations and their cashflows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America . Also,in our opinion the related financial statement schedule for the yearended October 26, 2002, when considered in relation to theconsolidated financial statements taken as a whole presents fairly, inall material respects, the information set forth therein.

42. On February 12, 2003, the Company issued a press release entitled "Brocade Reports

Financial Results for the First Quarter of Fiscal 2003 ; Storage Networking Leader Achieves Busines s

Optimization Targets and Expands Market Leadership Position ." The press release stated in part :

Brocade Communications Systems, Inc . reported financial resultstoday for its first quarter of fiscal year 2003 ended January 25, 2003(Q1 03) . Net revenue for Q1 03 was $123 .1 million . This comparesto $153 .1 million reported in the fourth quarter of fiscal year 2002(Q4 02), and $123 .1 million reported in the first quarter of fiscalyear 2002 (Q1 02) .

Pro forma net income for Q 1 03 was $0 .3 million or $0.00 per share .Pro forma net income excludes a restructuring charge of $10 .1million associated with the 12 percent reduction in workforce that

-23-

was announced on November 21, 2002 . Reporting on a GenerallyAccepted Accounting Principles (GAAP) basis, net loss for Q1 03was $6 .9 million, or $0.03 per share. This compares to GAAP netincome for Q4 02 of $15 .7 million, or $0.07 per share, and GAAP netincome of $11 .7 million or $0 .05 per share in Q102 . A reconciliationbetween pro forma net income and net loss on a GAAP basis isprovided in a table summary immediately following the Pro FormaCondensed Consolidated Statements of Operations .

Greg Reyes, Brocade Chairman and CEO, commented on the quarter,"We are pleased with our financial results for the first quarter of fiscalyear 2003 . This was a quarter of continued execution for Brocade . Wemet our business optimization goals, reducing operating expenses by12 percent quarter over quarter, and continued to expand ourleadership position in delivering the industry's leading intelligentplatform for networking storage, growing our installed base to 2 .3million Fibre Channel ports and completing the acquisition ofRhapsody Networks . By continuing to optimize and investstrategically in our business, we are positioned well for renewedgrowth in 2003 as we continue to drive the next phase of theevolution of the storage networking market .

43 . On March 7, 2003, Brocade filed its quarterly report with the SEC on Form 10-Q .

The Company's Form 10-Q was signed by defendant Canova and reaffirmed the Company's

previously announced financial results . With respect to the presentation of its financial results the

Company stated :

In the opinion of management, all adjustments (which include onlynormal recurring adjustments, except as otherwise indicated)necessary to present a fair statement of financial position as ofJanuary 25, 2003, results of operations for the three months endedJanuary 25, 2003 and January 26, 2002, and cash flows for the threemonths ended January 25, 2003 and January 26, 2002, have beenmade .

44. On May 14, 2003, the Company issued a press release entitled "Brocade Report s

Second Quarter Fiscal 2003 Financial Results ." Therein, the Company, in relevant part stated :

Brocade Communications Systems, Inc . reported today financialresults for its second quarter of fiscal year 2003, which ended Apri l

-24-

26, 2003 (Q2 03) . Net revenue for Q2 03 was $130.9 million, whichcompares to $123 .1 million reported in the first quarter of fiscal year2003 (Q1 03), and $135 .0 million reported in the second quarter offiscal year 2002 (Q2 02) .

Reporting on a Generally Accepted Accounting Principles (GAAP)basis, net loss for Q2 03 was $146 .0 million, or $0 .57 per share. Thiscompares to a GAAP net loss for Q1 03 of $6 .9 million, or $0 .03 pershare, and GAAP net income of $14 .0 million or $0 .06 per share inQ2 02.

Non-GAAP net loss for Q2 03 was $1 . 0 million or $0.00 per share,as compared to non-GAAP net income of $0.3 million or $0.00 pershare in Q1 03 . There was no difference between GAAP andnon-GAAP net income in Q2 02. Non- GAAP net income for Q2 03excludes in-process research and development , deferred stockcompensation and other acquisition costs related to the acquisition ofRhapsody Networks, Inc. (Rhapsody) in Q2 03, and severance, assetimpairment , and other charges related to the restructuring of businessoperations that was announced on April 10, 2003 . A reconciliationbetween GAAP and non-GAAP information is attached to this pressrelease.

"I am pleased with the results that we have delivered in meeting ourexpectations of revenue, gross margin and operating expense," saidGreg Reyes, Brocade Chairman and CEO . "Moving forward, weremain committed to driving revenue growth and profitability ."

45. On June 9, 2003, Brocade filed its quarterly report with the SEC on Form 10-Q. The

Company's Form 10-Q was signed by defendant Canova and reaffirmed the Company's previousl y

announced financial results . With respect to the presentation of its financial results the Compan y

stated:

In the opinion of management, all adjustments (which include onlynormal recurring adjustments, except as otherwise indicated)necessary to present a fair statement of financial position as of April26, 2003, results of operations for the three and six months endedApril 26, 2003 and April 27, 2002, and cash flows for the six monthsended April 26, 2003 and April 27, 2002, have been made .

-25-

46. On August 13, 2003, the Company issued a press release entitled "Brocade Report s

Third Quarter Fiscal 2003 Financial Results ; Storage Networking Leader Increases Revenue, Net

Income, and EPS On a Sequential Basis ." The press release stated in part :

Brocade Communications Systems, Inc . reported today financialresults for its third quarter of fiscal year 2003 (Q3 03), which endedJuly 26, 2003 . Net revenue for Q3 03 was $133 .5 million, an increasefrom the $130.9 million reported in the second quarter of fiscal year2003 (Q2 03). Net revenue reported in the third quarter of fiscal year2002 (Q3 02) was $151 .2 million .

Non-GAAP net income for Q3 03 was $2 .0 million, or $0 .01 pershare , as compared to a non -GAAP net loss of $ 1 .0 million or $0 .00per share in Q2 03 . Non-GAAP net income for Q3 03 excludesdeferred stock compensation related to the acquisition of RhapsodyNetworks, Inc. (Rhapsody) that was completed in Q2 03. Areconciliation between GAAP and non-GAAP information iscontained in the tables below .

Reporting on a Generally Accepted Accounting Principles (GAAP)basis, net income for Q3 03 was $ 1 .9 million, or $0.01 per share . Thiscompares to a GAAP net loss for Q2 03 of $146 .0 mi llion , or $0.57per share , and GAAP net income of $18 .3 million or $0.08 per sharein Q3 02. There was no difference between GAAP and non-GAAPnet income in Q3 02 .

"We are pleased with our results for our third fiscal quarter in whichwe delivered increased revenue, operating income, and earnings pershare to our shareholders," said Greg Reyes, Brocade Chairman andCEO. "Although the economic environment continues to bechallenging, storage area networking remains an important area of ITinvestment as companies optimize their storage, server andapplication infrastructures to reduce cost and improve productivity.The actions that we have taken over the last several quarters haveresulted in a more efficient and flexible business model more closelyaligned with our go to market strategy. Moving forward, we areconfident of our market position, and believe that we are wellpositioned for continued revenue and earnings growth ."

47 . On September 8, 2003, Brocade filed its quarterly repo rt with the SEC on Form 10-Q .


-26-


Company stated :

In the opinion of management, all adjustments (which include onlynormal recurring adjustments, except as otherwise indicated)necessary to present a fair statement of fmancial position as of April26, 2003, results of operations for the three and six months endedApril 26, 2003 and April 27, 2002, and cash flows for the six monthsended April 26, 2003 and April 27, 2002, have been made.

48 . On November 20, 2003, the Company issued a press release entitled "Brocad e

Reports Fourth Quarter and Fiscal Year 2003 Results ; Storage Networking Leader Increases

Revenue, Net Income, and EPS on a Sequential Basis ." Therein, the Company, in relevant part ,

stated :

Brocade Communications Systems, Inc . reported today financialresults for its fourth quarter (Q4 03) and fiscal year 2003 (FY 03)which ended October 25, 2003 . Net revenue for Q4 03 was $137 .8million, an increase of three percent from $133 .5 million reported inthe third quarter of fiscal year 2003 (Q3 03). Net revenue reported inthe fourth quarter of fiscal year 2002 (Q4 02) was $153 .1 million, Netrevenue for FY 03 was $525 .3 million, as compared to net revenue of$562 .4 million reported in fiscal year 2002 (FY 02) .

Non-GAAP net income for Q4 03 was $4 .6 million , or $0.02 pershare, as compared to a non-GAAP net income of $2 .0 million, or$0.01 per share, in Q3 03 . Non-GAAP net income for Q4 03 excludesgains related to repurchases of conve rtible subordinated debt, a gainon the disposition of private strategic investments , a reduction ofpreviously recorded restructuring costs, and deferred stockcompensation expense related to the acquisition of RhapsodyNetworks, Inc. For FY 03, non-GAAP net income was $5 .6 million,or $0.02 per share . Non-GAAP net income for FY 03 excludes gainsrelated to repurchases of convert ible subordinated debt , net gains onthe disposition of p rivate strategic investments , restructuring costs,and deferred stock compensation and in-process research anddevelopment expenses related to the Rhapsody acquisition .

-27-

49. On January 20, 2004, the Company filed its annual report with the SEC on Form 10-

K. The Company's Form 10-K was signed by defendant Reyes and Canova and reaffirmed th e

Company's previously announced fin ancial results . Additionally, the Company's Form 10- K

contained the following clean audit opinion from Brocade 's accountants, KPMG LLP :

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position ofBrocade Communications Systems, Inc . and subsidiaries as ofOctober 25, 2003 and October 2 6 , 2002, and the results of theiroperations and their cash flows for each of the years in the two-yearperiod ended October 25, 2003, in conformity with accountingprinciples generally accepted in the United States of America. Also,in our opinion the related financial statement schedule for the yearsended October 25, 2003 and October 26, 2002, when considered inrelation to the consolidated financial statements taken as a wholepresents fairly, in all material respects, the information set forththerein .

50. On February 11, 2004, the Company issued a press release entitled "Brocade Reports

First Quarter of Fiscal 2004 Results ; Revenues Increase 5% Sequentially and 18% Year Over Year ."

Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc . reported today financialresults for its first quarter of fiscal year 2004 (Q1 04) which endedJanuary 24, 2004 . Net revenues for Q 1 04 were $145 .0 million, anincrease of five percent from $137 .8 million reported in the fourthquarter of fiscal year 2003 (Q4 03) and an increase of 18 percent from$123 .1 million reported in the first quarter of fiscal 2003 (Q1 03) ."Our first quarter was a good one, and fiscal 2004 is off to anexcellent start for Brocade. During the first quarter, we saw revenuegrowth across our entire business," said Greg Reyes, BrocadeChairman and CEO. "This represents our 4t` quarter in a row ofimproved revenue, gross margin and operating margin . With ourupcoming product cycle and improving trends in the storage sector,we continue to be confident in our market position and futureprospects ."

Non-GAAP net income for Q1 04 was $8 .0 million , or $0.03 pershare, as compared to non-GAAP net income of $4.6 million, or

-28-

$0.02 per share, reported in Q4 03 and non-GAAP net income of $0 .0million, or $0.00 per share, reported in Q1 03 . Non-GAAP netincome for Q 104 excludes gains related to repurchases of convertiblesubordinated debt, deferred stock compensation expense related to theacquisition of Rhapsody Networks, Inc . (Rhapsody), and leasetermination, facilities consolidation and other related costs .Non-GAAP net income for Q4 03 excludes gains related torepurchases of convertible subordinated debt, a gain on thedisposition ofprivate strategic investments, a reduction ofpreviouslyrecorded restructuring costs, and deferred stock compensationexpense related to the acquisition of Rhapsody . Non-GAAP netincome for Q1 03 excludes net gains on the disposition of privatestrategic investments and restructuring costs associated with acompany-wide workforce reduction in Q1 03 . A reconciliationbetween GAAP and non-GAAP information is contained in the tablesbelow.

Reporting on a GAAP basis, net loss for Q1 04 was $36 .8 million, or$(0 .14) per share . This compares to GAAP net income for Q4 03 of$14.8 million, or $0 .06 per share , and GAAP net loss for Q1 03 of$ 6.9 million , or $(0.03) per share .

51 . On March 9, 2004, Brocade filed its quarterly report with the SEC on Form 10-Q.


previously announced financial results . With respect to the presentation of its financial results the

Company stated :

In the opinion of management , al l adjustments (which include onlynormal recurring adjustments , except as otherwise indicated)necessary to present a fair statement of financial position as ofJanuary 24, 2004, results of operations for the three months endedJanuary 24, 2004 and January 25, 2003, and cash flows for the threemonths ended January 24, 2004 and January 25, 2003, have beenmade .

52. On May 19, 2004, the Company issued a press release entitled "Brocade Report s

Second Quarter of Fiscal 2004 Results ; Revenues and Gross Margins Increase for Fifth Consecutive

Quarter." Therein, the Company, in relevant part, stated :

-29-

Brocade Communications Systems, Inc . reported today financialresults for its second quarter of fiscal year 2004 (Q2 04) which endedMay 1, 2004. Net revenues for Q2 04 were $145 .6 million, a slightincrease from $145 .0 million reported in the first quarter of fiscal year2004 (QI 04) and an increase of 11 percent from $130 .9 millionreported in the second quarter of fiscal 2003 (Q2 03) .

"In addition to delivering our fifth consecutive quarter ofimprovement in revenue and gross margin, during the quarter wecontinued to execute on our long term strategy by extending ourproduct portfolio with four major product introductions," said GregReyes, Brocade Chairman and CEO . "We also strengthened thecompany's position across the entire spectrum of the SAN market andhave set the stage to accelerate the achievement of our previo uslystated financial model targets by a full year ."

Non-GAAP net income for Q2 04 was $8 .1 million, or $0 .03 pershare, as compared to non-GAAP net income of $8 .0 million, or$0.03 per share, reported in Q 1 04 and non-GAAP net loss of $1 .1million, or $(0.00) per share, reported in Q2 03 . Non-GAAP netincome for Q2 04 excludes restructuring charges, settlement cost ofa claim associated with the acquisition of Rhapsody Networks, Inc .(Rhapsody), deferred stock compensation expense related toRhapsody, and gains on the disposition of private strategicinvestments . Non-GAAP net income for Q1 04 excludes leasetermination, facilities consolidation and other related costs, deferredstock compensation expense related to the acquisition of Rhapsody,and gains related to repurchases of convertible subordinated debt .Non-GAAP net loss for Q2 03 excludes restructuring charges,in-process research and development, and deferred stockcompensation expense related to the acquisition of Rhapsody. Areconciliation between GAAP and non-GAAP net income (loss) iscontained in the tables below .

Reporting on a GAAP basis, net loss for Q2 04 was $2 . 0 million, or$(0.01) per share . This compares to GAAP net loss for Ql 04 of$36 .8 million , or $(0 .14) per share , and GAAP net loss for Q2 03 of$ 146 .0 million , or $(0.57) per share .

Next Phase of Business Model Optimizatio n

Building on its continued positive financial performance, improvedoperational efficiencies, and successful execution of productdevelopment programs, Brocade today announced the next phase o f

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its plan to optimize the company's business model to drive improvedprofitability while sustaining revenue growth. This phase of the planencompasses organizational changes that include a reduction in forceof 110 employees, focusing of resources to better support OEMpartners, and continued investments in intelligent SAN switchingtechnology. As a result, Brocade will incur a $10 .5 millionrestructuring charge for severance, asset impairments, and contractterminations . (See today's press release : `Brocade Announces NextStage in Strategic Growth and Market Segmentation Plan" )

In addition, Brocade announced that it has recently settled a claimwith former Rhapsody shareholders regarding the Earn-Out Paymentassociated with the Rhapsody merger agreement. As disclosed inBrocade's Form 10-K for the fiscal year ended October 25, 2003 andQ1 04 Form 10-Q, Brocade did not issue the 2.9 million Earn Outshares because Brocade believed that the milestones for making theEarn Out Payment were not met . "We continue to believe that theterms of the contract were not met," said Reyes . "However, in thebest interest of all concerned, we determined it was better to settlethan litigate in a costly and protracted legal dispute ." As a result ofthe settlement Brocade has recorded a $6 .9 million charge and willissue 1 .3 million shares of common stock to the former Rhapsodyshareholders .

53 . On June 14, 2004, Brocade filed its quarterly report with the SEC on Form 10-Q . The

Company's Form 10-Q was signed by defendant Canova and reaffirmed the Company's previousl y

announced financial results . With respect to the presentation of its financial results the Company

stated:

In the opinion of management, all adjustments (which include onlynormal recurring adjustments, except as otherwise indicated)necessary to present a fair statement of financial position as of May1, 2004, results of operations for the three and six months ended May1, 2004 and April 26, 2003, and cash flows for the six months endedMay 1, 2004 and April 26, 2003, have been made .

54. On August 12, 2004, the Company issued a press release entitled "Brocade

Announces Preliminary Q3 2004 Results ; Revenue on Track, Exceeds EPS Guidance." Therein, the

Company, in relevant part, stated :

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Brocade Communications Systems, Inc., the world's leading providerof infrastructure solutions for Storage Area Networks (SANs), todayannounced preliminary results for the third quarter of fiscal 2004 (Q304) ended July 31, 2004. Brocade expects to report net revenue forQ3 04 in a range of $149 .5 to 150.5 million and GAAP net incomeper share of $0 .06 to $0.07. The GAAP earnings include a pre-taxgain of $3 .5 million, equivalent to $0.01 per share, related torepurchases of $47 .4 million of the company's convertiblesubordinated debt .

"I am pleased to announce revenue that is in line with our previousoutlook and better than expected EPS," said Greg Reyes, BrocadeChairman and CEO. "Given the unusually large number ofpre-announcements by storage-related companies with lower thanexpected financial results, we believe that it is important to provideour preliminary results so the market can assess Brocade'sperformance and competitive position accurately . "

55 . On September 13, 2004, Brocade filed its quarterly report with the SEC on Form 10-

Q. The Company's Form 10-Q was signed by defendant Canova and reaffirmed the Company' s


Company stated :

In the opinion of management, all adjustments (which include onlynormal recurring adjustments, except as otherwise indicated)necessary to present a fair statement of financial position as of July31, 2004, results of operations for the three and nine months endedJuly 31, 2004 and July 26, 2003, and cash flows for the nine monthsended July 31, 2004 and July 26, 2003, have been made .

56. On November 22, 2004, the Company issued a press release entitled "Brocad e

Reports Fourth Quarter and Fiscal Year 2004 Results ; Record Annual Revenue of $596.3 Million

Increases 14% Year Over Year Fourth Quarter Operating Margin Increases to 16%." Therein, the

Company, in relevant part, stated :

Brocade Communications Systems, Inc . reported today financialresults for its fourth quarter (Q4 04) and fiscal year 2004 (FY 04)which ended October 30 , 2004 . Net revenues for Q4 04 were $155 . 6

-32-

million , an increase of four percent from $150 . 0 million reported inthe third quarter of fiscal year 2004 (Q3 04) and an increase of 13percent from $ 137 .8 million reported in the fourth quarter of fiscal2003 (Q4 03) . Net revenues for FY 04 were $596 . 3 million, anincrease of 14 percent from $525 .3 million reported in fiscal year2003 (FY 03) .

Non-GAAP net income for Q4 04 was $18 .6 million, or $0 .07 pershare, as compared to non-GAAP net income of $15 .2 million, or$0.06 per share, reported in Q3 04 and non-GAAP net income of $4 .6million, or $0.02 per share, reported in Q4 03 . Non-GAAP netincome for Q4 04 excludes deferred stock compensation expenserelated to Rhapsody Networks, Inc . (Rhapsody), a reduction ofpreviously recorded restructuring costs, and gains related torepurchases of the Company's convertible subordinated debt .Non-GAAP net income for Q3 04 excludes deferred stockcompensation expense related to the acquisition of Rhapsody, gainsrelated to repurchases of the Company's convertible subordinateddebt, and gains on the disposition of private strategic investments .Non-GAAP net income for Q4 03 excludes deferred stockcompensation expense related to the acquisition of Rhapsody, areduction of previously recorded restructuring costs, gains related torepurchases of the Company's convertible subordinated debt, andgains on the disposition of private strategic investments . Areconciliation between GAAP and non-GAAP net income iscontained in the tables below.

Reporting on a GAAP basis, net income for Q4 04 was $20 .4 million,or $0.08 per share basic and diluted . This compares to GAAP netincome for Q3 04 of $17.0 million, or $0 .06 per share diluted, $0.07per share basic, and GAAP net income for Q4 03 of $14.8 million, or$0.06 per share basic and diluted .

"Fiscal 2004 was a good year for Brocade and I am very proud of ourresults," said Greg Reyes, Brocade Chairman and CEO . "During theyear we expanded and extended our product line, introduced newproducts in new segments, executed on our business strategy,achieved our financial model targets, and strengthened the overallposition of the company . "

57. The statements contained in ¶j 24-56 were materially false and misleading whe n

made because defendants failed to disclose or indicate the following: (1) that Brocade improperly

-33-

accounted for the cost of stock based compensation ; (2) that Brocade did not follow appropriat e

option granting guidelines; (3) that the Company lacked adequate internal controls ; and (4) that as

a consequence of the foregoing the Company's financial results were in violation of Generall y

Accepted Accounting Principles and were materially inflated at all relevant times .

The Truth Begins To Emerge

58 . On January 6, 2005, the Company issued a press release entitled "Brocad e

Communications to Restate Financial Statements ; Company Currently Expects Adjustments t o

Relate to Stock Compensation ; Company Plans to Delay the Filing of its Form 10-K for Fiscal Year

Ending October 30, 2004 ." Therein , the Company, in relevant part, stated :

Brocade Communications Systems, Inc ., the world's leading providerof infrastructure solutions for Storage Area Networks (SANs),announced today that it currently expects to restate its financialstatements for fiscal years ending 2002 and 2003 to record additionalstock-based compensation expense as a result of an internal review .During the course of the review, which is still ongoing, the Companydetermined that the way in which it accounted for stock option grantswas incorrect and requires restatement . The Company currentlyexpects the restatement to relate to stock compensation. TheCompany does not currently anticipate any material adjustments to itshistorical revenues, non-stock option related operating expenses orcash positions. The Company expects related adjustments will bemade to the Company's financial statements for fiscal years prior to2002, as necessary.

Specifically, the Company has determined it incorrectly accountedfor, and will record historical stock-based compensation chargesrelating to, (i) grants that were made to new hires on their offeracceptance date, rather than the date of their commencement ofemployment, during the period May 1999 to July 2000, and (ii) grantsthat were made to persons engaged on a part-time basis prior to theirnew hire full-time employment during the period August 2000 toOctober 2002 .Brocade's audit committee is conducting the internal review with theassistance of outside counsel and accountants, both of whom wereretained for this purpose. The review is ongoing. There can be no

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assurance that additional adjustments will not be required . The AuditCommittee expects to complete the review process in the next fewweeks. The Company intends to provide more information as soon asit is available .

"Our core business remains strong and the restatement does not affectthe underlying fundamentals of our business . We continue tosuccessfully execute on our strategies and plans and to furtherstrengthen the overall position of the Company," said Greg Reyes,Brocade Chairman and Chief Executive Officer .

59. The news shocked the market . Shares ofBrocade fell $0 .52 per share or 7 .51 percent,

on January 7, 2005, to close at $6.40 per share .

60. On January 24, 2005, the Company issued a press release entitled "Brocade

Announces the Completion of Audit Committee Internal Review; All Adjustments Are Non Cas h

and Relate to Stock-Based Compensation and Associated Tax Adjustments ." Therein, the Company,

in relevant part, stated :

Brocade Communications Systems, Inc ., the world's leading providerof infrastructure solutions for Storage Area Networks (SANS),announced today that its Audit Committee has completed itspreviously announced internal review . As a result of the findings ofthe review, the Company expects to record additional stockbasedcompensation charges, which are non-cash. In addition the Companyexpects to record a valuation allowance associated with deferred taxassets related to previously recorded stock option tax benefits .

The Company affirmed that none of the adjustments impact historicalrevenues, cash positions, or non-stock option related operatingexpenses . The Company emphasized that its core business remainsstrong and the financial restatement does not affect the underlyingfundamentals of the business . Brocade is working to prepare revisedfinancial statements to reflect the net stock compensation expensesand associated income tax effect . Brocade will provide moreinformation as soon as it is available .

The table below reflects the Company's expectations of theapproximate impact to the Company's Pre-tax Income (Loss) and NetIncome (Loss) :

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(Amounts in Millions (1) FY02 (1) FY03 (1) FY04 (1)Pre tax income ( loss) as reported $84 $(134) $(16)Adjustments to pre tax income (loss) :Stock based compensation 47 (1) (2 )Adjusted pre tax income (loss) $131 $(135) $(18)Income tax provision (bene fit) as reported

Adjustment to tax provision (benefit) :24 2 (14)

Changes in effective tax rate (19) 10 28Adjusted tax provision (benefit) $5 $12 $1 4Net income (loss) as restated $126 $(147) $(32)Net income (loss) as reported $60 $(136) $(2)

Change in reported net income $66 $(11) $(30)

(1) The amounts provided are estimates and subject to audit . TheCompany has not yet filed its Form 10-K report for the Year EndedOctober 30, 2004, and there can be no assurance that these amountsmay not change .

As announced on January 6, the Company determined it incorrectlyaccounted for, and would record historical stock-based compensationcharges relating to, (i) grants that were made to new hires on theiroffer acceptance date, rather than the date of their commencement ofemployment, during the period May 1999 to July 2000, and (ii) grantsthat were made to persons engaged on a part-time basis prior to theirnew hire full-time employment during the period August 2000 toOctober 2002 .

Upon completion of the internal review, the Audit Committee furtherdetermined that there was insufficient basis to rely on the Company'sprocess and related documentation to support recorded measurementdates used to account for certain stock options granted prior to August2003 . As a result, the Company will record additional stock-basedcompensation charges relating to many of its stock option grants fromthe periods 1999 though the third quarter of fiscal 2003 . In addition,it was concluded that there were improprieties in connection with thedocumentation of stock option grants and related employment recordsof a small number of employees prior to mid 2002, which resulted inimmaterial adjustments included in this restatement .

These charges will affect the previously filed financial statements forfiscal years 2002 and 2003 . The Company also expects to make stockbased compensation and associated income tax adjustments topreviously reported fiscal year 2004 financial results . Theseadjustments relate solely to matters pertaining to stock option s

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granted prior to August 2003 . For years prior to 2002, the Companywill reduce previously reported net income by approximately $304million (consisting of a reduction to net income in years 1999 and2000 of $15 million and $1,019 million, respectively, and an increaseto net income in 2001 of $730 million) relating solely to stock basedcompensation and associated income tax adjustments . The Companywill calculate the additional historical stock based compensationcharges using the variable method of accounting under APB 25. Thestock compensation and related tax adjustments are all non-cash .

As a result of the stock compensation adjustments, the Company'sdeferred tax assets previously recognized have now been fullyreserved. The Company expects to realize a tax benefit in futurereporting periods when it is able to utilize its Net Operating Losses tooffset future Income . This will result in a lower future effectiveincome tax rate than previously expected .

Brocade also announced today that Michael Klayko, previously VicePresident of Worldwide Sales, has been named Chief ExecutiveOfficer, and that David House, who previously served as lead outsidedirector of the Company, has been named Executive Chairman ofBrocade, effective immediately. Greg Reyes, who served in thesepositions for six years, will remain active as an employee advisor toBrocade. For more information, please see the press release entitled,"Brocade Announces Executive Appointments" issued today.

Brocade does not expect these developments to impact the timing ofits release of financial results for the first quarter fiscal year 2005,ending January 29, 2005, expected to occur on February 16, 2005.

61 . On these news shares of Brocade fell another $0.57 per share or about 10 percent, on

January 24 and January 25, 2005, to close at $5 .83 per share .

62. On April 28, 2005 , Reuters issued the following release "RESEARCH

ALERT-Merrill cuts Brocade to "sell" from "buy"." Therein, the Company, in relevant part, stated :

Merrill Lynch cut its rating on shares of Brocade CommunicationsSystems Inc. (BRCD.O: Quote, Profile, Research) to "sell" from"buy," citing concern the company's quarterly results could fall shortof expectations, and the stock fell 10 percent in pre-open trade .

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"We expect Brocade to miss consensus earnings expectations for theApril quarter by about 2 cents per share (or 20 percent)," SheblySeyrafi said in a research note to clients . "This could cause furtherdownward pressure on the stock, even at currently depressed levels . "

In addition, Seyrafi said investors could become increasinglyconcerned about the dilutive impact on earnings of expensingemployee stock options over the next few months, leading shares to"behave weakly. "

Early Thursday, shares of Brocade dropped to $4 .54 in pre-open tradefrom Wednesday's close of $5 .04 on Nasdaq .

Brocade typically reports its fiscal second quarter in mid-May .

63. On this news shares of Brocade fell another $0 .47 per share or 9 .33 percent, on Apri l

28, 2005, to close at $4.57 per share .

64. On May 2, 2005, the Company issued a press release entitled "Brocade Announce s

Preliminary Second Quarter Fiscal 2005 Results ." Therein, the Company, in relevant part, stated :

Brocade Communications Systems, Inc ., the world's leading providerof infrastructure solutions for Storage Area Networks (SANs), todayannounced preliminary results for the second quarter of fiscal 2005(Q2 05), ending April 30, 2005 . Brocade expects to report netrevenue for Q2 05 in a range of $144 to $145 million, which isbelow previous guidance issued on February 16, 2005 of $155 to$161 million, and diluted GAAP net income per share of $0 .07. Thecompany expects non-GAAP results to be generally consistent withGAAP results . These preliminary results compare to net revenue of$161 .6 million and diluted GAAP net income per share of $0 .10, forthe first quarter of fiscal 2005 (Q1 05) and net revenue of $145 .6million and GAAP diluted net income per share of $ .01 for thesecond quarter of fiscal 2004 (Q2 04). As previously disclosed, fiscal2004 was a 53-week year instead of a 52-week year and the extraweek fell into Q2 04. As a result, net revenue in Q2 04 includedapproximately $5 to $6 million in additional revenue, without whichnet revenue for Q2 04 would have been approximately $140 million .

These preliminary results are based on management 's initialestimates of operating results and there can be no assurance that theamounts may not change .

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Brocade attributed the revenue shortfall to greater seasonality thanexpected, reflecting a lower level of enterprise spending, and anextended sales cycle causing business from end customers to pushoutside of the quarter .

"Our sales p ipeline indicates that the underlying fundamentals ofour business remain intact, and while we are disappointed to missour original guidance, we continue to manage expenses and remainat a healthy level of profitability," said Michael Klayko, CEO . "Asreported recently by several industry observers, the storageenvironment in the last two weeks of March was weak and whileApril was a good month, it was not enough to offset the weakness inMarch. As we enter the third fiscal quarter, our sales pipelinecontinues to grow and the pipeline we see today is a stronger onethan it was entering our second quarter," continued Klayko .

Brocade will report final financial results for its second quarter fiscalyear 2005 on Wednesday, May 18, 2005 after the close of market .

65 . Following the news shares of Brocade fell $0 .17 per share or $3.92 percent, on May

3, 2005, to close at $4.17 per share .

66 . Then, on May 16, 2005, before the markets opened , the Company issued a press

release entitled "Brocade Restates Financial Statements to Reflect Additional Stock-Base d

Compensation Expense ; Company Affirms That None of the Adjustments Impact Historica l

Revenues , Cash Positions, or Non-Stock Option Related Operating Expenses ." Therein, the

Company, in relevant part , stated :

Brocade Communications Systems, Inc . announced today that theCompany will restate its financial statements for the fiscal yearsending 2002 through 2004 to record additional charges forstock-based compensation expense . The Company affirmed that noneof the charges will have an impact on Brocade's historical revenues,cash positions, or non-stock option related operating expenses . Thecompany expects related adjustments will be made to the Company'sfinancial information for fiscal 2001, as necessary .

Following the completion of an Audit Committee review announcedon January 24, 2005, additional information came to the Company' s

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attention that indicated that its guidelines regarding stock optiongranting practices were not followed during the period from August2003 through November 2004 .

After further review , the Company concluded that it could not rely onthe documentation used to suppo rt the recorded measurement datesfor stock options granted in that period. As a result, the Company willrestate its financial statements to account for additional stock-basedcompensation for stock options granted from August 2003 throughNovember 2004. The additional charges are expected to result in acumulative increase in non -cash stock option compensation expenseof$0.8 million over fiscal years 2003 and 2004. After discovering theadditional information regarding non-compliance of its guidelines, theCompany commenced a review of certain other practices that couldimpact stock option accounting . This review determined that from2001 through 2004, the Company had not appropriately accounted forthe cost of stock based compensation for certain employees on leavesof absences (LOA) and in transition roles prior to ceasingemployment with Brocade . Prior to 2003 , Brocade's LOA policyallowed certain employees to continue vesting in their stock optionsand to have extended stock option exercise pe riods for up to threemonths from the start of the LOA. The expected charges relateprincipally to options that continued to vest for employees who wereon LOAs for a period greater than three months. The Company alsoexpects to record additional adjustments related to options thatcontinued to vest for certain employees in transition roles .Management estimates the total inc rease in non-cash compensationexpense related to these matters to be in a range of approximately $31to $52 million for fiscal years 2001 through 2004.

Brocade's Audit Commi ttee has commenced an independent reviewof the Company' s stock option accounting regarding LOAs . Based onthat ongoing review , the Company' s preliminary estimates ofanticipated adjustments are subject to change .

The table below reflects the total effects of these combinedadjustments and are the Company's preliminary estimate of theapproximate impact to the Company's non-cash expenses and EPS .The Company does not currently expect that there will be any impacton non-cash expenses and EPS for any period in fiscal year 2005 .

Fiscal Year Ending : Additional Non-Cash Expense Reduction in EPS2001 $12 .0 - $26.0 million $0.05 - $0 .112002 $19 .0 - $23 .0 million $0 . 08 - $0 .09

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2003 $0 .2 - $0.8 million $0.00 - $0 .012004 $0 .8 - $2.8 million $0.00 - $0 .0 1

The Company also announced today that it has been informed that theDepartment of Justice (DOJ) is working with the SEC in a jointinvestigation regarding the Company 's stock option grantingpractices . Brocade has no further information regarding the timing orscope ofthe investigation .

"It is not unusual in the current environment that multiple relevantgovernment agencies will take an interest in these types of matters,"said Michael Klayko, Brocade's newly appointed Chief ExecutiveOfficer. "We are cooperating fully with the SEC and DOJ and hopethat the investigation can be concluded as quickly as possible ."Klayko continued, "The Board and management team are absolutelycommitted to the highest standard of accounting and continuouslyimproving our internal controls and compliance with our policies . Ihave confidence in my team and we remain focused on executing toour business plan . "

67. On this news shares of Brocade fell $0 .12 per share or 2 .91 percent, on May 17 ,

2005, to close at $4 .01 per share .

BROCADE'S VIOLATION OF GAAP RULES IN ITSFINANCIAL REPORTS FILED WITH THE SEC

68 . These financial statements and the statements about them were false and misleading ,

as such financial information was not prepared in conformity with GAAP, nor was the financial

information a fair presentation of the Company's operations due to the Company's improper

accounting for and disclosure about its revenues, in violation of GAAP and SEC rules.

69. GAAP are those principles recognized by the accounting profession as the

conventions, rules and procedures necessary to define accepted accounting practice at a particula r

time. Regulation S-X (17 C.F .R. §210 .4-01(a) (1 )) states that financial statements filed with the SEC

which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate .

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Regulation S-X requires that interim financial statements must also comply with GAAP, with the

exception that interim financial statements need not include disclosure which would be duplicative

of disclosures accompanying annual financial statements . 17 C.F.R. §210.10-01(a) .

70 . Given these accounting irregularities, the Company announced financial results tha t

were in violation of GAAP and the following p rinciples :

(a) The principle that "interim financial reporting should be based upon the same

accounting principles and practices used to prepare annual financial statements " was violated (APB

No. 28, ¶10) ;

(b) The principle that "financial reporting should provide information that is useful to

present to potential investors and creditors and other users in making rational investment, credit, an d

similar decisions" was violated (FASB Statement of Concepts No . 1, ¶34) ;

(c) The principle that "financial reporting should provide information about the economi c

resources of an enterprise, the claims to those resources, and effects of transactions, events, an d

circumstances that change resources and claims to those resources" was violated (FASB Statement

of Concepts No . 1, ¶40) ;

(d) The principle that "financial reporting should provide information about a n

enterprise 's financial performance during a period " was violated (FASB Statement of Concepts No .

1, ¶42) ;

(e) The principle that " completeness, meaning that nothing is left out of the information

that may be necessary to insure that it validly represents underlying events and conditions" wa s

violated (FASB Statement of Concepts No . 2, ¶79) ;

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(f) The principle that "financial reporting should be reliable in that it represents what it

purports to represent" was violated (FASB Statement of Concepts No . 2, ¶¶58-59); and

(g) The principle that "conservatism be used as a prudent reaction to uncertainty to try

to ensure that uncertainties and risks inherent in business situations are adequately considered" was

violated. (FASB Statement of Concepts No . 2, ¶95) .

71 . The adverse information concealed by defendants during the Class Period and

detailed above was in violation of Item 303 of Regulation S-K under the federal securities law (17

C.F.R. 229.303) .

72. Moreover, the adverse information concealed by defendants during the Class Perio d

and detailed above was in violation of SEC Regulation S-X, which states that "financial statements

filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading

and inaccurate." SEC Regulation S-X also required that "interim financial statements [i .e ., Form

10-Qs] must also comply with GAAP." 17 C.F.R. §210.10-01(a) .

UNDISCLOSED ADVERSE FACTS

73 . The market for Brocade's securities was open, well-developed and efficient at all

relevant times . As a result of these materially false and misleading statements and failures to

disclose, Brocade's securities traded at artificially inflated prices during the Class Period . Plaintiff

and other members of the Class purchased or otherwise acquired Brocade securities relying upon the

integrity of the market price of Brocade's securities and market information relating to Brocade, and

have been damaged thereby .

74 . During the Class Period, defendants materially misled the investing public, thereby

inflating the price of Brocade's securities, by publicly issuing false and misleading statements an d

-43-

omitting to disclose material facts necessary to make defenda nts' statements, as set forth herein, no t

false and misleading. Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as alleged herein .

75. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of th e

damages sustained by plaintiff and other members of the Class . As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleadin g

statements about Brocade's business, prospects and operations . These material misstatements an d

omissions had the cause and effect of creating in the market an unrealistically positive assessment

of Brocadeand its business, prospects and operations, thus causing the Company's securities to b e

overvalued and artificially inflated at all relevant times . Defendants ' mate rially false and misleading

statements during the Class Period resulted in plaintiff and other members of the Class purchasing

the Company's securities at artificially inflated prices, thus causing the damages complained o f

herein .

ADDITIONAL SCIENTER ALLEGATION S

76 . As alleged herein, defendants acted with scienter in that defendants knew that th e

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading ; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced i n

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

-44-

information reflecting the true facts regarding Brocade, their control over, and/or receipt and/o r

modification of Brocade's allegedly materially misleading misstatements and/or their associations

with the Company which made them privy to confidential proprietary information concerning

Brocade, participated in the fraudulent scheme alleged herein .

77. Defendants knew and/or recklessly disregarded the falsity and misleading nature o f

the information which they caused to be disseminated to the investing public. The ongoing

fraudulent scheme described in this complaint could not have been perpetrated over a substantia l

period of time, as has occurred, without the knowledge and complicity of the personnel at the highes t

level of the Company, including the Individual Defendants .

78. During the Class Period and with the Company's stock trading at artificially inflate d

prices Reyes sold 4,957,053 shares for gross proceeds of more than $30 million . Defendant Canov a

sold 4,903 shares for gross proceeds of $31,526 .

79. Additionally, during the Class Period and with the Company's stock trading at

inflated p rices Brocade completed a $129 million stock- for-stock acquisition ofRhapsody Network s

and sold $550 million in 2% convertible subordinated notes in December 2001 and January 2002 .

Applicability Of Presumption Of Reliance :Fraud-On-The-Market Doctrine

80 . At all relevant times, the market for Brocade securities was an efficient market fo r

the following reasons, among others :

(a) Brocade stockmet the requirements for listing, and was listed and actively traded

on the NASDAQ, a highly efficient and automated market ;

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(b) As a regulated issuer , Brocade filed periodic public reports with the SEC and th e

NASDAQ;

(c) Brocade regularly communicated with public investors via established marke t

communication mechanisms, including through regular disseminations of press releases on th e

national circuits ofmaj or newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services ; and

(d) Brocade was followed by several securities analysts employed by majorbrokerag e

firms who wrote reports which were distributed to the sales force and certain customers of thei r

respective brokerage firms . Each of these reports was publicly availBrocade and entered the publi c

marketplace .

81 . As a result of the foregoing, the market for Brocade securities promptly digeste d

current information regarding Brocade from all publicly-available sources and reflected such

information in Brocade's stock price . Under these circumstances, all purchasers of Brocad e

securities during the Class Period suffered similar injury through their purchase of Brocade securitie s

at artificially inflated prices and a presumption of reliance applies .

NO SAFE HARBOR

82. The statutory safe harbor provided for forward- looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Many of the specific statements pleaded herein were not identified as "forward-Iooking statements "

when made . To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materiall y

from those in the purportedly forward-looking statements . Alternatively, to the extent that the

-46-

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of Brocade who knew that those statements were false when made .

FIRST CLAIMViolation Of Section 10(b) Of

The Exchange Act Against And Rule 10b-5Promulgated-Thereunder Against All Defendants

83. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

84. During the Class Period, defendants carried out a plan, scheme and course of conduc t

which was intended to and, throughout the Class Period, did : (i) deceive the investing public,

including Plaintiff and other Class members, as alleged herein ; and (ii) cause Plaintiff and other

members of the Class to purchase Brocade securities at artificially inflated prices . In furtherance of

this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set

forth herein .

85 . Defendants (a) employed devices, schemes, and artifices to defraud ; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements

not misleading ; and (c) engaged in acts, practices, and a course ofbusiness which operated as a fraud

and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high

market prices for Brocade securities in violation of Section 10(b) of the Exchange Act and Rule 10b-

5 . All defendants are sued either as primary participants in the wrongful and illegal conduct charged

herein or as controlling persons as alleged below .

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86. Defendants, individually and in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business, operation s

and future prospects of Brocade as specified herein .

87 . These defendants employed devices, schemes, and artifices to defraud, while i n

possession of material adverse non-public information and engaged in acts, practices, and a cours e

of conduct as alleged herein in an effort to assure investors of Brocade value and performance and

continued substantial growth, which included the making of, or the participation in the making of ,

untrue statements of material facts and omitting to state material facts necessary in order to make the

statements made about Brocade and its business operations and future prospects in the light of th e

circumstances under which they were made, not misleading , as set forth more particularly herein ,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

upon the purchasers of Brocade secu rities during the Class Period .

88. Each of the Individual Defendants' primary liability, and controlling person liability ,

arises from the following facts: (i) the Individual Defendants were high-level executives and/o r

directors at the Company during the Class Period and members of the Company' s management team

or had control thereof; (ii) each of these defendants, by virtue of his or her responsibilities an d

activities as a senior officer and/or director of the Company was privy to and participated in th e

creation, development and reporting of the Company's internal budgets, plans, projections and/o r

reports ; (iii) each of these defendants enjoyed significant personal contact and familiarity with the

other defendants and was advised of and had access to other members of the Company' s

management team, internal reports and other data and information about the Company's finances ,

-48-

operations, and sales at all relevant times ; and (iv) each' of these defendants was aware of the

Company's dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading .

89. The defendants had actual knowledge of the misrepresentations and omissions o f

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them . Such defendants'

material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose

and effect of concealing Brocade's operating condition and future business prospects from the

investing public and supporting the artificially inflated price of its securities . As demonstrated by

defendants' overstatements and misstatements of the Company's business, operations and earnings

throughout the Class Period, defendants, if they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by

deliberately refraining from taking those steps necessary to discover whether those statements were

false or misleading.

90. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Brocade securities was

artificially inflated during the Class Period. In ignorance of the fact that market prices of Brocade's

publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by defendants, or upon the integrity of the market in which the securities

trade, and/or on the absence of material adverse information that was known to or recklessly

disregarded by defendants but not disclosed in public statements by defendants during the Clas s

-49-

Period, Plaintiff and the other members of the Class acquired Brocade securities during the Class

Period at artificially high prices and were damaged thereby .

91 . At the time of said misrepresentations and omissions, Plaintiff and other members

of the Class were ignorant of their falsity, and believed them to be true . Had Plaintiff and the other

members of the Class and the marketplace known the truth regarding the problems that Brocade wa s

experiencing, which were not disclosed by defendants, Plaintiff and other members of the Clas s

would not have purchased or otherwise acquired their Brocade secu rities, or, if they had acquired

such securities during the Class Period, they would not have done so at the artificially inflated price s

which they paid .

92. By virtue of the foregoing , defendants have violated Section 10 (b) of the Exchange

Act, and Rule 10b-5 promulgated thereunder .

93 . As a direct and proximate result of defendants' wrongful conduct, Plaintiff and th e

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company's securities during the Class Period .

SECOND CLAIMViolation Of Section 20(a) Of

The Exchange Act Against the Individual Defendants

94. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein .

95. The Individual Defendants acted as controlling persons of Brocade within th e

meaning of Section 20(a) of the Exchange Act as alleged here in. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of th e

Company's operations and/or intimate knowledge of the false financial statements filed by the

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Company with the SEC and disseminated to the investing public, the Individual Defendants had the

power to influence and control and did influence and control, directly or indirectly, the decision-

making of the Company, including the content and dissemination of the various statements which

Plaintiff contend are false and misleading . The Individual Defendants were provided with or had

unlimited access to copies of the Company's reports, press releases, public filings and other

statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were

issued and had the ability to prevent the issuance of the statements or cause the statements to be

corrected .

96. In particular, each of these defendants had direct and supervisory involvement in the

day-to-day operations of the Company and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same .

97 . As set forth above, Brocade and the Individual Defendants each violated Sectio n

10(b) and Rule IOb-5 by their acts and omissions as alleged in this Complaint. By virtue of their

positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of

the Exchange Act . As a direct and proximate result of defendants' wrongful conduct, Plaintiff and

other members of the Class suffered damages in connection with their purchases of the Company's

securities during the Class Period.

WHEREFORE, Plaintiff prays for relief and judgment, as follows :

(a) Determining that this action is a proper class action, designating Plaintiff as Lead

Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal Rules of Civil

Procedure and Plaintiffs counsel as Lead Counsel ;

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(b) Awarding compensatory damages in favor of Plaintiff and the other Clas s

members against all defendants , jointly and severally , for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

(c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees ; and

(d) Such other and further relief as the Court may deem just and proper .

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JURY TRIAL DEMANDED

Plaintiffhereby demands a trial by jury.

Dated :

GREEN WELLING, LLPBy:Robert Green, Esquire235 Pine Street, 15th FloorSan Francisco , California 94104(415) 477-6700

BRODSKY & SMITH, LLCEvan J. Smith , EsquireTwo Bala Plaza, Suite 602Bala Cynwyd, PA 19004610.667 .6200

SCHIFFRIN & BARROWAY, LLPMarc A. Topaz, EsquireRichard A. Maniskas, EsquireTamara Skvirsky, Esquire280 King of Prussia Road,Radnor, PA 19087(610) 667-7706

Attorneys for Plaintiff

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united states district court mario saldana-harlow,...

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