8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 24, 2005 (January 18, 2005)

BROCADE COMMUNICATIONS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 000-25601
(Commission File Number) 77-0409517
(I.R.S. Employer
Identification Number)

1745 Technology Drive
San Jose, CA 95110
(Address, including zip code, of principal executive offices)

(408) 333-8000
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

	Item 1.01 Entry into a material Definitive Agreement
	Item 2.02 Results of Operations and Financial Condition
	Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
	Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
	Item 9.01 Financial Statements and Exhibits
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2

Item 1.01 Entry into a material Definitive Agreement.

     At a meeting on January 21, 2005, the Compensation Committee of Brocade Communications Systems, Inc. (“Brocade” or the “Company”) approved a compensation package for Michael Klayko as described in Item 5.02 below. Such description is incorporated herein by reference.

Item 2.02 Results of Operations and Financial Condition.

In a press release issued January 24, 2005, Brocade announced that its Audit Committee has completed its previously announced internal review.

A copy of the press release is attached as Exhibit 99.1 hereto and is incorporated by reference herein.

Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

     As announced on January 6, 2005, on management’s recommendation, the Company, in consultation with KPMG LLP, the Company’s independent auditors, and the Company’s advisors, concluded that the Company’s financial statements for the fiscal years ending 2001, 2002 and 2003, and the interim periods contained therein, should no longer be relied upon because of an error in such financial statements as addressed in Accounting Principles Board Opinion No. 20. Upon completion of the internal review, the Audit Committee further determined that there was insufficient basis to rely on the Company’s process and related documentation to support recorded measurement dates used to account for certain stock options granted prior to August 2003. As a result, the Company will record additional stock-based compensation charges relating to many of its stock option grants from the periods 1999 though the third quarter of fiscal 2003. In addition, it was concluded that there were improprieties in connection with the documentation of stock option grants and related employment records of a small number of employees prior to mid 2002, which resulted in immaterial adjustments included in this restatement. These charges will affect the previously filed financial statements for fiscal years 2002 and 2003. The Company also expects to make stock based compensation and associated income tax adjustments to previously reported fiscal year 2004 financial results. Therefore, previously reported fiscal year 2004 financial results should not be relied upon.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

(b)(c) At a meeting of the Board of Directors (the “Board”) of Brocade on January 21, 2005, the Board elected Michael Klayko as the Chief Executive Officer of the Company and appointed him as a member of the Board. Mr. Klayko, 50, has been serving as the Company’s Vice President of Worldwide Sales since May 2004 and previously served as the Vice President of Marketing and Support. Mr. Klayko joined Brocade in January 2003 when the Company acquired Rhapsody Networks, Inc., a privately held technology company, where he served as the Chief Executive Officer and President. Prior to joining Rhapsody, from December 1998 to April 2001, Mr. Klayko was the Executive Vice president of McDATA Corporation, a storage networking company.

     The Compensation Committee of the Board approved a compensation package at a meeting for Mr. Klayko which includes a base salary of $520,000 with a target incentive bonus of 75% of his base salary or $390,000. Mr. Klayko will also be granted 1,000,000 options to purchase common stock of the Company.

     At the meeting of the Board on January 18, 2005, the Board appointed Dave House as the Executive Chairman of the Board and interim Chief Executive Officer. Mr. House’s biographical information is contained in the Company’s Proxy Statement, filed with the Securities and Exchange Commission on February 23, 2004 and such biographical information is incorporated herein by reference. No compensation arrangements were made.

     Effective on January 18, 2005, Greg Reyes ceased being the Company’s Chief Executive Officer and Chairman. Mr. Reyes will remain on the Board and will serve as a consultant to the Company.

     A copy of the press release announcing the appointments is attached as Exhibit 99.2 hereto and is incorporated by reference herein.

Item 9.01 Financial Statements and Exhibits.

     (c) Exhibits

99.1 Press release, dated January 24, 2005, entitled “Brocade Announces the Completion of Audit Committee Internal Review.”

99.2 Press release, dated January 24, 2005, entitled “Brocade Announces Executive Appointments: Michael Klayko Named CEO.”

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	BROCADE COMMUNICATIONS SYSTEMS, INC.
Dated: January 24, 2005	By:	/s/ Antonio Canova
		Antonio Canova
		Vice President, Administration and Chief Financial Officer

EXHIBIT INDEX

Exhibit
Number	Description
99.1	Press release, dated January 24, 2005, entitled “Brocade Announces the Completion of Audit Committee Internal Review.”
99.2	Press release, dated January 24, 2005, entitled “Brocade Announces Executive Appointments: Michael Klayko Named CEO.”

EX-99.1

Exhibit 99.1

BROCADE CONTACTS

Media Relations	Investor Relations
Leslie Davis	Shirley Stacy
Tel: 408.333.5260	Tel: 408.333.5752
lmdavis@brocade.com	sstacy@brocade.com

BROCADE ANNOUNCES THE COMPLETION OF AUDIT COMMITTEE INTERNAL REVIEW

All Adjustments are Non Cash and Relate to Stock-Based Compensation and Associated Tax Adjustments

Company Affirms No Adjustments to Historical Revenues;
Previously Announced Restatement of Financial Statements to Record Stock-Based Compensation and Associated Tax Adjustments to Increase Net Income by Approximately $66 Million in Fiscal 2002 and Decrease Net Income by Approximately $11 Million in 2003 and $30 Million in 2004

SAN JOSE, Calif., January 24, 2005 – Brocade Communications Systems, Inc. (Nasdaq: BRCD), the world’s leading provider of infrastructure solutions for Storage Area Networks (SANs), announced today that its Audit Committee has completed its previously announced internal review. As a result of the findings of the review, the Company expects to record additional stock-based compensation charges, which are non-cash. In addition the Company expects to record a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits.

The Company affirmed that none of the adjustments impact historical revenues, cash positions, or non-stock option related operating expenses. The Company emphasized that its core business remains strong and the financial restatement does not affect the underlying fundamentals of the business. Brocade is working to prepare revised financial statements to reflect the net stock compensation expenses and associated income tax effect. Brocade will provide more information as soon as it is available.

The table below reflects the Company’s expectations of the approximate impact to the Company’s Pre-tax Income (Loss) and Net Income (Loss):

(Amounts in Millions)	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 (benefit) as reported		24			2			(14	)
Adjustment to tax provision (benefit):
Changes in effective tax rate		(19	)		10			28

(Amounts in Millions)	FY02 (1)		FY03 (1)			FY04 (1)
Adjusted tax provision (benefit)	$	5	$	12		$	14
Net 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. The Company has not yet filed its Form 10-K report for the Year Ended October 30, 2004, and there can be no assurance that these amounts may not change.

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

Upon completion of the internal review, the Audit Committee further determined that there was insufficient basis to rely on the Company’s process and related documentation to support recorded measurement dates used to account for certain stock options granted prior to August 2003. As a result, the Company will record additional stock-based compensation charges relating to many of its stock option grants from the periods 1999 though the third quarter of fiscal 2003. In addition, it was concluded that there were improprieties in connection with the documentation of stock option grants and related employment records of a small number of employees prior to mid 2002, which resulted in immaterial adjustments included in this restatement.

These charges will affect the previously filed financial statements for fiscal years 2002 and 2003. The Company also expects to make stock based compensation and associated income tax adjustments to previously reported fiscal year 2004 financial results. These adjustments relate solely to matters pertaining to stock options granted prior to August 2003. For years prior to 2002, the Company will reduce previously reported net income by approximately $304 million (consisting of a reduction to net income in years 1999 and 2000 of $15 million and $1,019 million, respectively, and an increase to net income in 2001 of $730 million) relating solely to stock based compensation and associated income tax adjustments. The Company will calculate the additional historical stock based compensation charges using the variable method of accounting under APB 25. The stock compensation and related tax adjustments are all non-cash.

As a result of the stock compensation adjustments, the Company’s deferred tax assets previously recognized have now been fully reserved. The Company expects to realize a tax benefit in future reporting periods when it is able to utilize its Net Operating Losses to offset future Income. This will result in a lower future effective income tax rate than previously expected.

Brocade also announced today that Michael Klayko, previously Vice President of Worldwide Sales, has been named Chief Executive Officer, and that David House, who previously served as lead outside director of the Company, has been named Executive Chairman of Brocade, effective immediately. Greg Reyes, who served in these positions for six years, will remain active as an employee advisor to Brocade.

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 of its release of financial results for the first quarter fiscal year 2005, ending January 29, 2005, expected to occur on February 16, 2005.

Conference Call
Brocade will host a conference call on Monday, January 24, 2005, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time to discuss the completion of the Audit Committee Review. The dial-in numbers for the conference call are 1-877-407-2753 and 1-706-634-7602, password is Brocade. A replay of the conference call will be available within two hours after the call concludes. The replay number is 1-800-642-1687 or 706-645-9291, password is 3616329. The conference call will also be webcast live via the Internet at www.brocade.com/investors. This webcast will be available for the next month at www.brocade.com/investors.

About Brocade Communications Systems, Inc.
Brocade offers the industry’s leading intelligent platform for networking storage. The world’s leading systems, applications, and storage vendors have selected Brocade to provide a networking foundation for their SAN solutions. The Brocade SilkWorm family of fabric switches and software is designed to optimize data availability and storage and server resources in the enterprise. Using Brocade solutions, companies can simplify SAN implementation, reduce the total cost of ownership of data storage environments, and improve network and application efficiency. For more information, visit the Brocade website at www.brocade.com or contact the Company at info@brocade.com.

Forward Looking Statements
This press release contains forward-looking statements, as defined under Federal Securities Laws. These forward-looking statements include the statements regarding Brocade’s restated financial statements,, and future tax benefits. These statements are just predictions and involve risks and uncertainties, such that actual results may differ significantly. These risks include, but are not limited to the review and audit by the Company’s independent auditors of the restated financial statements; actions resulting from discussions with or required by the Securities Exchange Commission; and our ability to take utilize of future tax benefit resulting from the restatement.

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Brocade, the Brocade B weave logo, Secure Fabric OS, Fabric OS, SilkWorm, and SilkWorm Express are registered trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries.

EX-99.2

Exhibit 99.2

BROCADE CONTACTS

Media Relations	Investor Relations
Leslie Davis	Shirley Stacy
Tel: 408.333.5260	Tel: 408.333.5752
lmdavis@brocade.com	sstacy@brocade.com

BROCADE ANNOUNCES EXECUTIVE APPOINTMENTS:
MICHAEL KLAYKO NAMED CEO

Greg Reyes to Take on New Role As Advisor on Customer and Strategic Matters

SAN JOSE, Calif., January 24, 2005 – Brocade Communications Systems, Inc. (Nasdaq: BRCD), the world’s leading provider of infrastructure solutions for Storage Area Networks (SANs), announced today that the Board of Directors has appointed Michael Klayko to the position of Chief Executive Officer and a member of the Board of Directors. Greg Reyes, Brocade Chairman and CEO since 1998, remains as a director and will serve as an advisor to the Board and the new CEO, focusing on customer and strategic matters.

“Greg has built an outstanding company brand and organization during the past six years, and we appreciate the breadth and depth of his contributions to Brocade,” said Michael Klayko. “In his new role, he will continue to be a very important and valuable contributor to our customer relationships and to the continued success of Brocade.”

“It’s time for me to take on a new role, and I’m very proud of the company and confident in the management team that will continue to drive Brocade’s success,” said Greg Reyes. “Mike is uniquely qualified to lead Brocade going forward and brings an in-depth knowledge of the storage networking industry and strong customer relationships to his new role.”

Other Board changes announced today include Dave House being appointed to Executive Chairman and L. William Krause being named lead outside Director.

“I’m very excited about the opportunities ahead for Brocade,” said Klayko. “We’ve got a great management team, outstanding partners and the largest installed base in the industry. I look forward to working with Dave to help serve our customers and partners, and build shareholder value.
Dave’s broad experience and his tenure on Brocade’s board offer great value to our leadership team,” Klayko added.

Michael Klayko’s appointment as President and CEO follows nearly one year as Brocade’s Vice President of Worldwide Sales. Klayko joined Brocade in January 2003, when the company acquired Rhapsody Networks, where he was CEO and President. Before founding Rhapsody, Klayko held positions in executive management with McData, and senior sales and marketing management positions with EMC, HP, and IBM.

In a separate announcement today, Brocade said that a previously announced internal review by the firm’s Audit Committee, related to the issuance and recording of stock options, has been completed. For more information, please see: “Brocade Announces the Completion of Audit Committee Internal Review.”

Conference Call
Brocade will host a conference call on Monday, January 24, 2005, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time to discuss the new executive appointments. The dial-in numbers for the conference call are 1-877-407-2753 and 1-706-634-7602, password is Brocade. A replay of the conference call will be available within two hours after the call concludes. The replay number is 1-800-642-1687 or 706-645-9291, password is 3616329. The conference call will also be webcast live via the Internet at www.brocade.com/investors. This webcast will be available for the next month at www.brocade.com/investors.

About Brocade Communications Systems, Inc.
Brocade offers the industry’s leading intelligent platform for networking storage. The world’s leading systems, applications, and storage vendors have selected Brocade to provide a networking foundation for their SAN solutions. The Brocade SilkWorm family of fabric switches and software is designed to optimize data availability and storage and server resources in the enterprise. Using Brocade solutions, companies can simplify SAN implementation, reduce the total cost of ownership of data storage environments, and improve network and application efficiency. For more information, visit the Brocade website at www.brocade.com or contact the Company at info@brocade.com.

Forward Looking Statements
This press release contains forward-looking statements, as defined under Federal Securities Laws. These forward-looking statements include the statements regarding the statements about the strength of Brocade’s business and prospects and new management. These statements are just predictions and involve risks and uncertainties, such that actual results may differ significantly. These risks include, but are not limited to, the review and audit by the Company’s independent auditors of the Company’s restated financial statements; actions resulting from discussions with or required by the Securities Exchange Commission; our ability to manage the transition between new and older products; our ability to effectively transition management roles to new personnel; our ability to achieve market acceptance of the Silkworm Fabric Application Platform product family; our ability to develop new and enhanced products that achieve widespread market acceptance; the loss of our third-party contract manufacturers; our failure to accurately forecast demand for our products; our ability to manage the production of our products; our ability to retain key personnel and to continue to recruit qualified personnel; quarterly and annual fluctuations in our revenues and operating results; increased market competition and pricing pressure; our dependence on OEM partners; declines in the prices of our products and our revenues and gross margins; the effect of changes in IT spending levels; our failure to manage distribution channels and other customer relationships; our dependence on sole source and limited source suppliers for certain key components including ASICs, microprocessors, logic chips and programmable logic devices; our failure to manage our business effectively in a rapidly evolving market; the effect of future acquisitions on our business operations; our ability to attain profitability; international political instability; increased international sales activity; seasonal fluctuations and uneven sales patterns; the existence of undetected errors in our products; and our ability to protect our intellectual property and defend against infringement claims. These and other risks are set forth in more detail in the Company’s reports on Form 10-K for the fiscal year ended October 25, 2003 and Form 10-Q for the fiscal quarter ended July 31, 2004.

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Brocade, the Brocade B weave logo, Secure Fabric OS, Fabric OS, SilkWorm, and SilkWorm Express are registered trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries.