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

August 13, 2008
Date of Report (Date of earliest event reported)

BROCADE COMMUNICATIONS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation) 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)

Not Applicable
(Former name or former address, if changed since last report)

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

EXHIBIT 99.1

Item 2.02 Results of Operations and Financial Condition.

     On August 13, 2008, Brocade Communications Systems, Inc. issued a press release announcing its financial results for the third quarter ended July 26, 2008. A copy of the press release is attached as Exhibit 99.1, and the information in Exhibit 99.1 is incorporated herein by reference.

     The information in Item 2.02 and Item 9.01 in this Current Report on Form 8-K and the exhibit attached hereto shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Item 9.01 Financial Statements and Exhibits.

     (d) Exhibits.

Exhibit
Number	Description of Document
99.1	Press release, dated August 13, 2008, announcing financial results of Brocade Communications Systems, Inc. for the third quarter ended July 26, 2008.

SIGNATURES

     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: August 12, 2008	By:	/s/ Richard Deranleau
		Richard Deranleau
		Chief Financial Officer and Vice President, Finance

Index to Exhibits

Exhibit
Number	Description of Document
99.1	Press release, dated August 13, 2008, announcing financial results of Brocade Communications Systems, Inc. for the third quarter ended July 26, 2008.

EX-99.1

Exhibit 99.1

BROCADE CONTACTS
Public Relations
John Noh
Tel: 408-333-5108
jnoh@brocade.com Investor Relations
Alex Lenke
Tel: 408-333-6758
alenke@brocade.com

 
Brocade Reports Third Quarter Fiscal Year 2008 Results

Sets New Company Record in Quarterly Revenue and Returns to Double-Digit Year-Over-Year Growth

SAN JOSE, Calif., August 13 /PRNewswire-FirstCall/ — Brocade^® (NASDAQ: BRCD), the leader in data center networking solutions that help enterprises connect and manage their information, today reported financial results for its third fiscal quarter, which ended July 26, 2008.

Commenting on the Company’s third quarter financial results, Michael Klayko, Brocade CEO, said, “We delivered record results this quarter as we returned to double-digit revenue growth through continued, outstanding operational execution. These results validate that our product roadmap and solutions address customer demand for high-performance, ultra-reliable networking in the next-generation data center. We believe that they also indicate that the fundamental market trends and customer demand drivers remain intact.”

Third Fiscal Quarter 2008 Business Highlights

• Brocade announced its intent to acquire Foundry Networks, a performance and total solutions leader for network switching and routing. The acquisition will position Brocade as a leading provider of enterprise and service provider networking solutions, with innovative technology and product leadership from the Internet to the heart of data centers. The acquisition is subject to approval from Foundry stockholders, regulatory approvals and certain other closing conditions.

• Brocade’s industry-leading DCX Backbone, in only its second full quarter of shipments, continues to exceed initial sales expectations. Industry analyst data from the Dell’Oro Group also showed Brocade’s market share in the director segment climbed 5.5 percent over the previous quarter.

• Brocade’s switch business set new revenue records, driven by a combination of strong worldwide demand for the 4-Gbit/Sec products and a robust initial ramp for the new 8-Gbit/Sec family. Brocade’s top OEMs made these switches available during the quarter, which is expected to help expand market adoption of Brocade’s switch products in Q4 and into 2009.

• Increase in professional services helped drive record revenue for Brocade’s services business, as customers turn to Brocade as the trusted expert in the evolution of their data centers.

• Brocade announced the general availability of a new family of its 4- and 8-Gbit/Sec server host bus adapters (HBAs) that offers unique breakthroughs in terms of performance and end-to-end data center networking capabilities. Initial customer feedback has been very positive with early customer trials highlighting Brocade’s performance and integrated feature-set advantages.

• Brocade and NetApp announced a collaborative development effort that will enable data center customers to encrypt corporate data more quickly and easily for increased security and compliance.

Brocade
1745 Technology Dr., San Jose, CA 95110
T. 408.333.8000 F. 408.333.8101
www.brocade.com

Third Fiscal Quarter 2008 Financial Highlights and Additional Financial Information

• Brocade achieved record revenue and double-digit annual growth in a typically slower period.

• In Q3, the Company achieved record revenue in its switch business, embedded blade switch product line and its Services Business Unit.

• The Company’s total installed base of SAN ports was approximately 18.3 million.

• In Q3, Average Selling Price (ASP) declines were in the low single digits compared to Q2 08.

• Net stock-based compensation expense was $11.9 million and has been excluded from the Company’s non-GAAP results.

• In Q3, Brocade repurchased approximately 4.7 million shares of the Company’s common stock for approximately $38.1 million. As of the end of Q3 08, the Company had $414.1 million remaining under its $800 million total stock buyback program authorization. Since Q3 07 the company reduced the total number of shares outstanding by over 20 million net, or by over 5%.

• Brocade’s non-GAAP effective tax-rate was 32.3% in Q3, and its GAAP tax rate was 61.1%.

	Q3 2008			Q2 2008			Q3 2007
Revenue	$	365.7	M	$	354.9	M	$	327.5	M
GAAP net income	$	20.3	M	$	91.4	M	$	10.7	M
GAAP EPS — diluted	$	0.05		$	0.23		$	0.03
Non-GAAP net income	$	61.2	M	$	59.7	M	$	49.5	M
Non-GAAP EPS — diluted	$	0.16		$	0.15		$	0.12
Non-GAAP gross margin		61.9	%		61.1	%		55.0	%
Non-GAAP operating margin		22.6	%		22.9	%		19.2	%
Cash flow from operations	$	71.7	M	$	119.1	M	$	36.3	M
Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

As a % of total revenues	Q3 2008			Q2 2008			Q3 2007
OEM revenues		86	%		86	%		84	%
Channel/Direct revenues		14	%		14	%		16	%
10% or greater customer revenues (3)		62	%		65	%		64	%
Domestic revenues		65	%		62	%		58	%
International revenues1		35	%		38	%		42	%
Service revenues		17	%		17	%		14	%

	Q3 2008			Q2 2008			Q3 2007
Cash and cash equivalents and investments, net of convertible debt	$	595.1	M	$	627.9	M	$	639.2	M
Deferred revenues	$	148.5	M	$	140.9	M	$	128.8	M
Capital expenditures2	$	94.2	M	$	14.1	M	$	14.0	M
Stock repurchases (in dollars)	$	38.1	M	$	50.2	M	$	60.2	M
Stock repurchases (in shares)		4.7	M		6.9	M		6.9	M
Days sales outstanding	43 days			43 days			45 days
Employees at end of period		2,842			2,759			2,376

(1)	Ratio on a demand-basis was 40% for domestic and 60% for international
(2)	In Q3, capital expenditures included approximately $80.2 million related to the construction of the company’s new campus

Page 2 of 10

Non-GAAP Financial Measures

This press release and the related conference call contain non-GAAP financial measures. In evaluating the Company’s performance, management uses certain non-GAAP financial measures to supplement consolidated financial statements prepared under GAAP.

Management believes that non-GAAP net income and other non-GAAP measures used in this press release allow management to gain a better understanding of the Company’s comparative operating performance from period-to-period and to its competitors’ operating results. Management also believes these non-GAAP measures help indicate the Company’s baseline performance before gains, losses or charges that are considered by management to be outside ongoing operating results. Accordingly, management uses these non-GAAP measures for planning and forecasting of future periods and in making decisions regarding operations performance and the allocation of resources. Management believes these non-GAAP earnings measures, when read in conjunction with the Company’s GAAP financials, provide useful information to investors by offering:

• the ability to make more meaningful period-to-period comparisons of the Company’s ongoing operating results;

• the ability to better identify trends in the Company’s underlying business and perform related trend analysis;

• a better understanding of how management plans and measures the Company’s underlying business; and

• an easier way to compare the Company’s most recent results of operations against investor and analyst financial models.

Management excludes certain gains or losses and benefits or costs in determining non-GAAP net income that are the result of infrequent events or arise outside the ordinary course of our continuing operations. Management believes that it is appropriate to evaluate the Company’s operating performance by excluding those items that are not indicative of ongoing operating results or limit comparability. Such items include: (i) legal fees associated with indemnification obligations to former employees and other related costs, net, (ii) acquisition and integration costs (in connection with the McDATA acquisition), (iii) legal fees associated with certain pre-acquisition litigation (in connection with the McDATA acquisition), (iv) gain/loss on sale of investments, (v) provision for class action lawsuit, and (vi) gain on termination of interest rate swap.

Management also excludes the following non-cash charges in determining non-GAAP net income: (i) stock-based compensation, (ii) amortization of purchased intangible assets, and (iii) costs/benefits associated with facilities lease losses. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, management believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies. Further, management believes that excluding stock-based compensation expense allows for a more accurate comparison of our financial results to previous periods during which our equity-based awards were not required to be reflected on our income statement. Management believes that the expense associated with the amortization of acquisition-related intangible assets is appropriate to be excluded because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for the Company’s newly acquired and long-held businesses.

Finally, management believes that it is appropriate to exclude the tax effects of the items noted above as well as the release of the valuation allowance in order to present a more meaningful measure of non-GAAP net income.

Limitations. These non-GAAP measures have limitations, however, because they do not include all items of income and expense that impact the Company. Management compensates for these limitations by also considering the Company’s GAAP results. The non-GAAP financial measures the Company uses are not prepared in accordance with, and should not be considered an alternative to, measurements required by GAAP, such as operating income, net income and net income per share, and should not be considered

Page 3 of 10

measures of the Company’s liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measures reported by other companies.

Third Quarter Fiscal 2008 Conference Call and Webcast Information

Brocade management will host a conference call to discuss third quarter 2008 results on Wednesday, August 13, 2008 at 5:00 a.m. Pacific Time. To access the live webcast, please visit Brocade’s website at http://www.brcd.com at least 20 minutes prior to the call to download any necessary audio or plug-in software. A telephone replay will be available approximately two hours after the conference ends and will be available until 8:00 a.m. Pacific Time on August 20, 2008. A replay of the conference call will be available via the webcast at http://www.brcd.com for approximately twelve months.

Cautionary Statement

This press release contains statements that are forward-looking in nature, including statements regarding market dynamics, customer demand for the Company’s product and service offerings and the proposed acquisition of Foundry Networks, Inc. These statements are based on current expectations on the date of this press release and involve a number of risks and uncertainties which may cause actual results to differ significantly from such estimates. The risks include, but are not limited to, the degree of market adoption of the Company’s product and service offerings; market competition; the effect of changes in IT spending levels; the Company’s ability to anticipate future OEM and end-user product needs and to accurately forecast end-user demand; dependence on strategic partners; our ability to realize anticipated benefits from the proposed acquisition of Foundry Networks; and the Company’s ability to manage its business effectively in a rapidly evolving market. Certain of these and other risks are set forth in more detail in “Item 1A. Risk Factors” in Brocade’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 26, 2008. Brocade does not assume any obligation to update or revise any such forward-looking statements, whether as the result of new developments or otherwise.

About Brocade

Brocade is the leading provider of data center networking solutions that help enterprises connect and manage their information. Organizations that use Brocade products and services are better able to optimize their IT infrastructures and ensure compliant data management. For more information, visit the Brocade Website at http://www.brocade.com or contact the company at info@brocade.com.

Brocade, the B-wing symbol, DCX, Fabric OS, File Lifecycle Manager, MyView, and StorageX are registered trademarks, and DCFM and SAN Health are trademarks of Brocade Communications Systems, Inc., in the United States and/or in other countries. All other brands, products, or service names are or may be trademarks or service marks of, and are used to identify, products or services of their respective owners.

# # #

Page 4 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

	Three Months Ended						Nine Months Ended
	July 26,			July 28,			July 26,			July 28,
	2008			2007			2008			2007
Net revenues
Product	$	301,804		$	282,855		$	895,333		$	790,509
Services		63,892			44,600			173,107			106,370
Total net revenues		365,696			327,455			1,068,440			896,879
Cost of revenues
Product		111,072			131,862			345,476			345,153
Services		41,419			29,805			107,728			73,724
Total cost of revenues		152,491			161,667			453,204			418,877
Gross margin		213,205			165,788			615,236			478,002
Operating expenses:
Research and development		65,368			54,085			184,704			154,780
Sales and marketing		70,039			57,200			203,200			155,150
General and administrative		17,577			12,536			43,260			33,511
Legal fees associated with indemnification obligations and other related costs, net		7,951			17,984			22,399			38,446
Provision for class action lawsuit		—			—			160,000			—
Acquisition and integration costs		—			4,055			—			19,051
Amortization of intangible assets		7,846			7,924			23,664			16,810
Facilities lease losses (benefits)		—			—			(477	)		—
Total operating expenses		168,781			153,784			636,750			417,748
Income (loss) from operations		44,424			12,004			(21,514	)		60,254
Interest and other income, net		8,872			10,913			27,663			29,157
Interest expense		(1,103	)		(2,683	)		(4,384	)		(4,741	)
Gain (loss) on investments, net		(36	)		1,240			(6,985	)		1,240
Income (loss) before provision for income taxes		52,157			21,474			(5,220	)		85,910
Income tax provision (benefit)		31,891			10,784			(136,709	)		41,058
Net income	$	20,266		$	10,690		$	131,489		$	44,852
Net income per share — Basic	$	0.05		$	0.03		$	0.35		$	0.13
Net income per share — Diluted	$	0.05		$	0.03		$	0.34		$	0.12
Shares used in per share calculation — Basic		371,345			392,450			376,455			353,627
Shares used in per share calculation — Diluted		392,586			407,113			396,445			368,080

Page 5 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

	July 26,			October 27,
	2008			2007
Assets
Current assets:
Cash and cash equivalents	$	459,399		$	315,755
Short-term investments		244,922			325,846
Total cash, cash equivalents and short-term investments		704,321			641,601
Marketable equity securities		—			14,205
Accounts receivable, net		174,103			175,755
Inventories		14,369			18,017
Deferred tax assets		73,100			22,781
Prepaid expenses and other current assets		75,091			39,841
Total current assets		1,040,984			912,200
Long-term investments		59,906			137,524
Property and equipment, net		300,116			204,052
Goodwill		280,347			384,376
Intangible assets, net		237,167			272,652
Non-current deferred tax assets		200,715			167
Other assets		19,064			19,129
Total assets	$	2,138,299		$	1,930,100
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	109,886		$	108,810
Accrued employee compensation		72,762			76,017
Deferred revenue		110,698			94,533
Current liabilities associated with facilities lease losses		13,930			12,807
Liability associated with class action lawsuit		160,000			—
Purchase commitments		20,459			23,176
Other accrued liabilities		54,651			94,358
Total current liabilities		542,386			409,701
Convertible subordinated debt		169,119			167,498
Non-current liabilities associated with facilities lease losses		16,929			25,742
Non-current liabilities — deferred taxes		—			22,781
Non-current deferred revenue		37,850			36,344
Non-current income tax liability		55,971			—
Other non-current liabilities		9,350			1,376
Stockholders’ equity
Common stock		1,370,331			1,463,169
Accumulated other comprehensive loss		(2,874	)		(1,180	)
Accumulated deficit		(60,763	)		(195,331	)
Total stockholders’ equity		1,306,694			1,266,658
Total liabilities and stockholders’ equity	$	2,138,299		$	1,930,100

Page 6 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended JULY 26, 2008 and JULY 28, 2007
(in thousands)
(unaudited)

	Three Months Ended
	July 26,			July 28,
	2008			2007
Cash flows from operating activities:
Net income	$	20,266		$	10,690
Adjustments to reconcile net income to net cash provided by operating activities:
Excess tax benefit from employee stock plans		(3,589	)		(8,959	)
Depreciation and amortization		30,121			28,758
Loss on disposal of property and equipment		133			609
Net losses on investments and marketable equity securities		41			—
Non-cash compensation expense		11,874			9,714
Provision for doubtful accounts receivable and sales allowances		1,605			1,453
Changes in assets and liabilities:
Accounts receivable		(7,828	)		(12,381	)
Inventories		(1,951	)		4,636
Prepaid expenses and other assets		(7,137	)		6,920
Accounts payable		17,988			53,453
Accrued employee compensation		(6,123	)		(15,429	)
Deferred revenue		7,683			2,828
Other accrued liabilities		10,940			(43,137	)
Liabilities associated with facilities lease losses		(2,372	)		(2,866	)
Net cash provided by operating activities		71,651			36,289
Cash flows from investing activities:
Purchases of property and equipment		(94,218	)		(13,939	)
Purchases of short-term investments		(65,388	)		(106,973	)
Proceeds from sale of property and equipment		—			1,336
Proceeds from maturities and sale of short-term investments		42,393			210,326
Purchases of long-term investments		—			(60,801	)
Proceeds from maturities and sale of long-term investments		—			5,015
Purchases of non-marketable minority equity investments		—			(5,000	)
Decrease in restricted cash		—			6,583
Net cash provided by (used in) investing activities		(117,213	)		36,547
Cash flows from financing activities:
Payments on capital lease obligations		—			(5	)
Termination of interest rate swap		—			(4,989	)
Common stock repurchases		(38,112	)		(81,009	)
Excess tax benefit from employee stock plans		3,589			8,959
Proceeds from issuance of common stock, net		27,103			14,970
Net cash used in financing activities		(7,420	)		(62,074	)
Effect of exchange rate fluctuations on cash and cash equivalents		(1,152	)		(192	)
Net decrease in cash and cash equivalents		(54,134	)		10,570
Cash and cash equivalents, beginning of period		513,533			363,838
Cash and cash equivalents, end of period	$	459,399		$	374,408

Page 7 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.
GAAP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended JULY 26, 2008 and JULY 28, 2007
(in thousands)
(unaudited)

	Nine Months Ended
	July 26,			July 28,
	2008			2007
Cash flows from operating activities:
Net income	$	131,489		$	44,852
Adjustments to reconcile net income to net cash provided by operating activities:
Release of valuation allowance		(185,176	)		—
Excess tax benefit from employee stock plans		(2,505	)		(9,120	)
Depreciation and amortization		89,645			69,560
Loss on disposal of property and equipment		1,328			812
Net losses on investments and marketable equity securities		6,488			—
Non-cash compensation expense		31,521			24,443
Non-cash facilities lease loss benefit		(477	)		—
Provision for doubtful accounts receivable and sales allowances		4,914			3,115
Changes in assets and liabilities:
Accounts receivable		3,758			41,354
Inventories		3,648			51
Prepaid expenses and other assets		(28,840	)		(2,077	)
Accounts payable		1,196			32,515
Accrued employee compensation		(3,526	)		(37,701	)
Deferred revenue		17,671			15,101
Other accrued liabilities		46,003			(61,522	)
Liabilities associated with facilities lease losses		(7,213	)		(5,519	)
Liability associated with class action lawsuit		160,000			—
Net cash provided by operating activities		269,924			115,864
Cash flows from investing activities:
Purchases of property and equipment		(125,468	)		(41,526	)
Purchases of short-term investments		(166,963	)		(397,863	)
Proceeds from sale of property and equipment		—			1,336
Proceeds from sale of marketable equity securities and equity investments		9,926			—
Proceeds from maturities and sale of short-term investments		340,838			588,159
Purchases of long-term investments		(37,731	)		(152,602	)
Proceeds from maturities and sale of long-term investments		22,483			10,862
Purchases of non-marketable minority equity investments		—			(5,000	)
Cash paid in connection with acquisitions, net of cash acquired		(43,554	)		(7,704	)
Decrease in restricted cash		—			12,422
Cash acquired on merger with McDATA		—			147,407
Net cash provided by (used in) investing activities		(469	)		155,491
Cash flows from financing activities:
Payments on capital lease obligations		—			(712	)
Common stock repurchases		(168,293	)		(140,883	)
Termination of interest rate swap		—			(4,989	)
Excess tax benefit from employee stock plans		2,505			9,120
Redemption of outstanding convertible debt		—			(124,185	)
Proceeds from issuance of common stock, net		41,803			90,670
Net cash used in financing activities		(123,985	)		(170,979	)
Effect of exchange rate fluctuations on cash and cash equivalents		(1,826	)		(336	)
Net increase in cash and cash equivalents		143,644			100,040
Cash and cash equivalents, beginning of period		315,755			274,368
Cash and cash equivalents, end of period	$	459,399		$	374,408

Page 8 of 10

BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(in thousands, except per share data)
(unaudited)

	Three Months Ended
	July 26,		April 26,			July 28,
	2008		2008			2007
Net income on a GAAP basis	$	20,266	$	91,378		$	10,690
Adjustments:
Stock-based compensation expense included in cost of revenues		2,638		2,371			3,128
Amortization of intangible assets expense included in cost of revenues		8,780		8,512			11,328
Legal fees associated with certain pre-acquisition litigation		1,860		458			—
Total gross margin adjustments		13,278		11,341			14,456
Legal fees associated with indemnification obligations and other related costs, net		7,951		4,789			17,984
Provision for class action lawsuit		—		160,000			—
Stock-based compensation expense included in research and development		2,788		2,528			2,992
Stock-based compensation expense included in sales and marketing		3,195		3,146			2,453
Stock-based compensation expense included in general and administrative		3,253		3,131			1,139
Amortization of intangible assets expense included in operating expenses		7,846		7,909			7,924
Acquisition and integration costs		—		—			4,055
Facilities lease losses (benefits)		—		(477	)		—
Total operating expense adjustments		25,033		181,026			36,547
Total operating income adjustments		38,311		192,367			51,003
Gain on termination of interest rate swap		—		—			(367	)
(Gain) loss on investments		—		4,189			(895	)
Income tax effect of adjustments		2,643		(228,248	)		(10,937	)
Non-GAAP net income	$	61,220	$	59,686		$	49,494
Non-GAAP net income per share — Basic	$	0.16	$	0.16		$	0.13
Non-GAAP net income per share — Diluted	$	0.16	$	0.15		$	0.12
Shares used in non-GAAP per share calculation — Basic		371,345		374,827			392,450
Shares used in non-GAAP per share calculation — Diluted		392,586		393,471			407,113

See explanation of non-GAAP information included herein.

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BROCADE COMMUNICATIONS SYSTEMS, INC.
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(in thousands, except per share data)
(unaudited)

	Nine Months Ended
	July 26,			July 28,
	2008			2007
Net income on a GAAP basis	$	131,489		$	44,852
Adjustments:
Stock-based compensation expense included in cost of revenues		7,501			6,805
Amortization of intangible assets expense included in cost of revenues		28,620			22,656
Legal fees associated with certain pre-acquisition litigation		2,319			—
Total gross margin adjustments		38,440			29,461
Legal fees associated with indemnification obligations and other related costs, net		22,399			38,446
Provision for class action lawsuit		160,000			—
Stock-based compensation expense included in research and development		7,939			7,046
Stock-based compensation expense included in sales and marketing		8,327			5,521
Stock-based compensation expense included in general and administrative		7,755			2,736
Amortization of intangible assets expense included in operating expenses		23,664			16,810
Acquisition and integration costs		—			19,051
Facilities lease losses (benefits)		(477	)		—
Total operating expense adjustments		229,607			89,610
Total operating income adjustments		268,047			119,071
Gain on termination of interest rate swap		—			(367	)
(Gain) loss on investments		6,004			(895	)
Income tax effect of adjustments		(220,399	)		(17,123	)
Non-GAAP net income	$	185,141		$	145,538
Non-GAAP net income per share — Basic	$	0.49		$	0.41
Non-GAAP net income per share — Diluted	$	0.47		$	0.40
Shares used in non-GAAP per share calculation — Basic		376,455			353,627
Shares used in non-GAAP per share calculation — Diluted		396,445			368,080

See explanation of non-GAAP information included herein.

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