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Brocade to Restate

Brocade Communications Systems Inc. (Nasdaq: BRCD) must redo financial statements containing year-end summations of its fiscal 2002 and 2003 to reflect some faulty reporting of stock-based employee compensation (see Brocade to Restate Financials).

The company apparently recorded stock option charges for employees too soon between May 1999 and July 2000, recording the compensation when the workers accepted the job offer instead of waiting until their first hire date. Also, charges for stock awarded to part-time employees who later went full time between August 2000 and October 2002 probably shouldn't have been recorded until those employees began full-time work.

Brocade says the restatement should not mean any "material adjustments to its historical revenues, non-stock option related operating expenses or cash positions." But a spokeswoman concedes the review is still ongoing, so nothing is written in stone.

Still, analysts seem confident there's no big surprise in store. The adjustments will not affect non-GAAP reports, which many investors rely on, according to Steve Berg, analyst at Punk Ziegel & Co. He thinks this looks like a problem discovered when Brocade attempted to conform to new FASB laws about stock compensation reporting. In other words, an honest mistake with little potential impact.

"There are egregious errors and there are not so egregious ones," he says. "Obviously, people hear 'restatement' and take notice, and they should, but it ... wasn't malicious and based on their description will affect only stock compensation."

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