Brocade Communications (BRCD) named Michael Klayko chief executive and said an internal review would result in restating net income over several fiscal years.

Greg Reyes, chairman and CEO since 1998, remains as a director and will serve as an adviser to the board and the new CEO, focusing on customer and strategic matters.

Prior to his appointment, Klayko was Brocade's vice president of worldwide sales for nearly one year. He joined Brocade in January 2003, when the company acquired Rhapsody Networks, where Klayko was CEO and president.

The company also named Dave House executive chairman of the board and said L. William Krause would be named lead outside director.

Brocade said as a result of its audit committee's review it expects to record additional noncash stock-based compensation charges. Brocade anticipates that it will record a valuation allowance associated with deferred tax assets related to previously recorded stock option tax benefits.

As the company announced Jan. 6, it determined that it incorrectly accounted for stock-based grants 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 grants made to part-time employees prior to their new hire full-time employment during the period August 2000 to October 2002.

In addition, the audit committee 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.

The company estimated that its fiscal 2002 net income would be boosted by $66 million, while its losses in fiscal 2003 and fiscal 2004 would be widened by $11 million and $30 million, respectively.

For the three fiscal years prior to 2002, the company will reduce net income by a total of $304 million.

Brocade said none of the adjustments affect historical revenues, cash positions, or non-stock option related operating expenses. The company emphasized that its core business remains strong and the financial restatement doesn't 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.

Shares of Brocade edged up 3 cents in after-hours trading to $6.17.

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