##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
 For the fiscal year ended December 31, 2006
 Commission file number:
    000-26689
 FOUNDRY NETWORKS,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Delaware

77-0431154(State or jurisdiction of
    incorporation or organization)

(I.R.S. Employer
    Identification Number)   4980 Great America Parkway
 Santa Clara, CA 95054
 Website: www.foundrynetworks.com
 (Address of principal executive
    offices, including zip code)
  Registrants telephone number, including area code:
 (408) 207-1700
   Securities registered pursuant
    to Section 12(b) of the Act:Common Stock, $0.0001 par value

Nasdaq Stock Market, LLC(Title of each class)

(Name of each exchange on which
    registered)   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  þ o o
  Rule 12b-2 o þ




---



##### 



FOUNDRY
    NETWORKS, INC.
  TABLE OF CONTENTS
  PageExplanatory
    Note


2PART IItem 1.

Business


3Item 1A.

Risk
    Factors


11Item 1B.

Unresolved Staff
    Comments


24Item 2.

Properties


25Item 3.

Legal
    Proceedings


25Item 4.

Submission of
    Matters to a Vote of Security Holders


29PART IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder Matters,
    and Issuer
    Purchases of Equity Securities


29Item 6.

Selected
    Consolidated Financial Data


30Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


36Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


56Item 8.

Financial
    Statements and Supplementary Data


58Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


109Item 9A.

Controls and
    Procedures


109Item 9B.

Other
    Information


112PART IIIItem 10.

Directors,
    Executive Officers and Corporate Governance


113Item 11.

Executive
    Compensation


116Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


127Item 13.

Certain
    Relationships and Related Transactions, and Director
    Independence


130Item 14.

Principal
    Accounting Fees and Services


130PART IVItem 15.

Exhibits and
    Financial Statement Schedules


131SIGNATURES


134EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   1




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##### Table of Contents



Form 10-K we us or
    Foundry Form 10-Q
 Explanatory
    Note    Form 10-K.
  Form 10-K,
    Form 10-K, Form 10-Q Form 8-K Form 10-K, Form 10-Q, Form 8-K
 2




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##### Table of Contents



PART I  Item 1.
    Business.  Overview
  2-7 end-to-end
  e-commerce, end-to-end ® ® ® ® tm tm ® ® tm 10/100/1000 ® ®
  Market
    Trends and Business Drivers
     3




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##### Table of Contents




    Convergence
    Mobility
    Security  Convergence 4-7 4-7
  Mobility
  Security
  Strategy
    Continue to Deliver Products that Meet the Needs of the
    High-End Switching Market.
    
    10-Gigabit
    Ethernet  Our 10GbE solutions have achieved
    commercial success in the marketplace. Our 10GbE customers
    include healthcare, government, research, university, and media
    organizations. As the 4




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##### Table of Contents



boundaries of LANs, MANs and WANs continue to blur, companies
    will want to unify networks at a lower cost, with few management
    and operational requirements. 10GbE addresses the key concerns
    facing businesses today  the continued need for
    additional bandwidth while building a reliable network.
    Foundrys new 10GbE offerings include the EdgeIron product
    family, FastIron Edge and X Series, FastIron SuperX Series,
    BigIron RX, ServerIron, NetIron XMR Series and NetIron MLX
    Series. The FastIron SuperX family of modular switches began
    shipping in 2006 and gained rapid acceptance as an edge
    aggregation switch for both the traditional enterprise and VoIP
    market segments. The BigIron RX modular switch began shipment in
    July 2005 and delivered strong growth as an enterprise core
    router, high performance computing core switch, and as a data
    center and infrastructure router for service providers. The
    NetIron XMR Series and NetIron MLX Series were delivered for
    beta testing by service provider customers in the fourth quarter
    of 2005. The introduction of these products is central to our
    strategy of offering high performance Layer 2/3 10 GbE
    capable switches from the enterprise edge to the Internet core.  
    Mobility  Our
    IronPointtm
    family of wireless products delivers a complete solution for
    enterprises of all sizes. This comprehensive wireless product
    family has been designed to meet current  and
    future  mobility requirements and support a diverse
    set of environments. The IronPoint Mobility Series of
    controllers and access points is designed to deliver
    best-in-class
    converged wireless performance in high-density environments. For
    iron-tight security, the IronPoint Wireless Location Manager is
    designed to protect enterprise networks from wireless security
    threats, such as rogue access points and unauthorized users, by
    delivering real-time, location mapping of all wireless devices.
    The feature-rich IronPoint 200 Access Point is a cost-effective
    solution that allows enterprise networks to quickly and easily
    enable safe and secure wireless access. The IronPoint 200 Access
    Point can also be connected to the
    IronPoint-FES
    Wireless Switch for enhanced management, mobility and security.
    Voice-over-IP
    (VoIP)  An increasing number of enterprises are
    migrating to converged environments in which voice, video, and
    data are carried by the same network to take advantage of
    valuable business benefits such as reduced costs and increased
    productivity. A converged network needs a network foundation
    that provides superior performance, high availability and
    secure, guaranteed voice quality. We deliver high-performance
    networking products in our FastIron Layer 2/3 enterprise
    switches and the tools necessary to configure and optimize a
    converged environment with our IronView Network Manager system.
    Our adherence to industry and international standards has been
    validated by our customers who have successfully used a wide
    variety of IP phones from industry
    best-of-breed
    providers such as Avaya Inc., Cisco Systems, Inc., Mitel
    Networks Corp., Nortel Networks, Shoretel Inc., and Siemens AG.
    In 2005, we delivered the new chassis-based FastIron SuperX and
    the stackable FastIron Edge switch, each with support for both
    legacy and industry standard 802.3af power over Ethernet,
    automated Quality of Service (QoS), redundant & hot
    swappable power supplies, wireless mobility, and a range of VoIP
    security features. These provide customers the technology needed
    to power new devices such as IP phones, optimize network
    performance, and manage network resources. We intend to further
    develop and expand our networking and management offerings for
    converged environments so that customers will have more options
    for efficiencies and productivity.
    Security  As networking has become an
    essential part of nearly all businesses, agencies, and
    organizations, security has become an integral part of designing
    and deploying todays networks and data centers.
    Organizations increasingly rely on IP networks to deliver
    applications that are critical to business productivity and
    profits. Securing this infrastructure against debilitating
    attacks from malicious users is necessary to ensure sustained
    business operations. Mobility, convergence, and Web-centric
    applications are rendering centralized security models
    ineffective. Today, organizations require distributed,
    network-wide, security architectures to protect against threats
    from outside the network and to minimize vulnerabilities inside
    the network. Furthermore, the line between Internet and intranet
    is fading fast as users become more mobile and less
    identifiable. In such an open infrastructure, the threats are
    not concentrated at a single entry point at the network
    perimeter, but are network wide. Attacks are also becoming more
    sophisticated and exploiting application-level vulnerabilities
    to cripple critical IP services.  tm
 5




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L2-4 Denial-of-Service
  tm
  
    Internet Protocol version 6 (IPv6)  Although
    interest in and adoption of IPv6 is gaining momentum in
    international markets, we believe the widespread adoption of
    IPv6 in the U.S. commercial sector is likely to take
    several years. However, the U.S. federal government has
    made IPv6 a requirement for its installations. We deliver
    products that meet the requirements of IPv6 using a phased
    approach. In 2006, we delivered new IPv6 interface modules for
    the BigIron RX Series, NetIron MLX Series and NetIron XMR
    Series. We intend to further develop and deliver IPv6 solutions.  Continue to Expand our Metro Router Capabilities to
    Address this Market and Deliver a New Level of
    Price/Performance. state-of-the-art
  Continue to Leverage our Product Capabilities to Address
    Emerging Markets. non-networking
  Continue to Deliver High-Performance Application Traffic
    Management Systems.
  Expand Global Sales Organization.
 6




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Deliver World Class Service and
    Support. on-site 24-hour, days-a-week
  Sales and
    Marketing
    Domestic field sales.
  Domestic resellers.
  International sales.
  OEM/Co-Branding. OEM/co-branding
  Marketing programs.
  Customer
    Service and Support
  24-hour
  90-day on-site
 7




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Centers-of-Excellence Centers-of-Excellence Centers-of-Excellence hands-on end-to-end
  Significant
    Customers
      Manufacturing
  burn-in
  Sanmina-SCI Sanmina-SCI back-up
   8




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in-circuit burn-in
    Research
    and Development
      Competition
      Alcatel-Lucent,
 9




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Seasonality
    Backlog
    Intellectual
    Property
       10




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Employees
    Item 1A.
    Risk
    Factors.  The
    matters relating to our Special Committee investigation into our
    stock option granting practices and the restatement of our
    financial statements have exposed us to civil litigation claims,
    regulatory proceedings and government proceedings which could
    burden Foundry and have a material adverse effect on
    us.
    and/or
  We have
    not been in compliance with The Nasdaq Stock Markets
    continued listing requirements and remain subject to the risk of
    our stock being delisted from The Nasdaq Global Select Market,
    which would have a material adverse effect on us and our
    stockholders.
  Form 10-Q Form 10-K Form 10-Q
 11




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The
    process of restating our financial statements, making the
    associated disclosures, and complying with SEC requirements are
    subject to uncertainty and evolving requirements.
    A number
    of our current and former executive officers and directors have
    been named as parties to several derivative action lawsuits
    arising from our internal option review, and there is a
    possibility of additional lawsuits, all of which could require
    significant management time and attention and result in
    significant legal expenses.
    Ongoing
    government inquiries relating to our past stock option practices
    may be time consuming and expensive and could result in
    injunctions, fines and penalties that may have a material
    adverse effect on our financial condition and results of
    operations.
    Intense
    competition in the market for networking solutions could prevent
    us from maintaining or increasing revenue and sustaining
    profitability.
   12




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Alcatel-Lucent.
    We must
    continue to introduce new products with superior performance and
    features in a timely manner in order to sustain and increase our
    revenue, and if we fail to predict and respond to emerging
    technological trends and customers changing needs, our
    operating results may suffer.
      We depend
    on large, recurring purchases from certain significant
    customers, and a loss, cancellation or delay in purchases by
    these customers could negatively affect our revenue.
   13




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
    our reseller agreements generally do not require minimum
    purchases;
    our customers can stop purchasing and our resellers can stop
    marketing our products at any time; and
    our reseller agreements generally are not exclusive and are for
    one-year terms, with no obligation of the resellers to renew the
    agreements.    The
    United States government is a significant customer and has been
    one key to our financial success. However, government demand is
    unpredictable and there is no guarantee of future contract
    awards.
    We may be
    subject to litigation risks and intellectual property
    infringement claims that are costly to defend and could limit
    our ability to use certain technologies in the future.
    Additionally, we may be found to infringe on intellectual
    property rights of others.
   14




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If we
    fail to protect our intellectual property, our business and
    ability to compete could suffer.
      Our
    ability to increase our revenue depends on expanding our direct
    sales operations and reseller distribution channels and
    providing excellent customer support.
     15




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We are
    required to expense equity compensation given to our employees,
    which has reduced our reported earnings, will significantly
    impact our operating results in future periods and may reduce
    our stock price and our ability to effectively utilize equity
    compensation to attract and retain employees.
    Because
    our financial results are difficult to predict and may fluctuate
    significantly, we may not meet quarterly financial expectations,
    which could cause our stock price to decline.
           16




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period-to-period
  We
    purchase several key components for our products from sole
    sources; if these components are not available, our revenue may
    be adversely affected.
        Our
    reliance on third-party manufacturing vendors to manufacture our
    products may cause a delay in our ability to fill
    orders.
     17




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Our gross
    margins and average selling prices of our products have
    decreased in the past and may continue to decrease as a result
    of competitive pressures and other factors.
      Weak
    economic and market conditions or geopolitical turmoil may
    adversely affect our revenue, gross margins and
    expenses.
    We need
    additional qualified personnel to maintain and expand our
    business. If we are unable to promptly attract and retain
    qualified personnel, our business may be harmed.
   18




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Our
    operations in international markets involve inherent risks that
    we may not be able to control. As a result, our business may be
    harmed if we are unable to successfully address these
    risks.
    
    seasonal reductions in business activity;
    potential recessions in economies outside the United States;
    adverse fluctuations in currency exchange rates;
    difficulties in managing operations across disparate geographic
    areas;
    export restrictions;
    unexpected changes in regulatory requirements;
    higher costs of doing business in foreign countries;
    longer accounts receivable collection cycles;
    potential adverse tax consequences;
    difficulties associated with enforcing agreements through
    foreign legal systems;
    infringement claims on foreign patents, copyrights, or trademark
    rights.
    natural disasters and widespread medical epidemics;
    military conflict and terrorist activities; and
    political instability.     19




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Due to
    the lengthy sales cycles of some of our products, the timing of
    our revenue is difficult to predict and may cause us to fail to
    meet our revenue expectations.
    As a
    result of our delayed filing of our periodic SEC reports, our
    inability to maintain our
    Form S-3
    eligibility may adversely affect our ability to raise future
    capital or complete acquisitions.
  Form S-3 Form S-1
  If we do
    not adequately manage and evolve our financial reporting and
    managerial systems and processes, our ability to manage and grow
    our business may be harmed.
    We had a
    material weakness in internal control over financial reporting
    in the past and cannot assure you that additional material
    weaknesses will not be identified in the future. If our internal
    control over financial reporting or disclosure controls and
    procedures are not effective, there may be errors in our
    financial statements that could require a restatement or our
    filings may not be timely and investors may lose confidence in
    our reported financial information, which could lead to a
    decline in our stock price.
  Form 10-K.
     20




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The
    timing of the adoption of industry standards may negatively
    affect widespread market acceptance of our products.
    If our
    products do not interoperate with our customers networks,
    installations will be delayed or cancelled and could harm our
    business.
   21




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If our
    products contain undetected software or hardware errors, we
    could incur significant unexpected expenses and lost sales and
    be subject to product liability claims.
    
    negative customer reactions;
    product liability claims;
    negative publicity regarding us and our products;
    delays in or loss of market acceptance of our products;
    product returns;
    lost sales; and
    unexpected expenses to remedy defects or errors.  We may
    incur liabilities that are not subject to maximum loss
    clauses.
    Our
    products may not continue to comply with the regulations
    governing their sale, which may harm our business.
   22




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We may
    engage in acquisitions that could result in the dilution of our
    stockholders, disrupt our operations, cause us to incur
    substantial expenses and harm our business if we cannot
    successfully integrate the acquired business, products,
    technologies or personnel.
    
    difficulties in the assimilation of products, operations,
    personnel and technologies of the acquired companies;
    diversion of managements attention from other business
    concerns;
    disruptions to our operations, including potential difficulties
    in completing ongoing projects in a timely manner;
    risks of entering geographic and business markets in which we
    have no or limited prior experience; and
    potential loss of key employees of acquired organizations.    Our stock
    price has been volatile historically, which may make it more
    difficult to sell shares when needed at attractive
    prices.
    Anti-takeover
    provisions could make it more difficult for a third party to
    acquire us.
   23




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##### Table of Contents



Our
    operations could be significantly hindered by the occurrence of
    a natural disaster, terrorist acts or other catastrophic
    events.
    Item 1B.
    Unresolved
    Staff Comments.  10-K.
 24




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##### Table of Contents



Item 2.
    Properties.    Americas

EMEA

APACIrvine, California

London, England

Sydney, AustraliaDenver, Colorado

Paris, France

Beijing, ChinaAtlanta, Georgia

Munich, Germany

Shanghai, ChinaFort Lauderdale, Florida

Milan, Italy

Hong Kong, ChinaHonolulu, Hawaii

Amsterdam, Netherlands

Hyderabad, IndiaChicago, Illinois

Stockholm, Sweden

Tokyo, JapanBoston, Massachusetts

Dubai, United Arab Emirates

Auckland, New ZealandNew York City, New York



SingaporeDallas, Texas



Seoul, South KoreaHouston, Texas



Taipei, TaiwanHerndon, VirginiaTacoma, WashingtonSao Paulo, BrazilToronto, CanadaMexico City, Mexico     Item 3.
    Legal
    Proceedings.  Intellectual Property Proceedings.
     25




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Securities Litigation. In re Foundry Networks, Inc. Initial Public
    Offering Securities Litigation No. 01-CV-10640 related to In re Initial Public Offering
    Securities Litigation
   26




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##### Table of Contents



In re Initial Public Offering Securities
    Litigation
  Watkins v.
    Johnson, et al. No. 1-06-CV Rosenbaum v. Johnson, et al. No. 1-06 In re Foundry
    Networks, Inc. Derivative Litigation and/or
  Patel v. Akin, et al. No. 1-07-CV Patel Patel
  Desai v. Johnson, et al. No. C-06-05598 , McDonald v. Johnson, et al. Jackson v. Akin, et al. Edrington v. Johnson, Jr., et al. In re Foundry Networks, Inc. Derivative Litigation No. 5:06-CV-05598-RMW.
 27




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Edrington v. Johnson, Jr., et al.
  SEC Informal Inquiry.
  United States Attorneys Office Subpoena for Production
    of Documents.
   The Nasdaq Stock Market Proceedings,
    Docket #5181N-06. Form 10-Q Form 10-Q Form 10-K
          General.
 28




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##### Table of Contents



Accounting for Contingencies
    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder
    Matters, and Issuer Purchases of Equity
    Securities.  Price
    Range of Common Stock
    High


Low2006Fourth quarter

$
15.04


$
12.06Third quarter

$
13.43


$
9.07Second quarter

$
17.78


$
9.85First quarter

$
18.16


$
13.582005Fourth quarter

$
14.61


$
11.55Third quarter

$
12.70


$
8.56Second quarter

$
9.79


$
8.12First quarter

$
12.51


$
9.90  29




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##### Table of Contents



5-year 12/31/2001 12/31/2006.
  
  12/01


3/02


6/02


9/02


12/02


3/03


6/03


9/03


12/03


3/04


6/04


9/04


12/04


3/05


6/05


9/05


12/05


3/06


6/06


9/06


12/06Foundry Networks, Inc.


100



88



86



67



86



99



175



264



335



211



173



116



161



121



106



156



169



223



131



161



184NASDAQ Composite


100



97



78



63



72



70



86



95



107



107



109



102



117



108



111



117



121



131



122



125



137NASDAQ Computer Manufacturers


100



91



74



57



67



68



86



95



109



109



112



99



115



107



109



106



107



117



103



117



135   The stock price performance included in this graph is not
    necessarily indicative of future stock price performance.
  Dividend
    Policy
    Unregistered
    Securities Sold in 2006
    Issuer
    Purchases of Equity Securities
    Item 6.
    Selected
    Consolidated Financial Data.   30




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##### Table of Contents



1999-2005
    Summary
    of Stock Option Investigation Restatement
  Decrease(Increase) toPre-Tax


Income


Total


Capitalized in


RetainedFiscal Year

Adjustments


Tax Benefit(1)


Impact


Inventory(2)


Earnings1999

$
0.3


$
(1.4
)

$
(1.1
)

$



$
(1.1
)2000


38.0



(16.5
)


21.5







21.52001


52.3



(21.1
)


31.2







31.22002


24.1



(9.6
)


14.5



(0.3
)


14.22003


74.8



(30.1
)


44.7



(0.7
)


44.0Subtotal


189.5



(78.7
)


110.8



(1.0
)


109.82004


(17.1
)


6.1



(11.0
)


1.2



(9.8
)2005


4.7



(2.0
)


2.7



(0.2
)


2.5Total

$
177.1


$
(74.6
)

$
102.5


$



$
102.5     (1)
    
    Income Tax Benefit includes adjustments to reflect a previously
    unrecorded deferred tax benefit of approximately
    $3.6 million to our cheap stock compensation
    expense at the time of our initial public offering,
    $1.8 million of which is associated with amortization of
    cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation
    cost capitalized in inventory. They represent the net change to
    cost of product and service revenue by year based on the
    compensation cost incurred as a result of the restatement and
    the respective inventory turnover in each affected period. 31




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Year Ended December 31,Consolidated Statements of Income Data:

2006


2005


2004


2003


2002As


As


As


AsRestated(1)


Restated(1)


Restated(2)


Restated(2)(In millions, except share and per share amounts)Net revenue

$
473.3


$
403.9


$
409.1


$
399.6


$
300.7Cost of revenue


188.5



155.4



143.2



146.4



141.3Gross margin


284.8



248.5



265.9



253.2



159.4Operating expenses


256.3



186.5



186.6



215.3



156.1Income from operations


28.5



62.0



79.3



37.9



3.3Interest and other income, net


34.4



18.1



9.9



5.2



5.0Income before provision for income
    taxes and cumulative effect of change in accounting principle


62.9



80.1



89.2



43.1



8.3Provision for income taxes


24.7



26.5



31.4



12.0



Net income before cumulative
    effect of change in accounting principle


38.2



53.6



57.8



31.1



8.3Cumulative effect of change in
    accounting principle, net of taxes


0.5















Net income

$
38.7


$
53.6


$
57.8


$
31.1


$
8.3Basic net income per share

$
0.27


$
0.38


$
0.43


$
0.25


$
0.07Weighted-average shares used in
    computing basic net income per share (in thousands)


145,167



139,176



135,442



125,681



120,204Diluted net income per share (in
    thousands)

$
0.26


$
0.37


$
0.40


$
0.23


$
0.07Weighted-average shares used in
    computing diluted net income per share


150,509



143,974



143,363



137,476



123,630     (1)
    
    See Item 7, Managements Discussion and Analysis
    of Financial Condition and Results of Operations, and
    Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements of this
    Form 10-K.(2)
    
    The Selected Financial Data for 2003 and 2002 has been restated
    to reflect adjustments related to stock-based compensation
    expense and the associated tax impact. See table below for
    additional information related to the restatement of fiscal
    years December 31, 2003 and 2002.  Year Ended December 31,Consolidated Balance Sheet Data:

2006


2005


2004


2003


2002As


As


As


AsRestated(1)


Restated(2)


Restated(2)


Restated(2)(In millions)Cash, cash equivalents and
    investments

$
886.4


$
746.4


$
617.4


$
505.7


$
326.5Working Capital


735.3



617.7



536.3



443.2



404.1Total assets


1,095.4



941.0



830.5



691.7



467.1Long-term liabilities


23.9



21.8



17.6



7.7



Total stockholders equity


958.1



811.9



722.7



622.1



413.7  32




---



##### Table of Contents



(1)
    
    See Item 7, Managements Discussion and Analysis
    of Financial Condition and Results of Operations, and
    Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements of this
    Form 10-K.(2)
    
    The Selected Financial Data for 2004, 2003 and 2002 has been
    restated to reflect adjustments related to stock-based
    compensation expense and the associated tax impact. See table
    below for additional information related to the restatement of
    fiscal years ended December 31, 2004, 2003 and 2002.    December 31, 2005


December 31, 2004As





As


As





AsConsolidated Statements of Income Data

Reported


Adjustments


Restated


Reported


Adjustments


Restated(In millions, except share and per share amounts)Net revenue

$
403.9


$



$
403.9


$
409.1


$



$
409.1Cost of revenue


155.2



0.2



155.4



143.4



(0.2
)


143.2Gross margin


248.7



(0.2
)


248.5



265.7



0.2



265.9Operating expenses


182.2



4.3



186.5



202.3



(15.7
)


186.6Income from operations


66.5



(4.5
)


62.0



63.4



15.9



79.3Interest and other income, net


18.1







18.1



9.9







9.9Income before provision for income
    taxes


84.6



(4.5
)


80.1



73.3



15.9



89.2Provision for income taxes


28.5



(2.0
)


26.5



25.3



6.1



31.4Net income

$
56.1


$
(2.5
)

$
53.6


$
48.0


$
9.8


$
57.8Basic net income per share

$
0.40






$
0.38


$
0.35






$
0.43Weighted-average shares used in
    computing basic net income per share (in thousands)


139,176







139,176



135,445







135,442Diluted net income per share

$
0.39






$
0.37


$
0.34






$
0.40Weighted-average shares used in
    computing diluted net income per share (in thousands)


143,323







143,974



143,118







143,363   33




---



##### Table of Contents



December 31, 2003


December 31, 2002As





As


As





AsConsolidated Statements of Income Data

Reported


Adjustments


Restated


Reported


Adjustments


Restated(In millions, except share and per share amounts)Net revenue

$
399.6


$



$
399.6


$
300.7


$



$
300.7Cost of revenue


140.9



5.5



146.4



140.2



1.1



141.3Gross margin


258.7



(5.5
)


253.2



160.5



(1.1
)


159.4Operating expenses


146.7



68.6



215.3



133.4



22.7



156.1Income from operations


112.0



(74.1
)


37.9



27.1



(23.8
)


3.3Interest and other income, net


5.2







5.2



5.0







5.0Income before provision for income
    taxes


117.2



(74.1
)


43.1



32.1



(23.8
)


8.3Provision for income taxes


42.1



(30.1
)


12.0



9.6



(9.6
)


Net income

$
75.1


$
(44.0
)

$
31.1


$
22.5



(14.2
)

$
8.3Basic net income per share

$
0.60






$
0.25


$
0.19






$
0.07Weighted-average shares used in
    computing basic net income per share (in thousands)


125,133







125,681



119,482







120,204Diluted net income per share

$
0.55






$
0.23


$
0.18






$
0.07Weighted-average shares used in
    computing diluted net income per share (in thousands)


135,631







137,476



123,780







123,630   December 31, 2005As





AsConsolidated Balance Sheet Data

Reported


Adjustments


Restated(In millions)Cash, cash equivalents and
    investments

$
746.4


$



$
746.4Working capital


616.0



1.7



617.7Total assets


921.9



19.1



941.0Long-term liabilities


21.8







21.8Total stockholders equity


796.0



15.9



811.9   December 31, 2004As





AsConsolidated Balance Sheet Data

Reported


Adjustments


Restated(In millions)Cash, cash equivalents and
    investments

$
617.4


$



$
617.4Working capital


519.1



17.2



536.3Total assets


811.2



19.3



830.5Long-term liabilities


17.6







17.6Total stockholders equity


706.3



16.4



722.7   34




---



##### Table of Contents



December 31, 2003As





AsConsolidated Balance Sheet Data

Reported


Adjustments


Restated(In millions)Cash, cash equivalents and
    investments

$
505.7


$



$
505.7Working capital


430.0



13.2



443.2Total assets


658.1



33.6



691.7Long-term liabilities


7.7







7.7Total stockholders equity


590.5



31.6



622.1   December 31, 2002As





AsConsolidated Balance Sheet Data

Reported


Adjustments


Restated(In millions)Cash, cash equivalents and
    investments

$
326.5


$



$
326.5Working capital


390.5



13.6



404.1Total assets


451.5



15.6



467.1Long-term liabilities










Total stockholders equity


398.1



15.6



413.7   SFAS 123
    Disclosure
   35




---



##### Table of Contents



2005


2004(As restated)


(As restated)Net income

$
53.6


$
57.8Add:Stock-based employee compensation
    expense (benefit) included in net income, net of tax


2.9



(10.4
)Deduct:Compensation expense determined
    under fair value based method for all awards, net of tax (as
    reported)


(44.5
)


(35.4
)Incremental compensation expense
    determined under fair value based method resulting from
    correction of option grant dates


3.0



(4.0
)Incremental compensation expense
    determined under fair value based method resulting from
    correction of other accounting errors


(19.5
)


(21.9
)Pro forma net loss

$
(4.5
)

$
(13.9
)Basic earnings (loss) per share:As reported

$
0.38


$
0.43Pro forma

$
(0.03
)

$
(0.10
)Diluted earnings (loss) per share:As reported

$
0.37


$
0.40Pro forma

$
(0.03
)

$
(0.10
)   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  The following discussion and analysis of our financial
    condition and results of operations should be read together with
    our consolidated financial statements and related notes
    appearing elsewhere in this Annual Report on
    Form 10-K.
    This discussion and analysis contains forward-looking statements
    that involve risks, uncertainties and assumptions. Our actual
    results may differ materially from those anticipated in these
    forward-looking statements as a result of many factors,
    including, but not limited to, those discussed in
    Item 1A  Risk Factors. Readers are
    cautioned to not place undue reliance on these forward-looking
    statements, which reflect managements opinions only as of
    the date hereof. We undertake no obligation to revise or
    publicly release the results of any revision to these
    forward-looking statements. Readers should carefully review the
    risk factors described in this document as well as in other
    documents we file from time to time with the SEC. All public
    reports filed by us with the SEC are available free of charge on
    our website at www.foundrynetworks.com or from the SEC at
    www.sec.gov as soon as practicable after we file such reports
    with the SEC.
  Restatement
    of Previously-Issued Financial Statements
     36




---



##### Table of Contents



Form 10-K.
  Form 10-K,
    Form 10-K, Form 10-Q Form 8-K Form 10-K, Form 10-Q Form 8-K
  Background of Our Stock Option
    Investigation.
    Form 8-K
  Form 10-K.
 37




---



##### Table of Contents



Summary of Stock Option Investigation RestatementDecrease(Increase) toPre-Tax


Income Tax





Capitalized in


RetainedFiscal Year

Adjustments


Benefit(1)


Total Impact


Inventory(2)


Earnings1999

$
0.3


$
(1.4
)

$
(1.1
)

$



$
(1.1
)2000


38.0



(16.5
)


21.5







21.52001


52.3



(21.1
)


31.2







31.22002


24.1



(9.6
)


14.5



(0.3
)


14.22003


74.8



(30.1
)


44.7



(0.7
)


44.0Subtotal


189.5



(78.7
)


110.8



(1.0
)


109.82004


(17.1
)


6.1



(11.0
)


1.2



(9.8
)2005


4.7



(2.0
)


2.7



(0.2
)


2.5Total

$
177.1


$
(74.6
)

$
102.5


$



$
102.5     (1)
    
    Income Tax Benefit includes adjustments to reflect a previously
    unrecorded deferred tax benefit of approximately
    $3.6 million related to our cheap stock
    compensation expense at the time of our initial public offering,
    $1.8 million of which is associated with amortization of
    cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation
    cost capitalized in inventory. They represent the net change to
    cost of product and service revenue by year based on the
    compensation cost incurred as a result of the restatement and
    the respective inventory turnover in each affected period.  Findings of the Special Committee.
       38




---



##### Table of Contents



Impact of Judgments and Interpretations on Restatement
    Values.
         39




---



##### Table of Contents



(1) Director Grants 
      (2) End-of-Month Grants
 40




---



##### Table of Contents



(3) Employee Retention Grants 
   41




---



##### Table of Contents



(4) Officer Grants 
    e-mail
 42




---



##### Table of Contents



(5) CEO Grants
  Grant Modified by Tender Offer
       43




---



##### Table of Contents



1999


2000


2001


2002


2003


2004


2005


TotalDirector Grants

$



$



$



$
0.1


$
4.3


$
(2.2
)

$
0.1


$
2.3End-of-Month Grants


0.3



24.1



22.0



12.5



3.5







0.9



63.3Employee Retention Grants






10.4



22.9



8.7



13.1



7.9



2.8



65.8Officer Grants






3.5



7.0



2.1



16.7



(7.7
)


0.4



22.0CEO Grants






























Grant Modified by Tender Offer














0.7



36.9



(15.5
)


0.4



22.5Other, net(1)










0.4







0.3



0.4



0.1



1.2Pre-tax stock-based compensation
    expense adjustments(2)


0.3



38.0



52.3



24.1



74.8



(17.1
)


4.7



177.1Income tax (benefit)/expense


(1.4
)


(16.5
)


(21.1
)


(9.6
)


(30.1
)


6.1



(2.0
)


(74.6
)Net stock-based compensation
    expense/(benefit) adjustments

$
(1.1
)

$
21.5


$
31.2


$
14.5


$
44.7


$
(11.0
)

$
2.7


$
102.5     (1)
    
    Other, net represents related employment tax charges and other
    stock-based compensation charges.(2)
    
    Includes the following amounts attributable to the impact of
    variable accounting: 1999, $0; 2000, $0; 2001, $0; 2002,
    $0.9 million; 2003, $59.4 million; 2004,
    $(27.0) million; 2005, $0.9 million; total,
    $34.2 million. We determined that as a result of revised
    measurement, eleven granting actions required both a revised
    measurement date and the application of variable accounting.
    Generally, variable accounting resulted because strong evidence
    indicated that the grant was approved at an earlier date (often
    a Board of Directors meeting). However, the granting action was
    not recorded at that date, and was instead recorded at a
    subsequent grant date at a lower price than the earlier date
    that we subsequently determined to be when the grant was
    originally awarded.  Share-Based Payment
    Common Stock &Additional


Deferred Stock





Net Impact toFiscal Year

Paid-In Capital


Compensation


Retained Earnings


Stockholders Equity1999

$
2.2


$
(2.3
)

$
1.1


$
1.02000


96.6



(59.5
)


(21.5
)


15.62001


12.3



38.1



(31.2
)


19.22002


(19.1
)


13.1



(14.2
)


(20.2
)2003


73.8



(13.8
)


(44.0
)


16.0Subtotal


165.8



(24.4
)


(109.8
)


31.62004


(42.0
)


17.0



9.8



(15.2
)2005


(2.6
)


4.6



(2.5
)


(0.5
)Total

$
121.2


$
(2.8
)

$
(102.5
)

$
15.9  44




---



##### Table of Contents



Tax
    Impact of Restatement Items
            Business
    Environment
     45




---



##### Table of Contents



2006
    Financial Performance
  
    2006 marked our 10th anniversary and the sixth year that we
    have operated profitably in the seven years since we went public
    in September 1999.
    Our total net revenue for 2006 increased 17% to
    $473.3 million from $403.9 million in 2005 due to the
    increased breadth and depth of the solutions we are now
    delivering to both the service provider and enterprise markets
    and the expansion of our sales organization.
    Net income in 2006 was $38.7 million, or 8% of total net
    revenue, compared to $53.6 million, or 13% of total net
    revenue, in 2005. Our profitability in 2006 was reduced by an
    increase in non-cash stock-based compensation expense of
    $46.2 million, increased professional and legal fees
    associated with the restatement of our prior period financial
    statements of $7.4 million and pre-tax litigation
    settlement expenses and associated legal fees of
    $5.4 million.
    Our balance sheet remains debt-free, with cash and investments
    of $886.4 million, an increase of $140.1 million from
    2005. During 2006, we generated $95.2 million of cash from
    operations and received $47.7 million of cash from
    issuances of common stock.
    In the fourth quarter of 2006 our annualized revenue per
    employee increased to approximately $647,000.
    During 2006 our book-to bill ratio, the ratio of new orders
    received compared to revenue recognized continued to be greater
    than one.  Critical
    Accounting Policies and Use of Estimates
    Revenue
    Recognition
  Revenue Recognition
 46




---



##### Table of Contents



Bulletin 90-1, Accounting for Separately Priced Extended Warranty and
    Product Maintenance Contracts.
  No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21) , EITF 00-21. EITF 00-21
    Allowance
    for Doubtful Accounts
    Inventories
   47




---



##### Table of Contents



Stock-Based
    Compensation
    Deferred
    Tax Asset Valuation Allowance
    Income
    Taxes
   48




---



##### Table of Contents



Accounting for Contingencies.
    Loss
    Contingencies
    Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of FASB Statement No. 109, Accounting for Income Taxes
  No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits
    Pursuant to FASB Statement No. 43, Accounting for
    Compensated Absences (EITF 06-2). Accounting for
    Compensated Absences EITF 06-2 EITF 06-2
 49




---



##### Table of Contents



Fair Value Measurements
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
  Results
    of Operations
  Net
    Revenue
      Year Ended December 31,


Percentage Change% of Net





% of Net





% of Net2006


Revenue


2005


Revenue


2004


Revenue


2006 to 2005


2005 to 2004Net revenue:Product

$
395,701



84
%

$
338,784



84
%

$
349,019



85
%


17
%


(3
)%Service


77,579



16
%


65,072



16
%


60,085



15
%


19
%


8
%Total net revenue

$
473,280



100
%

$
403,856



100
%

$
409,104



100
%


17
%


(1
)%Chassis

$
279,383



71
%

$
226,062



67
%

$
261,764



75
%


24
%


(14
)%Stackable


116,318



29
%


112,722



33
%


87,255



25
%


3
%


29
%Total net product revenue

$
395,701



100
%

$
338,784



100
%

$
349,019



100
%


17
%


(3
)%      50




---



##### Table of Contents



2006


2005


2004Americas


63
%


64
%


64
%EMEA


18
%


18
%


18
%Japan


11
%


10
%


10
%Asia Pacific


8
%


8
%


8
%       Gross
    Margins
    Year Ended December 31,Gross





Gross





Gross2006


Margin%


2005


Margin%


2004


Margin%Restated (1)





Restated(1)Gross margins:Product

$
221,175



56
%

$
195,370



58
%

$
219,255



63
%Service


63,652



82
%


53,151



82
%


46,631



78
%Total gross margin

$
284,827



60
%

$
248,521



62
%

$
265,886



65
%     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements.   51




---



##### Table of Contents



Operating
    Expenses
    Year Ended December 31,


Percentage Change% of Net





% of Net





% of Net2006


Revenue


2005


Revenue


2004


Revenue


2006 to 2005


2005 to 2004Restated (1)





Restated(1)Research and development

$
70,658



15
%

$
53,041



13
%

$
38,149



9
%


33
%


39
%Sales and marketing


128,985



27
%


105,701



26
%


93,260



23
%


22
%


13
%General and administrative


43,854



9
%


27,765



7
%


24,958



6
%


58
%


11
%Other charges, net


12,807



3
%










30,193



7
%


100
%


(100
)%     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements.  Research and development
 52




---



##### Table of Contents



Sales and marketing
    General and administrative
    Other charges, net.
  Litigation settlement.
  Stock option investigation costs.
  Interest and other income, net.
 53




---



##### Table of Contents



year-to-year
  Provision for Income Taxes.
    Accelerated Vesting of Stock Options.
  Liquidity
    and Capital Resources
  Year Ended December 31,2006


2005


2004(In thousands)Restated(1)


Restated(1)Cash and cash equivalents

$
258,137


$
291,511


$
112,274Short-term investments


434,182



280,868



331,202Long-term investments


194,114



173,988



173,965Total

$
886,433


$
746,367


$
617,441Net cash provided by operating
    activities

$
95,181


$
109,905


$
81,525Net cash provided by (used in)
    investing activities


(181,713
)


40,411



(169,627
)Net cash provided by financing
    activities


53,685



28,426



39,156     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements.   54




---



##### Table of Contents



Disclosures
    about Contractual Obligations and Commercial
    Commitments
    Less Than








More ThanTotal


1 Year


1-3 Years


3-5 Years


5 YearsOperating leases of facilities

$
15,177


$
6,211


$
7,030


$
1,927


$
9Purchase commitments with contract
    manufacturers


53,434



53,434











Total contractual cash obligations

$
68,611


$
59,645


$
7,030


$
1,927


$
9      55




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
    Indemnifications
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    rate risk
    held-to-maturity
    Foreign
    currency exchange rate risk
   56




---



##### Table of Contents



57




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data.  FOUNDRY
    NETWORKS, INC.
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageManagements
    Report on Internal Control Over Financial Reporting


59Report of
    Independent Registered Public Accounting Firm


59Report of
    Independent Registered Public Accounting Firm


60Consolidated
    Balance Sheets


61Consolidated
    Statements of Income


62Consolidated
    Statements of Stockholders Equity


63Consolidated
    Statements of Cash Flows


64Notes to
    Consolidated Financial Statements


65  58




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 Ernst
    & Young LLP
    59




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 Ernst
    & Young LLP
    60




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(In thousands, except per share amounts)Restated(1)ASSETSCurrent assets:Cash and cash equivalents

$
258,137


$
291,511Short-term investments


434,182



280,868Accounts receivable, net of
    allowances for doubtful accounts of $2,493 and $2,387 and sales
    returns of $2,910 and $1,784 at December 31, 2006 and 
    2005, respectively


73,145



78,351Inventories


34,856



32,312Deferred tax assets


39,455



34,000Prepaid expenses and other assets


8,978



7,825Total current assets


848,753



724,867Property and equipment, net


11,103



10,986Investments


194,114



173,988Deferred tax assets


35,150



24,657Other assets


6,270



6,467Total assets

$
1,095,390


$
940,965LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
23,011


$
22,306Accrued payroll and related
    expenses


27,878



24,132Income taxes payable


5,661



12,457Other accrued expenses


15,181



9,660Deferred support revenue


41,706



38,653Total current liabilities


113,437



107,208Deferred support revenue


23,858



21,827Total liabilities


137,295



129,035Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par
    value:Authorized 
    5,000 shares at December 31, 2006 and 2005; None
    issued and outstanding as of December 31, 2006 and 2005






Common stock, $0.0001 par
    value:Authorized 
    300,000 shares at December 31, 2006 and 2005:Issued and outstanding 
    147,034 and 141,149 shares at December 31, 2006 and
    2005, respectively


15



14Additional paid-in capital


727,358



622,125Deferred stock compensation






(2,760
)Accumulated other comprehensive
    income (loss)


(483
)


44Retained earnings


231,205



192,507Total stockholders equity


958,095



811,930Total liabilities and
    stockholders equity

$
1,095,390


$
940,965     (1)
    
    The consolidated balance sheet as of December 31, 2005 has
    been restated to reflect the adjustments discussed in
    Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements.   61




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.CONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2006


2005


2004(In thousands, except per share data)Restated(1)


Restated(1)Net revenue:Product

$
395,701


$
338,784


$
349,019Service


77,579



65,072



60,085Total net revenue


473,280



403,856



409,104Cost of revenue:Product


174,526



143,414



129,764Service


13,927



11,921



13,454Total cost of revenue


188,453



155,335



143,218Gross margin


284,827



248,521



265,886Operating expenses:Research and development


70,658



53,041



38,149Sales and marketing


128,985



105,701



93,260General and administrative


43,854



27,765



24,958Other charges, net


12,807







30,193Total operating expenses


256,304



186,507



186,560Income from operations


28,523



62,014



79,326Interest and other income, net


34,407



18,078



9,846Income before provision for income
    taxes and cumulative effect of change in accounting principle


62,930



80,092



89,172Provision for income taxes


24,671



26,530



31,380Income before cumulative effect of
    change in accounting principle


38,259



53,562



57,792Cumulative effect of change in
    accounting principle, net of taxes


439







Net income

$
38,698


$
53,562


$
57,792Basic net income per share:Before cumulative effect of change
    in accounting principle

$
0.26


$
0.38


$
0.43Cumulative effect of change in
    accounting principle


0.01







Net income per share 
    basic

$
0.27


$
0.38


$
0.43Weighted-average shares used in
    computing basic net income per share


145,167



139,176



135,442Diluted net income per share:Before cumulative effect of change
    in accounting principle

$
0.25


$
0.37


$
0.40Cumulative effect of change in
    accounting principle


0.01







Net income per share 
    diluted

$
0.26


$
0.37


$
0.40Weighted-average shares used in
    computing diluted net income per share


150,509



143,974



143,363     (1)
    
    The consolidated statements of
    income for the years ended December 31, 2005 and 2004 have
    been restated to reflect the adjustments discussed in
    Note 3, Restatement of Consolidated Financial
    Statements, to Consolidated Financial Statements.   62




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
  Note





AccumulatedAdditional


Receivable


Deferred


Other





TotalCommon Stock


Paid-In


From


Stock


Comprehensive


Retained


Stockholders


ComprehensiveShares


Amount


Capital


Stockholder


Compensation


Income (Loss)


Earnings


Equity


Income(In thousands)BALANCES AT DECEMBER 31,
    2003  Previously reported


131,623


$
13


$
399,789


$
(480
)

$



$
47


$
191,126


$
590,495


$
75,074Adjustment to opening
    stockholders equity  Restated(1)










165,896







(24,398
)






(109,973
)


31,525



BALANCES AT DECEMBER 31,
    2003  Restated(1)


131,623



13



565,685



(480
)


(24,398
)


47



81,153



622,020


$
75,074Issuances of common stock under
    stock plans


5,603



1



38,675



















38,676Tax benefit from stock option
    exercises  Restated(1)










21,824



















21,824Repayment of note receivable from
    stockholder














480















480Stock-based
    compensation  Restated(1)










(34,624
)






16,993











(17,631
)Foreign currency translation
    adjustments






















(498
)






(498
)

$
(498
)Net income  Restated(1)


























57,792



57,792



57,792BALANCES AT DECEMBER 31,
    2004  Restated(1)


137,226



14



591,560







(7,405
)


(451
)


138,945



722,663


$
57,294Issuances of common stock under
    stock plans  Restated(1)


3,923







28,425



















28,425Stock-based
    compensation  Restated(1)










(39
)






4,645











4,606Tax benefit from stock option
    exercises  Restated(1)










2,179



















2,179Foreign currency translation
    adjustments






















495







495


$
495Net income  Restated(1)


























53,562



53,562



53,562BALANCES AT DECEMBER 31,
    2005  Restated(1)


141,149



14



622,125







(2,760
)


44



192,507



811,930


$
54,057Elimination of unearned deferred
    compensation upon adoption of SFAS 123R










(2,760
)






2,760











Issuances of common stock under
    stock plans


5,885



1



47,091



















47,092Stock-based compensation










50,855



















50,855Tax benefit from stock option
    exercises










10,486



















10,486Cumulative effect of change in
    accounting principle










(439
)


















(439
)Foreign currency translation
    adjustments






















(527
)






(527
)

$
(527
)Net income


























38,698



38,698



38,698BALANCES AT DECEMBER 31, 2006


147,034


$
15


$
727,358


$



$



$
(483
)

$
231,205


$
958,095


$
38,171     (1)
    
    The consolidated statements of stockholders equity for the
    years ended December 31, 2005, 2004 and 2003 have been
    restated to reflect the adjustments discussed in Note 3
    Restatement of Consolidated Financial Statements, of
    Notes to Consolidated Financial Statements.   63




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2006


2005


2004(In thousands)Restated (1)


Restated(1)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income

$
38,698


$
53,562


$
57,792Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


10,190



9,124



7,746Stock-based compensation expense


50,269



4,549



(17,394
)Provision for doubtful accounts


106



(730
)


(1,033
)Provision for sales returns


1,126



157



(393
)Inventory provisions


9,414



15,116



13,485Deferred tax assets


(15,948
)


3,181



4,003Tax benefit from stock option
    exercises






2,179



21,823Excess tax benefits from
    stock-based compensation


(6,001
)






Changes in operating assets and
    liabilities:Accounts receivable


3,974



13,725



(12,999
)Inventories


(11,811
)


(8,865
)


(23,207
)Prepaid expenses and other assets


(3,581
)


(3,274
)


(6,490
)Accounts payable


704



4,069



8,157Accrued payroll and related
    expenses


3,746



1,770



5,443Income taxes payable


3,690



10,598



78Other accrued expenses


5,521



497



3,395Deferred support revenue


5,084



4,247



21,119Net cash provided by operating
    activities


95,181



109,905



81,525CASH FLOWS FROM INVESTING
    ACTIVITIES:Purchases of available-for-sale
    investments


(85,625
)


(150,700
)


(419,426
)Purchases of held-to-maturity
    investments


(665,511
)


(256,022
)


(179,602
)Proceeds from sales of
    available-for-sale investments


87,725



314,625



326,900Proceeds from maturities of
    held-to-maturity investments


489,971



142,408



110,926Purchases of property and
    equipment, net


(8,273
)


(9,900
)


(8,425
)Net cash provided by (used in)
    investing activities


(181,713
)


40,411



(169,627
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Excess tax benefits from
    stock-based compensation


6,001







Proceeds from issuances of common
    stock


47,684



28,426



38,676Repayment of note receivable from
    stockholder










480Net cash provided by financing
    activities


53,685



28,426



39,156Increase (decrease) in cash and
    cash equivalents


(32,847
)


178,742



(48,946
)Effect of exchange rate changes on
    cash


(527
)


495



(498
)Cash and cash equivalents,
    beginning of year


291,511



112,274



161,718Cash and cash equivalents, end of
    year

$
258,137


$
291,511


$
112,274SUPPLEMENTAL CASH FLOW
    INFORMATION:Cash paid for income taxes, net of
    refunds

$
36,914


$
10,813


$
5,252     (1)
    
    The consolidated statements of cash flows for the years ended
    December 31, 2005 and 2004 have been restated to reflect
    the adjustments discussed in Note 3 of Notes to
    Consolidated Financial Statements Restatement of
    Consolidated Financial Statements.   64




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    DESCRIPTION
    OF BUSINESS  e-commerce
  2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Principles
    of Consolidation and Foreign Currency Translation
    Reclassifications
    Use of
    Estimates
    Cash
    Equivalents and Investments
       65




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          December 31, 2006Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueCash equivalents:Money market funds

$
89,299


$



$



$
89,299Government-sponsored enterprise
    securities


104,425



32







104,457Available-for-sale:Auction rate municipal bonds


92,774











92,774Held-to-maturity:Municipal bonds


46,377



13



(29
)


46,361Government-sponsored enterprise
    securities


500,092



8



(1,145
)


498,955$
832,967


$
53



(1,174
)

$
831,846Cash equivalents

$
204,671



32



(6
)

$
204,697Short-term investments


434,182



2



(860
)


433,324Long-term investments


194,114



19



(308
)


193,825$
832,967


$
53


$
(1,174
)

$
831,846   66




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31, 2005 (Restated )(1)Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueCash equivalents:Money market funds

$
125,441


$



$



$
125,441Government-sponsored enterprise
    securities


102,912



3



(61
)


102,854Available-for-sale:Auction rate municipal bonds


84,575











84,575Held-to-maturity:Municipal bonds


22,974







(86
)


22,888Corporate bonds


1,511







(9
)


1,502Government-sponsored enterprise
    securities


345,796







(2,619
)


343,177$
683,209


$
3


$
(2,775
)

$
680,437Cash equivalents

$
228,353


$
3


$
(61
)

$
228,295Short-term investments


280,868







(1,360
)


279,508Long-term investments


173,988







(1,354
)


172,634$
683,209


$
3


$
(2,775
)

$
680,437     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.  Municipal and corporate bonds.
  Government-sponsored enterprise securities
    (GSEs).
  No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
    application to Certain Investments (EITF 03-1),
  Loss Less than 12 months


Loss Greater than 12 months


TotalGross





Gross





GrossUnrealized





Unrealized





UnrealizedFair Value


Losses


Fair Value


Losses


Fair Value


LossesMunicipal bonds

$
31,179


$
(27
)

$
1,363


$
(2
)

$
32,542


$
(29
)Government-sponsored enterprise
    securities


316,166



(435
)


171,788



(710
)


487,954



(1,145
)$
347,345


$
(462
)

$
173,151


$
(712
)

$
520,496


$
(1,174
)  67




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Allowance
    for Doubtful Accounts
    Inventories
  first-in,
  December 31,2006


2005Restated(1)Purchased parts

$
5,758


$
8,008Work-in-process


13,193



11,475Finished goods


15,905



12,829$
34,856


$
32,312     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.   68




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair
    Value of Financial Instruments
    Concentrations
      Property
    and Equipment
      December 31,2006


2005Computers, software and equipment

$
46,052


$
39,198Leasehold improvements


5,440



4,021Furniture and fixtures


109



10951,601



43,328Less accumulated depreciation


(40,498
)


(32,342
)Property and equipment, net

$
11,103


$
10,986   Purchased
    Intangible Assets
   69




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Weighted-AverageUseful LifeYear Acquired:

(in years)

Amount2006


5.0


$
1,8832005


3.0


$
1,893     Gross



NetCarrying

Accumulated

CarryingAmount

Amortization

AmountDecember 31, 2006

$
8,583


$
3,698


$
4,885December 31, 2005

$
6,700


$
1,665


$
5,035     Fiscal Years:2007

$
2,2082008


1,7502009


3772010


3772011


173$
4,885   Impairment
    Revenue
    Recognition
  General.
 70




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), EITF 00-21.
  Product.
    Services. when-and-if
  Bulletin 90-1, Accounting for Separately Priced Extended Warranty and
    Product Maintenance Contracts
  Segment
    and Geographic Information
     71




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006


2005


2004Americas


63%



64%



64%EMEA


18%



18%



18%Japan


11%



10%



10%Asia Pacific


8%



8%



8%       Advertising
    Costs
    Sales
    Taxes
    Computation
    of Per Share Amounts
    72




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31,2006


2005


2004(In thousands, except per share amounts)Restated(1)


Restated(1)Net income

$
38,698


$
53,562


$
57,792Basic:Weighted-average shares outstanding


145,167



139,176



135,442Basic EPS

$
0.27


$
0.38


$
0.43Diluted:Weighted-average shares outstanding


145,167



139,176



135,442Add: Weighted-average dilutive
    potential shares


5,342



4,798



7,921Weighted-average shares used in
    computing diluted EPS


150,509



143,974



143,363Diluted EPS

$
0.26


$
0.37


$
0.40     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.  Stock-Based
    Compensation
  Share-Based Payment Accounting for Stock
    Issued to Employees Accounting for Stock-Based
    Compensation
       73




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Accounting for Income Taxes No. D-32, Intraperiod Tax Allocation of the Effect of Pretax Income
    from Continuing Operations
   74




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2005


2004Restated (1)


Restated(1)Net income

$
53,562


$
57,792Add: Total stock-based
    compensation expense (benefit) included in reported net income,
    net of tax effect


2,852



(10,431
)Deduct: Total stock-based
    compensation expense determined using the fair value method for
    all awards, net of related tax effect


(60,922
)


(61,214
)Pro forma net loss

$
(4,508
)

$
(13,853
)Basic net income (loss) per share:As reported

$
0.38


$
0.43Pro forma

$
(0.03
)

$
(0.10
)Diluted net income (loss) per shareAs reported

$
0.37


$
0.40Pro forma

$
(0.03
)

$
(0.10
)Weighted-average shares for basic
    EPS


139,176



135,442Weighted-average shares for
    diluted EPS


143,974



143,363     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.  Valuation
    of Stock-Based Compensation
      Stock Option Plan


Employee Stock Purchase PlanYear Ended December 31,


Year Ended December 31,2006


2005


2004


2006


2005


2004Average risk free interest rate


4.71
%


3.72
%


2.93
%


4.40
%


2.48
%


2.12
%Average expected life of the
    options


3.4 years



3.0 years



3.5 years



1.4 years



1.3 years



1.4 yearsDividend yield


0
%


0
%


0
%


0
%


0
%


0
%Volatility of common stock


46.6
%


61.9
%


71.9
%


48.3
%


63.2
%


67.1
%   Risk-Free Interest Rate.
  Expected Term.
 75




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Expected Dividend.
  Expected Volatility.
  Estimated Forfeitures.
    Accelerated
    Vesting of Stock Options
    Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes  an
    interpretation of FASB Statement No. 109
 76




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits
    Pursuant to FASB Statement No. 43, Accounting for
    Compensated Absences (EITF 06-2). Accounting for
    Compensated Absences EITF 06-2 EITF 06-2
  Fair Value Measurements
  Considering the Effects of Prior Year Misstatements when
    Quantifying Misstatements in Current Year Financial Statements
  3.
    RESTATEMENT
    OF CONSOLIDATED FINANCIAL STATEMENTS    Stock
    Option Investigation
   77




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Judgment
          Summary
    of Stock-Based Compensation Adjustments
   78




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Summary of Stock Option Investigation RestatementDecrease(Increase) toPre-Tax


Income Tax





Capitalized in


RetainedFiscal Year

Adjustments


Benefit(1)


Total Impact


Inventory(2)


Earnings1999

$
0.3


$
(1.4
)

$
(1.1
)

$



$
(1.1
)2000


38.0



(16.5
)


21.5







21.52001


52.3



(21.1
)


31.2







31.22002


24.1



(9.6
)


14.5



(0.3
)


14.22003


74.8



(30.1
)


44.7



(0.7
)


44.0Subtotal


189.5



(78.7
)


110.8



(1.0
)


109.82004


(17.1
)


6.1



(11.0
)


1.2



(9.8
)2005


4.7



(2.0
)


2.7



(0.2
)


2.5Total

$
177.1


$
(74.6
)

$
102.5


$



$
102.5     (1)
    
    Income Tax Benefit includes adjustments to reflect a previously
    unrecorded deferred tax benefit of approximately
    $3.6 million related to our cheap stock
    compensation expense at the time of our initial public offering,
    $1.8 million of which is associated with amortization of
    cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation
    cost capitalized in inventory. They represent the net change to
    cost of product and service revenue by year based on the
    compensation cost incurred as a result of the restatement and
    the respective inventory turnover in each affected period.     79




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Common Stock &








Net Impact toAdditional Paid-In


Deferred Stock


Retained


StockholdersFiscal Year

Capital


Compensation


Earnings


Equity1999

$
2.2


$
(2.3
)

$
1.1


$
1.02000


96.6



(59.5
)


(21.5
)


15.62001


12.3



38.1



(31.2
)


19.22002


(19.1
)


13.1



(14.2
)


(20.2
)2003


73.8



(13.8
)


(44.0
)


16.0Subtotal


165.8



(24.4
)


(109.8
)


31.62004


(42.0
)


17.0



9.8



(15.2
)2005


(2.6
)


4.6



(2.5
)


(0.5
)Total

$
121.2


$
(2.8
)

$
(102.5
)

$
15.9   Tax
    Impact of Restatement Items
           80




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Impact on
    SFAS 123 Disclosure
  under-amortized
    Year Ended December 31, 2005


Year Ended December 31, 2004As





As


AsReported


Adjustments


Restated


Reported


Adjustments


As RestatedNet income

$
56.1


$
(2.5
)

$
53.6


$
48.0


$
9.8


$
57.8Add: Total stock-based
    compensation expense (benefit) included in reported net income,
    net of tax effect






2.9



2.9







(10.4
)


(10.4
)Deduct: Total stock-based
    compensation expense determined using the fair value method for
    all awards, net of related tax effect


(54.1
)


(6.9
)


(61.0
)


(42.2
)


(19.1
)


(61.3
)Pro forma net income (loss)

$
2.0


$
(6.5
)

$
(4.5
)

$
5.8


$
(19.7
)

$
(13.9
)Basic net income (loss) per share:As reported

$
0.40






$
0.38


$
0.35






$
0.43Pro forma

$
0.01






$
(0.03
)

$
0.04






$
(0.10
)Diluted net income (loss) per shareAs reported

$
0.39






$
0.37


$
0.34






$
0.40Pro forma

$
0.01






$
(0.03
)

$
0.04






$
(0.10
)  81




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Effect of
    Restatement Adjustments
    December 31, 2005As





AsReported


Adjustments


RestatedASSETSCurrent assets:Cash and cash equivalents

$
291.5


$



$
291.5Short-term investments


280.9







280.9Accounts receivable, net


78.4







78.4Inventories


32.3







32.3Deferred tax assets


29.3



4.7



34.0Prepaid expenses and other assets


7.8







7.8Total current assets


720.2



4.7



724.9Property and equipment, net


11.0







11.0Investments


174.0







174.0Deferred tax assets


10.3



14.4



24.7Other assets


6.4







6.4Total assets

$
921.9


$
19.1


$
941.0LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
22.3


$



$
22.3Accrued payroll and related
    expenses


23.4



0.7



24.1Income taxes payable


10.2



2.3



12.5Other accrued expenses


9.5



0.2



9.7Deferred support revenue


38.6







38.6Total current liabilities


104.0



3.2



107.2Deferred support revenue


21.9







21.9Total liabilities


125.9



3.2



129.1Stockholders equity:Preferred stock










Common stock










Additional paid-in capital


500.9



121.2



622.1Deferred stock compensation






(2.8
)


(2.8
)Accumulated other comprehensive
    income










Retained earnings


295.1



(102.5
)


192.6Total stockholders equity


796.0



15.9



811.9Total liabilities and
    stockholders equity

$
921.9


$
19.1


$
941.0  82




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2005


Year Ended December 31, 2004As





As


As





AsReported


Adjustments


Restated


Reported


Adjustments


RestatedNet revenue

$
403.9


$



$
403.9


$
409.1


$



$
409.1Cost of revenue


155.2



0.2



155.4



143.4



(0.2
)


143.2Gross margin


248.7



(0.2
)


248.5



265.7



0.2



265.9Operating expenses:Research and development


51.3



1.7



53.0



43.9



(5.8
)


38.1Sales and marketing


103.9



1.8



105.7



98.6



(5.3
)


93.3General and administrative


27.0



0.8



27.8



29.6



(4.6
)


25.0Other charges, net














30.2







30.2Total operating expenses


182.2



4.3



186.5



202.3



(15.7
)


186.6Income from operations


66.5



(4.5
)


62.0



63.4



15.9



79.3Interest and other income, net


18.1







18.1



9.9







9.9Income before provision for income
    taxes


84.6



(4.5
)


80.1



73.3



15.9



89.2Provision for income taxes


28.5



(2.0
)


26.5



25.3



6.1



31.4Net income

$
56.1


$
(2.5
)

$
53.6


$
48.0


$
9.8


$
57.8Basic net income per share

$
0.40






$
0.38


$
0.35






$
0.43Weighted-average shares used in
    computing basic net income per share (in thousands)


139,176







139,176



135,445







135,442Diluted net income per share

$
0.39






$
0.37


$
0.34






$
0.40Weighted-average shares used in
    computing diluted net income per share (in thousands)


143,323







143,974



143,118







143,363  83




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2005As Reported


Adjustments


As RestatedCASH FLOWS FROM OPERATING
    ACTIVITIES:Net income

$
56.1


$
(2.5
)

$
53.6Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


9.1







9.1Stock-based compensation






4.6



4.6Provision for doubtful accounts


0.2



(0.9
)


(0.7
)Provision for sales returns


0.1







0.1Inventory provisions


15.1







15.1Deferred tax assets


2.7



0.5



3.2Tax benefit from stock option
    exercises


4.5



(2.3
)


2.2Changes in operating assets and
    liabilities:Accounts receivable


12.9



0.8



13.7Inventories


(8.7
)


(0.2
)


(8.9
)Prepaid expenses and other assets


(3.3
)






(3.3
)Accounts payable


4.1







4.1Accrued payroll and related
    expenses


1.7



0.1



1.8Income taxes payable


10.2



0.4



10.6Other accrued expenses


0.8



(0.3
)


0.5Deferred support revenue


4.2







4.2Net cash provided by operating
    activities


109.7



0.2



109.9CASH FLOWS FROM INVESTING
    ACTIVITIES:Purchases of available-for-sale
    investments


(150.7
)






(150.7
)Purchases of held-to-maturity
    investments


(256.0
)






(256.0
)Proceeds from sales of
    available-for-sale investments


314.6







314.6Proceeds from maturities of
    held-to-maturity investments


142.4







142.4Purchases of property and
    equipment, net


(9.9
)






(9.9
)Net cash provided by investing
    activities


40.4







40.4CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from issuances of common
    stock


28.6



(0.2
)


28.4Net cash provided by financing
    activities


28.6



(0.2
)


28.4Increase in cash and cash
    equivalents


178.7







178.7Effect of exchange rate changes on
    cash


0.5







0.5Cash and cash equivalents,
    beginning of year


112.3







112.3Cash and cash equivalents, end of
    year

$
291.5


$



$
291.5SUPPLEMENTAL CASH FLOW
    INFORMATION:Cash paid for income taxes, net of
    refunds

$
10.8


$



$
10.8   84




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31, 2004As Reported


Adjustments


As RestatedCASH FLOWS FROM OPERATING
    ACTIVITIES:Net income

$
48.0


$
9.8


$
57.8Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


7.4



0.3



7.7Stock-based compensation






(17.4
)


(17.4
)Provision for doubtful accounts






(1.0
)


(1.0
)Provision for sales returns


(0.4
)






(0.4
)Inventory provisions


13.5







13.5Deferred tax assets


(9.0
)


13.0



4.0Tax benefit from stock option
    exercises


29.2



(7.4
)


21.8Changes in operating assets and
    liabilities:Accounts receivable


(14.0
)


1.0



(13.0
)Inventories


(24.2
)


1.0



(23.2
)Prepaid expenses and other assets


(6.2
)


(0.3
)


(6.5
)Accounts payable


8.2







8.2Accrued payroll and related
    expenses


5.0



0.4



5.4Income taxes payable


0.1







0.1Other accrued expenses


2.8



0.6



3.4Deferred support revenue


21.1







21.1Net cash provided by operating
    activities


81.5







81.5CASH FLOWS FROM INVESTING
    ACTIVITIES:Purchases of available-for-sale
    investments


(419.4
)






(419.4
)Purchases of held-to-maturity
    investments


(179.6
)






(179.6
)Proceeds from sales of
    available-for-sale investments


326.9







326.9Proceeds from maturities of
    held-to-maturity investments


110.9







110.9Purchases of property and
    equipment, net


(8.4
)






(8.4
)Net cash used in investing
    activities


(169.6
)






(169.6
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Proceeds from issuances of common
    stock


38.7







38.7Repayment of note receivable from
    stockholder


0.5







0.5Net cash provided by financing
    activities


39.2







39.2Decrease in cash and cash
    equivalents


(48.9
)






(48.9
)Effect of exchange rate changes on
    cash


(0.5
)






(0.5
)Cash and cash equivalents,
    beginning of year


161.7







161.7Cash and cash equivalents, end of
    year

$
112.3


$



$
112.3SUPPLEMENTAL CASH FLOW
    INFORMATION:Cash paid for income taxes, net of
    refunds

$
5.3


$



$
5.3  85




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    COMMITMENTS
    AND CONTINGENCIES  Guarantees
    and Product Warranties
  Guarantors Accounting
    and Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others
  90-day and/or
    Balance, December 31, 2005

$
1,511Liabilities accrued for warranties
    issued during the period


1,252Warranty claims settled during the
    period


(1,217
)Balance, December 31, 2006

$
1,546     Deferred support revenue at
    December 31, 2005

$
60,480New support arrangements


80,870Recognition of support revenue


(75,786
)Ending balance at
    December 31, 2006

$
65,564     Leases
   86




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    OperatingLeases2007

$
6,2112008


4,2242009


2,8062010


1,6142011


313Thereafter


9Total lease payments

$
15,177   Purchase
    Commitments with Suppliers and Third-Party
    Manufacturers
    Settlement
    and Patent License Agreements
  Alcatel-Lucent Alcatel-Lucent
   87




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Litigation
  Intellectual Property Proceedings.
  Alcatel-Lucent Alcatel-Lucent) Alcatel-Lucent Alcatel-Lucent Alcatel-Lucent. Alcatel-Lucent.
  Alcatel-Lucent
   88




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Securities Litigation. In re Foundry Networks, Inc. Initial Public
    Offering Securities Litigation No. 01-CV-10640 related to In re Initial Public Offering
    Securities Litigation
     89




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  In re Initial Public
    Offering Securities Litigation
  Watkins v.
    Johnson, et al. No. 1-06-CV Rosenbaum v. Johnson, et al. No. 1-06 In re Foundry Networks, Inc. Derivative
    Litigation and/or
  Patel v. Akin, et al. No. 1-07-CV Patel Patel
  Desai v. Johnson, et al. No. C-06-05598 , McDonald v. Johnson, et al. Jackson v. Akin, et al. Edrington v. Johnson, Jr., et al. In re Foundry Networks, Inc. Derivative Litigation No. 5:06-CV-05598-RMW. Edrington v. Johnson, Jr., et al.
 90




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    SEC Informal Inquiry.
  United States Attorneys Office Subpoena for Production
    of Documents.
  The Nasdaq Stock Market Proceedings, Docket #
    5181N-06. Form 10-Q Form 10-Q Form 10-K
          General. Accounting for Contingencies
 91




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    5.
    INCOME
    TAXES  Accounting for Income Taxes
  December 31,2006


2005Restated(1)Deferred Tax Assets:Accrued payroll and related
    expenses

$
3,034


$
2,167Inventory valuation reserve


17,574



17,204Accrued warranty


605



594Allowance for doubtful accounts


976



938Write-down of minority interest


979



983Depreciation


2,953



1,332Stock-based compensation


28,196



18,728Research and development credits


7,866



8,964Deferred support revenue


7,687



6,033Other temporary differences


6,536



3,994Total deferred tax assets


76,406



60,937Valuation allowance


(979
)


(983
)Total deferred tax assets, net of
    valuation allowance


75,427



59,954Deferred Tax Liability:Litigation settlement tax liability


(822
)


(1,297
)Net deferred tax assets

$
74,605


$
58,657     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.     92




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          2006


2005


2004Restated (1)


Restated(1)Current:Federal

$
37,240


$
30,758


$
23,858Foreign


366



405



165State


5,754



4,583



3,425Total current


43,360



35,746



27,448Deferred:Federal


(16,132
)


(8,459
)


3,419Foreign and state


(2,557
)


(757
)


513Total deferred


(18,689
)


(9,216
)


3,932Total provision

$
24,671


$
26,530


$
31,380  93




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.    2006


2005


2004Restated (1)


Restated(1)Provision at U.S. statutory rate
    of 35%

$
22,025



35.0
%

$
28,032



35.0
%

$
31,210



35.0
%State income taxes, net of federal
    benefit


2,728



4.3
%


3,444



4.3
%


3,834



4.3
%Federal and state research and
    development credits


(3,161
)


(5.0
)%


(2,665
)


(3.3
)%


(2,248
)


(2.5
)%Nondeductible deferred stock
    compensation


5,482



8.7
%














Export sales incentive


(1,373
)


(2.2
)%


(1,654
)


(2.1
)%


(1,413
)


(1.6
)%Tax-exempt interest


(1,465
)


(2.3
)%


(1,523
)


(1.9
)%


(1,185
)


(1.3
)%U.S. production activities
    deduction


(165
)


(0.3
)%


(400
)


(0.5
)%






Other


600



1.0
%


1,297



1.6
%


1,182



1.3
%Total

$
24,671



39.2
%

$
26,531



33.1
%

$
31,380



35.2
%     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.    6.
    STOCKHOLDERS
    EQUITY  Preferred
    Stock
    Common
    Stock
   94




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006 Stock Incentive Plan


26,000,0001999 Directors Stock
    Option Plan


3,126,2501999 Employee Stock Purchase Plan


6,628,7762000 Non-Executive Stock Option
    Plan


1,963,7781996 Stock Plan


27,062,547Total


64,781,351   2006
    Stock Incentive Plan
    1996
    Stock Plan
    1999 Directors
    Stock Option Plan
   95




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2000
    Non-Executive Stock Option Plan
      Weighted-Weighted-


Average


AggregateOptions


Average


Remaining


IntrinsicOutstanding


Exercise Price


Contractual Term


Value(In thousands)Balance, December 31, 2003


26,516,559


$
12.96Granted


11,358,800



15.30Exercised


(4,483,154
)


7.00Cancelled


(3,353,693
)


19.53Balance, December 31, 2004


30,038,512



14.00Granted


6,526,700



9.71Exercised


(2,945,346
)


6.85Cancelled


(1,832,239
)


14.44Balance, December 31, 2005


31,787,627



13.75Granted


6,502,300



14.07Exercised


(4,798,821
)


7.86Cancelled


(1,741,194
)


19.29Balance, December 31, 2006


31,749,912



14.40



5.37


$
111,434Vested and expected to vest at
    December 31, 2006


30,664,093



14.45



5.39


$
109,314Exercisable at December 31,
    2006


22,732,876



14.92



5.53


$
93,549    96




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                Year Ended December 31,2006


2005


2004(In thousands)Restated(1)


Restated(1)Cost of revenue  Product

$
1,858


$
179


$
(741
)Cost of revenue  Service


2,175



201



(780
)Research and development


17,542



1,733



(5,912
)Sales and marketing


20,680



1,808



(5,518
)General and administrative


8,519



684



(4,675
)Total

$
50,774


$
4,605


$
(17,626
)     (1)
    
    See Note 3, Restatement of Consolidated Financial
    Statements.     97




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock
    Award Activity
    Weighted-AverageRestricted Stock


Grant DateOutstanding


Fair Value(In thousands)Balance, December 31, 2005





$
Granted


644


$
14.57Vested





$
Forfeited


(16
)

$
14.21Balance, December 31, 2006


628


$
14.58     1999
    Employee Stock Purchase Plan
       98




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    401(K)
    PLAN  U.S.-based
  8.
    SELECTED
    QUARTERLY FINANCIAL DATA (UNAUDITED)    Year Ended December 31, 2006

Fourth Quarter


Third Quarter


Second Quarter


First QuarterAs RestatedNet revenue

$
132.0


$
118.8


$
108.4


$
114.0Cost of revenue


53.7



46.9



42.9



44.9Gross margin


78.3



71.9



65.5



69.1Operating expenses:Research and development


16.9



16.8



17.0



20.0Sales and marketing


32.9



30.4



31.3



34.3General and administrative


10.0



10.7



12.1



11.1Other charges, net


2.9



4.2



5.7



Total operating expenses


62.7



62.1



66.1



65.4Income from operations


15.6



9.8



(0.6
)


3.7Interest and other income, net


9.9



9.1



8.4



6.9Income before provision for income
    taxes and cumulative effect of change in accounting principle


25.5



18.9



7.8



10.6Provision for income taxes


9.8



6.7



3.4



4.6Income before cumulative effect of
    change in accounting principle


15.7



12.2



4.4



6.0Cumulative effect of change in
    accounting principle, net of taxes














0.4Net income

$
15.7


$
12.2


$
4.4


$
6.4Basic net income per share

$
0.11


$
0.08


$
0.03


$
0.04Diluted net income per share

$
0.10


$
0.08


$
0.03


$
0.04Shares used in computing earnings
    per share (in thousands):Basic


146,764



146,082



145,279



142,477Diluted


152,364



149,830



150,968



149,333  99




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2005

Fourth Quarter


Third Quarter


Second Quarter


First QuarterAs Restated


As Restated


As Restated


As RestatedNet revenue

$
116.2


$
106.5


$
96.6


$
84.6Cost of revenue


45.0



41.2



37.5



31.7Gross margin


71.2



65.3



59.1



52.9Operating expenses:Research and development


13.2



14.9



13.8



11.1Sales and marketing


26.2



28.7



27.8



23.0General and administrative


7.6



11.2



5.0



4.0Other charges, net














Total operating expenses


47.0



54.8



46.6



38.1Income from operations


24.2



10.5



12.5



14.8Interest and other income, net


5.8



4.7



3.8



3.8Income before provision for income
    taxes


30.0



15.2



16.3



18.6Provision for income taxes


11.1



3.7



5.3



6.4Net income

$
18.9


$
11.5


$
11.0


$
12.2Basic net income per share

$
0.13


$
0.08


$
0.08


$
0.09Diluted net income per share

$
0.13


$
0.08


$
0.08


$
0.09Shares used in computing earnings
    per share (in thousands):Basic


140,557



139,581



138,627



137,908Diluted


146,129



144,466



141,486



142,082    100




---



##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended


Three Months EndedMarch 31, 2006


December 31, 2005As





As


As





AsReported


Adjustments


Restated


Reported


Adjustments


RestatedNet revenue

$
114.0


$



$
114.0


$
116.2


$



$
116.2Cost of revenue


44.5



0.4



44.9



45.0







45.0Gross margin


69.5



(0.4
)


69.1



71.2







71.2Operating expenses:Research and development


17.1



2.9



20.0



12.3



0.9



13.2Sales and marketing


30.8



3.5



34.3



25.2



1.0



26.2General and administrative


10.7



0.4



11.1



6.9



0.7



7.6Other charges, net






















Total operating expenses


58.6



6.8



65.4



44.4



2.6



47.0Income from operations


10.9



(7.2
)


3.7



26.8



(2.6
)


24.2Interest and other income, net


6.9







6.9



5.8







5.8Income before provision for income
    taxes and cumulative effect of change in accounting principle


17.8



(7.2
)


10.6



32.6



(2.6
)


30.0Provision for income taxes


6.9



(2.3
)


4.6



11.9



(0.8
)


11.1Income before cumulative effect of
    change in accounting principle


10.9



(4.9
)


6.0



20.7



(1.8
)


18.9Cumulative effect of change in
    accounting principle, net of taxes






0.4



0.4











Net income

$
10.9


$
(4.5
)

$
6.4


$
20.7


$
(1.8
)

$
18.9Basic net income per share

$
0.08






$
0.04


$
0.15






$
0.13Diluted net income per share

$
0.07






$
0.04


$
0.14






$
0.13Shares used in computing earnings
    per share (in thousands):Basic


142,477







142,477



140,557







140,557Diluted


149,208







149,333



146,369







146,129  101




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended


Three Months EndedSeptember 30, 2005


June 30, 2005As





As


As





AsReported


Adjustments


Restated


Reported


Adjustments


RestatedNet revenue

$
106.5


$



$
106.5


$
96.6


$



$
96.6Cost of revenue


40.5



0.7



41.2



37.8



(0.3
)


37.5Gross margin


66.0



(0.7
)


65.3



58.8



0.3



59.1Operating expenses:Research and development


12.4



2.5



14.9



14.2



(0.4
)


13.8Sales and marketing


25.8



2.9



28.7



28.3



(0.5
)


27.8General and administrative


9.5



1.7



11.2



5.4



(0.4
)


5.0Other charges, net






















Total operating expenses


47.7



7.1



54.8



47.9



(1.3
)


46.6Income from operations


18.3



(7.8
)


10.5



10.9



1.6



12.5Interest and other income, net


4.7







4.7



3.8







3.8Income before provision for income
    taxes


23.0



(7.8
)


15.2



14.7



1.6



16.3Provision for income taxes


7.1



(3.4
)


3.7



5.1



0.2



5.3Net income

$
15.9


$
(4.4
)

$
11.5


$
9.6


$
1.4


$
11.0Basic net income per share

$
0.11






$
0.08


$
0.07






$
0.08Diluted net income per share

$
0.11






$
0.08


$
0.07






$
0.08Shares used in computing earnings
    per share (in thousands):Basic


139,581







139,581



138,627







138,627Diluted


144,087







144,466



141,109







141,486  102




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended March 31, 2005As





AsReported


Adjustments


RestatedNet revenue

$
84.6


$



$
84.6Cost of revenue


31.9



(0.2
)


31.7Gross margin


52.7



0.2



52.9Operating expenses:Research and development


12.4



(1.3
)


11.1Sales and marketing


24.6



(1.6
)


23.0General and administrative


5.2



(1.2
)


4.0Total operating expenses


42.2



(4.1
)


38.1Income from operations


10.5



4.3



14.8Interest and other income, net


3.8







3.8Income before provision for income
    taxes


14.3



4.3



18.6Provision for income taxes


4.4



2.0



6.4Net income

$
9.9


$
2.3


$
12.2Basic net income per share

$
0.07






$
0.09Diluted net income per share

$
0.07






$
0.09Shares used in computing earnings
    per share (in thousands):Basic


137,908







137,908Diluted


141,758







142,082  103




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  As of March 31, 2006As





AsReported


Adjustments


RestatedAssetsCurrent assets:Cash and cash equivalents

$
211.4


$



$
211.4Short-term investments


401.3







401.3Accounts receivable


84.2







84.2Inventories


36.1







36.1Deferred tax assets


30.6



3.2



33.8Prepaid expenses and other current
    assets


12.1







12.1Total current assets


775.7



3.2



778.9Property and equipment, net


11.3







11.3Long-term investments


176.9







176.9Deferred tax assets


11.7



14.4



26.1Other assets


6.0







6.0Total assets

$
981.6


$
17.6


$
999.2Liabilities and
    Stockholders EquityCurrent liabilities:Accounts payable

$
23.4


$



$
23.4Accrued payroll and related
    benefits


17.1



0.8



17.9Income taxes payable


6.9



0.7



7.6Other accrued expenses


13.6







13.6Deferred support revenue


46.3







46.3Total current liabilities


107.3



1.5



108.8Deferred support revenue


22.7







22.7Total liabilities


130.0



1.5



131.5Stockholders equity:Common stock










Additional paid-in capital


545.5



123.3



668.8Deferred stock compensation










Accumulated other comprehensive
    income (loss)










Retained earnings


306.1



(107.2
)


198.9Total stockholders equity


851.6



16.1



867.7Total liabilities and
    stockholders equity

$
981.6


$
17.6


$
999.2  104




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  As of September 30, 2005As





AsReported


Adjustments


RestatedAssetsCurrent assets:Cash and cash equivalents

$
244.4


$



$
244.4Short-term investments


302.3







302.3Accounts receivable


77.1







77.1Inventories


31.1



(0.3
)


30.8Deferred tax assets


25.3



4.7



30.0Prepaid expenses and other current
    assets


6.4







6.4Total current assets


686.6



4.4



691.0Property and equipment, net


9.0







9.0Long-term investments


152.2







152.2Deferred tax assets


18.4



14.1



32.5Other assets


6.9







6.9Total assets

$
873.1


$
18.5


$
891.6Liabilities and
    Stockholders EquityCurrent liabilities:Accounts payable

$
20.7


$



$
20.7Accrued payroll and related
    benefits


16.8



0.7



17.5Income taxes payable


9.0



1.9



10.9Other accrued expenses


9.6



0.1



9.7Deferred support revenue


33.3







33.3Total current liabilities


89.4



2.7



92.1Deferred support revenue


18.8







18.8Total liabilities


108.2



2.7



110.9Stockholders equity:Common stock










Additional paid-in capital


490.4



120.2



610.6Deferred stock compensation






(3.6
)


(3.6
)Accumulated other comprehensive
    income (loss)










Retained earnings


274.5



(100.8
)


173.7Total stockholders equity


764.9



15.8



780.7Total liabilities and
    stockholders equity

$
873.1


$
18.5


$
891.6  105




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  As of June 30, 2005As





AsReported


Adjustments


RestatedAssetsCurrent assets:Cash and cash equivalents

$
269.0


$



$
269.0Short-term investments


244.3







244.3Accounts receivable


59.2







59.2Inventories


37.1



(0.1
)


37.0Deferred tax assets


25.7



4.1



29.8Prepaid expenses and other current
    assets


6.2







6.2Total current assets


641.5



4.0



645.5Property and equipment, net


8.0







8.0Long-term investments


170.9







170.9Deferred tax assets


16.5



12.2



28.7Other assets


5.3







5.3Total assets

$
842.2


$
16.2


$
858.4Liabilities and
    Stockholders EquityCurrent liabilities:Accounts payable

$
18.3


$



$
18.3Accrued payroll and related
    benefits


18.3



0.7



19.0Income taxes payable


7.7



2.2



9.9Other accrued expenses


8.8



0.1



8.9Deferred support revenue


33.5







33.5Total current liabilities


86.6



3.0



89.6Deferred support revenue


18.0







18.0Total liabilities


104.6



3.0



107.6Stockholders equity:Common stock










Additional paid-in capital


479.1



114.0



593.1Deferred stock compensation






(4.4
)


(4.4
)Accumulated other comprehensive
    income (loss)


(0.1
)






(0.1
)Retained earnings


258.6



(96.4
)


162.2Total stockholders equity


737.6



13.2



750.8Total liabilities and
    stockholders equity

$
842.2


$
16.2


$
858.4  106




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  As of March 31, 2005As





AsReported


Adjustments


RestatedAssetsCurrent assets:Cash and cash equivalents

$
129.6


$



$
129.6Short-term investments


354.8







354.8Accounts receivable


66.3







66.3Inventories


41.0



(0.4
)


40.6Deferred tax assets


25.7



4.3



30.0Prepaid expenses and other current
    assets


7.3







7.3Total current assets


624.7



3.9



628.6Property and equipment, net


8.2







8.2Long-term investments


172.1







172.1Deferred tax assets


16.5



13.0



29.5Other assets


5.4







5.4Total assets

$
826.9


$
16.9


$
843.8Liabilities and
    Stockholders EquityCurrent liabilities:Accounts payable

$
17.2


$



$
17.2Accrued payroll and related
    benefits


13.7



0.6



14.3Income taxes payable


7.9



2.6



10.5Other accrued expenses


8.2



0.1



8.3Deferred support revenue


36.6







36.6Total current liabilities


83.6



3.3



86.9Deferred support revenue


17.4







17.4Total liabilities


101.0



3.3



104.3Stockholders equity:Common stock










Additional paid-in capital


477.2



117.1



594.3Deferred stock compensation






(5.7
)


(5.7
)Accumulated other comprehensive
    income (loss)


(0.3
)






(0.3
)Retained earnings


249.0



(97.8
)


151.2Total stockholders equity


725.9



13.6



739.5Total liabilities and
    stockholders equity

$
826.9


$
16.9


$
843.8  107




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##### Table of Contents



FOUNDRY
    NETWORKS, INC.
  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
  Balance at


Charged to





Balance atBeginning


Costs and





End ofDescription

of Period


Expenses


Deductions(1)


Period(In thousands of dollars)Year ended December 31,
    2004:Allowance for doubtful accounts

$
4,151


$



$
1,034


$
3,117Allowance for sales returns


2,020



2,080



2,473



1,627Year ended December 31,
    2005:Allowance for doubtful accounts


3,117



154



884



2,387Allowance for sales returns


1,627



2,353



2,196



1,784Year ended December 31,
    2006:Allowance for doubtful accounts


2,387



1,027



921



2,493Allowance for sales returns


1,784



5,680



4,554



2,910     (1)
    
    Deductions for allowance for doubtful accounts refer to
    write-offs and deductions for allowance for sales returns refer
    to actual returns. 108




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Conclusion
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
  Rules 13a-15(e) 15d-15(e) Form 10-K.
  Form 8-K Form 8-K
    Managements
    Report on Internal Control over Financial
    Reporting
      Stock
    Options Granting Practices Review and Restatement Related to
    Stock Options
   109




---



##### Table of Contents



Form 8-K
      
    Grants were often effected by written actions that contained
    Effective as of language to indicate the grant date,
    rather than being effected at meetings of the Board of Directors
    or committees of the Board of Directors, or using a written
    action that was manually dated and effecting a granting action
    with the grant date based on the date of the manual signatures.
    Grants to non-officers were delegated to a sole member Stock
    Option Committee consisting of our CEO, which made it more
    difficult to confirm that the actions of the sole member
    committee were taken on the dates indicated on the granting
    actions.
    Minutes of meetings where granting actions were made were not
    prepared on a contemporaneous basis, which made it more
    difficult to confirm that the persons identified as receiving
    grants, and the number of shares covered by such grant, had been
    finally determined at the time of the meeting where the granting
    actions were made.
    We lacked a formal policy for issuing stock options, which
    contributed to our lack of contemporaneous documentation and to
    inadequate attention to process considerations.    Remedial
    Measures Instituted by the Company
     110




---



##### Table of Contents




    Our General Counsel or his designee takes the minutes of
    Compensation Committee meetings.
    Details of grant recommendations are circulated in advance of
    each meeting, and the Compensation Committee approves the
    grantee names and share amounts at the meeting.
    The exercise price of each stock option grant is the closing
    price of our common stock on the date that the Compensation
    Committee approved the grant.
    Stock option grants are made only after they are approved by the
    Compensation Committee and no changes are made after the
    Compensation Committees approval.
    All grants are communicated to employees within a relatively
    short period after the grant date, as required by applicable
    accounting rules.        
    The Executive Committee determined that the positions of the
    Chairman of the Board and Chief Executive Officer should be held
    by different persons. Accordingly, on January 19, 2007,
    Mr. Johnson resigned as Chairman of the Board, and the
    Board of Directors elected director Alfred J. Amoroso as
    Chairman. Mr. Amoroso has served as a member of our Board
    of Directors since October 2000. He also serves as President and
    Chief Executive Officer of Macrovision Corporation and as a
    member of its Board of Directors. Mr. Johnson continues to
    serve as a member of our Board of Directors, and as our
    President and CEO.
    The Board of Directors accepted the resignation of
    Mr. Heffner as Vice President, Finance and Administration
    and Chief Financial Officer on January 19, 2007, and
    Mr. Heffner assumed a new role as Vice President of
    Corporate Development. His role as Vice President of Corporate
    Development does not involve accounting or financial reporting
    responsibilities. Mr. Heffner has repaid us the net
    after-tax difference between the initial exercise price for two
    options he exercised for which the measurement date has been
    changed, and the price of the shares on the new measurement
    dates, an amount of approximately $162,000. All unexercised
    options which he holds which have been remeasured were repriced
    to reflect the price of our stock on the new measurement dates.   111




---



##### Table of Contents



Inherent
    Limitations of Internal Controls
    
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that our receipts and expenditures are being made only in
    accordance with authorizations of our management and
    directors; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use, or disposition of
    our assets that could have a material effect on the financial
    statements.    Changes
    in Internal Control over Financial Reporting
  Remedial Actions
  Item 9B.
    Other
    Information.   112




---



##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance.    Name

Age


PositionBobby R. Johnson, Jr.


50


President, Chief Executive Officer
    and DirectorAlfred J. Amoroso


57


Chairman of the Board of DirectorsC. Nicholas Keating, Jr.


65


DirectorJ. Steven Young


45


DirectorAlan L. Earhart


63


DirectorCeleste Volz Ford


51


DirectorLaurence L. Akin


59


Senior Vice President of Worldwide
    SalesRichard W. Bridges


58


Vice President, OperationsKen K. Cheng


52


Vice President and General
    Manager, High Value Layer 2/3 Systems Business UnitDaniel W. Fairfax


51


Vice President, Finance and
    Administration, Chief Financial Officer and Principal Accounting
    OfficerMichael R. Iburg


44


Vice President and TreasurerCliff G. Moore


53


Vice President and General CounselRobert W. Schiff


50


Vice President and General
    Manager, Small and Medium Systems   Directors
  Bobby R. Johnson, Jr.
  Alfred J. Amoroso
  C. Nicholas Keating, Jr.
 113




---



##### Table of Contents



J. Steven Young e-infrastructure
  Alan L. Earhart
  Celeste Volz Ford
  Executive
    Officers
  Laurence L. Akin
  Richard W. Bridges
  Ken K. Cheng
 114




---



##### Table of Contents



Daniel W. Fairfax e-commerce e-commerce
  Michael R. Iburg
  Cliff G. Moore
  Robert W. Schiff
    Section 16(a)
    Beneficial Ownership Reporting Compliance
    Code of
    Ethics
  http://www.foundrynet.com/company/ir/ir-corp-gov/. Form 8-K.
  Stockholder
    Director Nominations
   115




---



##### Table of Contents



c/o the
  Audit
    Committee and Audit Committee Financial Expert
    Item 11.
    Executive
    Compensation.  Compensation
    Discussion and Analysis
  Compensation
    Philosophy
    Peer
    Group Review
    
    Extreme Networks, Inc.
    F5 Networks, Inc.
    Juniper Networks, Inc.     
    3Com Corporation
    Brocade Communications Systems, Inc.
    Ciena Corporation
    Extreme Networks, Inc. 116




---



##### Table of Contents




    F5 Networks, Inc.
    Juniper Networks, Inc.
    Netgear, Inc.
    Network Appliance, Inc.
    Radisys Corporation
    Tekelec    Compensation
    Process and Criteria
       117




---



##### Table of Contents



Base
    Salary
      Executive
    Performance Incentive Plan
        
    One-fourth of the bonus amount is determined by the level of our
    revenue for the year. If revenue is achieved at the level of 95%
    to 97.5% of target, then 75% of the revenue portion of the bonus
    is earned; if revenue is achieved at 97.5% to 102.5% of target,
    then 100% of the revenue portion of the bonus is earned; if
    revenue is achieved at 102.5% to 105% of target, then 125% of
    the revenue portion of the bonus is earned, and if revenue
    exceeds 105% of target, then 150% of the revenue portion of the
    bonus is earned.
    One-fourth of the bonus amount is determined by the level of our
    gross margin for the year. If gross margin is achieved at the
    level of 95% to 97.5% of target, then 75% of this portion of the
    bonus is earned; if gross 118




---



##### Table of Contents



margin is achieved at 97.5% to 102.5% of target, then 100% of
    this portion of the bonus is earned; if gross margin is achieved
    at 102.5% to 105% of target, then 125% of this portion of the
    bonus is earned, and if gross margin exceeds 105% of target,
    then 150% of this portion of the bonus is earned.  
    One-fourth of the bonus amount is determined by the level of our
    operating income for the year. If operating income is achieved
    at the level of 95% to 97.5% of target, then 75% of this portion
    of the bonus is earned; if operating income is achieved at 97.5%
    to 102.5% of target, then 100% of this portion of the bonus is
    earned; if operating income is achieved at 102.5% to 105% of
    target,then 125% of this portion of the bonus is earned, and if
    operating income exceeds 105% of target, then 150% of this
    portion of the bonus is earned.
    One-fourth of the bonus amount is determined by the individual
    executives performance over the year on major management
    objectives determined by the Chief Executive Officer and
    typically communicated to the executive earlier in the year.
    These objectives vary depending on the executives
    functional area and focus primarily on departmental goals. If
    the executive achieves his or her individual management
    objectives, he or she is entitled to a payment for this portion
    of the bonus. The Compensation Committee determines the
    appropriate individual performance payout for all of the named
    executive officers. The maximum payment in the case of
    exceptional performance is 100% of the target value of this
    portion of the award.    Weighted

Level of

BonusPerformance Measures

Achievement

% PayoutRevenues (25%)

95.0% - 97.5%


75%>97.5% - <102.5%


100%102.5% - 105.0%


125%> 105%


150%(The revenue target must first be
    met before any bonus is paid on the following targets)Gross Margins (25%)

95.0% - 97.5%


75%And

>97.5% - <102.5%


100%Operating Income (25%)

102.5% - 105.0%


125%> 105%


150%Individual Management Objectives
    (25%)

100%


100%     Equity
    Compensation
   119




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##### Table of Contents




    We budget the number of shares of stock available for executive
    equity incentive grants. In determining the size of this pool,
    we consider factors such as the growth in the number of
    executives eligible for grants, competitive compensation
    practices, expected average grant sizes based on expected
    performance, and the accounting expense of granting
    awards; and
    We are budgeting equity grants to all employees, including
    executive officers, with reference to a best practice average
    annual dilution rate not to exceed 6.11% as measured over a 3
    year period from 2006 through 2008. We define the annual
    dilution rate as the gross number of new equity awards granted
    during a fiscal year, expressed as a percentage of the
    outstanding common stock at year-end. For purposes of
    calculating the number of shares of our common stock granted in
    a year, each share of restricted stock granted will be
    multiplied by a multiplier which is determined based on the
    annual stock price volatility. By doing so, we are placing more
    weight on restricted stock grants due to their higher intrinsic
    value and immediate dilutive effect. For 2006, the multiplier
    was 2. For complete details of this dilution calculation please
    see Proposal No. 3 in our 2006 Proxy Statement related
    to the Approval of the 2006 Stock Incentive Plan. For fiscal
    2006, our actual dilution rate was 5.3%, primarily reflecting
    retention grants to existing employees and to a more limited
    extent grants to newly-hired employees as the total number of
    our employees grew approximately 13%, from 719 to 816. We have
    no policy on any target proportion of executive officer equity
    awards to all employee equity awards.    and/or
     120




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##### Table of Contents



Other
    Benefits
        Executive
    Compensation Tables
  Executive
    Compensation
    Summary
    Compensation Table
  Non-EquityStock


Option


Incentive Plan


All OtherName and Principal Position

Year


Salary ($)


Awards ($)(1)


Awards ($)(1)


Compensation ($)(2)


Compensation ($)


Total ($)Bobby R. Johnson


2006


$
600,056


$
515,755


$
2,011,794


$



$
2,032(3
)

$
3,129,637President and
    Chief Executive OfficerTimothy D. Heffner


2006


$
400,040


$
257,878


$
935,112


$



$
2,310(4
)

$
1,595,340Vice President, Corporate
    DevelopmentKen K. Cheng*


2006


$
400,000


$
257,878


$
1,314,104


$
120,000


$
2,056(5
)

$
2,094,038Vice President and
    General Manager, 
    Layer 2-3 Systems Business UnitLaurence L. Akin


2006


$
344,423


$
128,939


$
1,004,905


$
297,159


$
2,357(6
)

$
1,777,783Senior Vice President,
    Worldwide SalesPaul L. Twombly


2006


$
360,000


$
257,878


$
926,064


$
108,000


$
2,224(7
)

$
1,654,165Vice President,
    Customer SupportRobert W. Schiff


2006


$
343,654


$
257,878


$
672,214


$
105,000


$
2,365(8
)

$
1,381,111Vice President and General
    Manager,
    Small and Medium Systems     *
    
    Mr. Heffner was our Vice President, Finance and
    Administration and Chief Financial Officer until January 2007.(1)
    
    Represents the amount recognized for financial statement
    reporting purposes for the fiscal year ended December 31,
    2006 in accordance with SFAS 123R for equity awards (which
    may or may not have been granted in fiscal year 2006),
    disregarding the estimate of forfeitures related to
    service-based
    vesting conditions. For a more detailed description on the
    valuation model and assumptions used to calculate the fair value
    of our options refer to Note 2, Summary of
    Significant Accounting Policies, to Consolidated Financial
    Statements.(2)
    
    The amounts in this column reflect the cash bonuses earned under
    our 2006 Executive Performance Incentive Plan during fiscal year
    2006. 121




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##### Table of Contents



(3)
    
    Reflects amounts paid by Foundry for Mr. Johnsons
    life insurance premiums amounting to $2,025, and for restricted
    stock purchased on 01/31/06 in the amount of $7.50(4)
    
    Reflects amounts paid by Foundry for Mr. Heffners
    life insurance premiums amounting to $2,307, and for restricted
    stock purchased on 01/31/06 in the amount of $3.75(5)
    
    Reflects amounts paid by Foundry for Mr. Chengs life
    insurance premiums amounting to $2,052, and for restricted stock
    purchased on 01/31/06 in the amount of $3.75(6)
    
    Reflects amounts paid by Foundry for Mr. Akins life
    insurance premiums amounting to $2,355, and for restricted stock
    purchased on 01/31/06 in the amount of $1.88(7)
    
    Reflects amounts paid by Foundry for Mr. Twomblys
    life insurance premiums amounting to $2,220, and for restricted
    stock purchased on 01/31/06 in the amount of $3.75(8)
    
    Reflects amounts paid by Foundry for Mr. Schiffs life
    insurance premiums amounting to $2,362, and for restricted stock
    purchased on 01/31/06 in the amount of $3.75  Grants of
    Plan-Based Awards
      Grant of
    Plan-Based Awards
  All Other OptionEstimated Future Payouts Under Non-Equity


All Other Stock


Awards: # ofIncentive Plan Awards


Awards: # of Shares


Securities


Exercise or Base


Grant Date FairThreshold


Target


Maximum


of Stock or Units


Underlying


Price of Option


Value of Stock andName

Grant Date


($)


($)


($)


(#)


Options (#)


Awards ($/Sh)


Option Awards ($)(4)Bobby R. Johnson, Jr.


N/A



225,000



300,000



450,0001/31/2006



















600,000


$
15.03


$
3,333,2401/31/2006















75,000










$
1,127,250Timothy D. Heffner


N/A



90,000



120,000



180,0001/31/2006



















125,000


$
15.03


$
694,4251/31/2006















37,500










$
563,625Ken K. Cheng


N/A



90,000



120,000



180,0001/31/2006



















240,000


$
15.03


$
1,518,3121/31/2006















37,500










$
563,6255/6/2002



















3,646
(1)

$
6.75
(1)Laurence L. Akin


N/A



187,500



250,000



375,0001/31/2006



















125,000


$
15.03


$
694,4251/31/2006















18,750










$
281,8132/5/2002



















10,279
(2)

$
7.28
(2)5/6/2002



















57,500
(2)

$
6.75
(2)Paul L. Twombly, Jr.


N/A



81,000



108,000



162,0001/31/2006



















150,000


$
15.03


$
948,9451/31/2006















37,500










$
563,6252/5/2002



















2,778
(3)

$
7.28
(3)5/6/2002



















3,125
(3)

$
6.75
(3)Robert W. Schiff


N/A



78,750



105,000



157,5001/31/2006



















200,000


$
15.031/31/2006















37,500






$
0.00  122




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##### Table of Contents



(1)
    
    In connection with our review of historic stock option grant
    practices, the Company and Mr. Cheng agreed to increase the
    exercise price of the unvested portion of an option granted to
    Mr. Cheng on May 6, 2002, covering 3,646 shares.
    Under that agreement, the exercise price of this option was
    increased to $6.75, the closing price of our common stock on the
    Nasdaq Global Select Market on the revised measurement date.
    This change provided no additional consideration to
    Mr. Cheng, and we did not recognize any financial expense
    under SFAS 123R in connection with the modification.(2)
    
    In connection with our review of historic stock option grant
    practices, the Company and Mr. Akin agreed to increase the
    exercise price of the unvested portion of two options granted to
    Mr. Akin, on February 5, 2002 and May 6, 2002,
    covering 10,279 and 57,500 shares respectively. Under that
    agreement, the exercise prices of these options were increased
    to $7.28 and $6.75, respectively, which were the closing prices
    of our common stock on the Nasdaq Global Select Market on the
    revised measurement dates. The changes provided no additional
    consideration to Mr. Akin, and we did not recognize any
    financial expense under SFAS 123R in connection with the
    modifications.(3)
    
    In connection with our review of historic stock option grant
    practices, the Company and Mr. Twombly agreed to increase
    the exercise price of the unvested portion of two options
    granted to Mr. Twombly, on February 5, 2002 and
    May 6, 2002, covering 2,778 and 3,125 shares
    respectively. Under that agreement the exercise prices of these
    options were increased to $7.28 and $6.75, respectively, which
    were the closing prices of our common stock on the Nasdaq Global
    Select Market on the revised measurement dates. The changes
    provided no additional consideration to Mr. Twombly, and we
    did not recognize any financial expense under SFAS 123R in
    connection with the modifications.(4)
    
    These amounts reflect the grant date fair value determined by us
    for financial accounting purposes under SFAS 123R for these
    awards and do not reflect whether the recipient has actually
    realized or will realize a financial benefit from the awards
    (such as by exercising stock options or by vesting in a
    restricted stock or restricted stock unit award). Pursuant to
    SEC rules, the amounts shown exclude the impact of estimated
    forfeitures related to service-based vesting conditions. Stock
    awards consist of restricted stock
    and/or
    restricted stock units. For additional information on the
    valuation model and assumptions used to calculate the grant date
    fair value of these awards, see Note 2 of the Notes to the
    Consolidated Financial Statements appearing elsewhere in
    Item 8 of this annual report on
    Form 10-K
    for the year ended December 31, 2006.  Outstanding
    Equity Awards
    Outstanding
    Equity Awards at Fiscal 2006 Year-End
  Option Awards


Stock AwardsNumber of


Number of











Market Value ofSecurities


Securities


Option





Number of Shares or


Shares or Units ofUnderlying


Underlying


Exercise


Option


Units of Stock That


Stock That HaveUnexercised Options


Unexercised Options


Price


Expiration


Have Not Vested


Not VestedName

(#) Exercisable


(#) Unexercisable


($)


Date


(#)


($)Bobby R. Johnson, Jr.


300,000






$
7.94



8/7/12400,000






$
13.92



6/10/14225,000
(1)


375,000


$
15.03



1/31/11



75,000
(4)


1,123,500Timothy D. Heffner


100,000






$
59.69



5/22/1085,000






$
11.38



1/9/1179,200






$
6.14



2/5/12230,000
(2)


10,000


$
8.14



2/4/13100,000






$
13.92



6/10/14114,583



10,417


$
10.31



2/11/1046,875
(1)


78,125


$
15.03



1/31/11



37,500
(4)


561,750 123




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##### Table of Contents



Option Awards


Stock AwardsNumber of


Number of











Market Value ofSecurities


Securities


Option





Number of Shares or


Shares or Units ofUnderlying


Underlying


Exercise


Option


Units of Stock That


Stock That HaveUnexercised Options


Unexercised Options


Price


Expiration


Have Not Vested


Not VestedName

(#) Exercisable


(#) Unexercisable


($)


Date


(#)


($)Laurence L. Akin


85,000






$
36.88



11/29/1042,500






$
11.38



1/9/11100,000






$
13.35



4/26/1120,000






$
6.14



2/4/1260,000






$
6.14



2/5/1257,500






$
4.94



5/6/12180,000
(2)


10,000


$
8.14



2/4/13100,000






$
13.92



6/10/14114,583



10,417


$
10.31



2/11/1046,875
(1)


78,125


$
15.03



1/31/11



18,750
(4)


280,875Ken K. Cheng


80,000






$
59.69



5/22/1085,000






$
11.38



1/9/11150,000






$
6.14



2/5/123,646






$
4.94



5/6/12230,000
(2)


10,000


$
8.14



2/4/13120,000
(3)


120,000


$
13.92



6/10/14114,583



10,417


$
10.31



2/11/1045,000



195,000


$
15.03



1/31/11



37,500
(4)


561,750Paul L. Twombly, Jr.


90,000






$
10.16



4/23/1150,000






$
6.14



2/5/123,125






$
4.94



5/6/12172,500
(2)


7,500


$
8.14



2/4/1390,000
(3)


90,000


$
13.92



6/10/1491,666



8,334


$
10.31



2/11/1028,125



121,875


$
15.03



1/31/11



37,500
(4)


561,750Robert W. Schiff


30,000
(2)


5,000


$
14.27



6/29/131,000






$
16.00



8/16/1315,000






$
21.76



2/20/1416,666
(2)


39,584


$
9.95



7/25/1435,833



54,167


$
10.31



2/11/1037,500



162,500


$
15.03



1/31/11



37,500
(4)


561,750     (1)
    
    The shares subject to the option vest quarterly over two years
    commencing on the grant date.(2)
    
    The shares subject to the option vest monthly over four years
    commencing on the six-month anniversary of the grant date.(3)
    
    The shares subject to this option vest monthly over five years
    commencing on the three-month anniversary of the grant date.(4)
    
    The shares subject to this award vest 50% on the first and
    second annual anniversaries of the grant date. 124




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##### Table of Contents



Option
    Exercises
    Option
    Exercises and Stock Vested
  Option AwardsNumber of SharesAcquired on


Value Realized onName

Exercise (#)


Exercise ($)Bobby R. Johnson, Jr.






Timothy D. Heffner


30,000


$
271,436Ken K. Cheng


61,979


$
643,901Laurence L. Akin






Paul L. Twombly, Jr.


18,125


$
149,747Robert W. Schiff


48,750


$
224,709   Potential
    Payments Upon Termination or Change of Control
      Director
    Compensation
   125




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##### Table of Contents



Director
    Compensation
  Fees Earned or


OptionName

Paid in Cash ($)


Awards ($)(1)


Total ($)Alfred J. Amoroso

$
30,000


$
367,155


$
397,155Alan L. Earhart

$
40,000


$
792,204


$
832,204C. Nicholas Keating, Jr.

$
30,000


$
367,155


$
397,155J. Steven Young

$
30,000


$
367,155


$
397,155Andrew K. Ludwick

$
15,000
(2)

$
330,255


$
345,255     (1)
    
    Represents amount recognized for financial statement reporting
    purposes for the fiscal year ended December 31, 2006 in
    accordance with SFAS 123R, for stock options (which may or may
    not have been granted in fiscal year 2006), disregarding the
    estimate of forfeitures related to service-based vesting
    conditions. On June 16, 2006, each of Messrs. Keating,
    Amoroso, Young and Earhart were automatically granted an option
    to purchase 60,000 shares of Company common stock. Each
    such option award had an aggregate grant date fair value for
    financial statement reporting purposes under SFAS 123R of
    $272,280. For additional information on the valuation model and
    assumptions used to calculate the grant date fair value of these
    options, see Note 2 of the Notes to the Consolidated
    Financial Statements appearing in Item 8 of this Annual
    Report on
    Form 10-K
    for the year ended December 31, 2006. At December 31,
    2006, the non-employee members of the Board of Directors held
    exercisable options as follows: Mr. Amoroso,
    560,000 shares; Mr. Earhart, 405,000 shares;
    Mr. Keating, 540,000 shares; and Mr. Young,
    641,250 shares. Mr. Ludwick had no outstanding options
    at December 31, 2006.(2)
    
    Mr. Ludwick ceased to be a director on June 16, 2006.
    Amounts in this column represent fees earned by Mr. Ludwick
    through that date.    Position

Annual Compensation(Effective April 19, 2007)Applicable to All Non-Employee
    Directors:Member of Board of Directors


$40,000As Appropriate (in addition to
    above compensation):Audit Committee Chair


$15,000Compensation Committee Chair


$10,000Nominating Committee Chair


$10,000Committee Member (audit,
    compensation and nominating committees only)


$5,000*Chairman of the Board


$50,000**     *
    Such amount to be paid to committee members not serving as chair.  **
    The Chairman of the Board shall not receive compensation for
    committees or other chairs.  Compensation
    Committee Interlocks and Insider Participation
   126




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##### Table of Contents



Compensation
    Committee Report
  Notwithstanding anything to the contrary set forth in any of
    Foundrys filings under the Securities Act of 1933 or the
    Securities Exchange Act of 1934 that might incorporate future
    filings, including this Annual Report on
    Form 10-K,
    in whole or in part, the following report shall not be deemed to
    be incorporated by reference into any such filings.
  Form 10-K. Form 10-K
  
  
  Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.    
    each person who is known by us to beneficially own more than 5%
    of our common stock;
    each of our directors;
    each of our named executive officers; and
    all of our directors and executive officers as a group.   127




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##### Table of Contents



Amount andNature of


Percent ofBeneficial


CommonName and Address of Beneficial Owner

Ownership


Stock(1)Greater than 5%
    Stockholders:Royce & Associates,
    LLC(2)


14,927,500



10.12
%1414 Avenue of the Americas
    New York, NY 10019Officers and
    Directors:Bobby R. Johnson, Jr.(3)


12,110,379



8.15
%Timothy D. Heffner(4)


1,480,955



1.00
%Ken K. Cheng(5)


1,273,880




*Laurence L. Akin(6)


875,610




*Robert Schiff(7)


225,963




*Paul L. Twombly(8)


613,903




*Alfred J. Amoroso(9)


474,750




*C. Nicholas Keating, Jr.(10)


453,750




*J. Steven Young(11)


555,000




*Alan L. Earhart(12)


314,062




*Celeste Volz Ford







*All directors and executive
    officers as a group (13) (13 persons)


17,421,384



11.35
%     *
    
    Less than 1% of the outstanding shares of common stock. Except
    as otherwise noted, the address of each person listed in this
    table is
    c/o Foundry
    Networks, Inc., 4980 Great America Parkway, Santa Clara,
    California, 95054.(1)
    
    For each person and group included in the table, percentage
    ownership is calculated by dividing the number of shares
    beneficially owned by such person or group as described above by
    the sum of the 147,550,883 shares of common stock
    outstanding on May 31, 2007 and the number of shares of
    common stock that such person or group had the right to acquire
    on or within 60 days of that date, including, but not
    limited to, the exercise of options.(2)
    
    Beneficial and percentage ownership information is based on
    information contained in Schedule 13G filed with the SEC on
    January 19, 2007 by Royce & Associates, LLC. The
    Schedule 13G indicates that Royce & Associates,
    LLC owns beneficially 14,927,500 shares.(3)
    
    Includes 1,075,000 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(4)
    
    Includes 807,325 shares issuable upon the exercise of
    options held by Mr. Heffner which are exercisable within
    sixty days of May 31, 2007. Also includes
    16,425 shares held by The Nicole M. Heffner Trust,
    16,425 shares held by The Krysta M. Heffner Trust and
    16,425 shares held by The Tyler B. Heffner Trust.
    Mr. Heffner disclaims beneficial ownership of the shares
    held by The Nicole M. Heffner Trust, The Krysta M. Heffner Trust
    and The Tyler B. Heffner Trust.(5)
    
    Includes 906,646 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(6)
    
    Includes 858,125 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(7)
    
    Includes 195,166 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007. 128




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##### Table of Contents



(8)
    
    Includes 581,000 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(9)
    
    Includes 473,750 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007. Also includes 1,000 shares held by the Amoroso Family
    Trust dated 4/2/00, for which Mr. Amoroso serves as
    co-trustee with his wife.(10)
    
    Includes 453,750 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(11)
    
    Includes 555,000 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(12)
    
    Includes 314,062 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.(13)
    
    Includes 5,875,005 shares issuable upon the exercise of
    options which are exercisable within sixty days of May 31,
    2007.  Securities
    Authorized for Issuance under Equity Compensation
    Plans
    Number ofsecuritiesremainingavailable forfuture issuanceunder equityNumber of





compensationsecurities to be


Weighted-average


plans (excludingissued upon exercise


exercise price of


securitiesof outstanding


outstanding


reflected inPlan Category

options(a)


options(b)


column (a))(c)Equity compensation plans
    approved by stockholders:2006 Stock Incentive Plan


978,500


$
12.92



25,021,5001996 Stock Plan


27,062,547


$
13.31




(1)1999 Employee Stock Purchase Plan










6,628,776
(2)1999 Directors Stock
    Option Plan


1,991,250


$
31.43



1,135,000Equity compensation plans
    not approved by stockholders:2000 Non-Executive Stock Option
    Plan


1,717,615


$
12.73



246,163     (1)
    
    Because the 2006 Stock Incentive Plan was approved at the 2006
    Annual Meeting, no further grants were made under the 1996 Stock
    Plan after the date of the Annual Meeting. The number of shares
    reserved for issuance under the 1996 Stock Plan has increased on
    the first day of each fiscal year through 2006 by the lesser of
    (i) 5,000,000 shares, (ii) 5% of our outstanding
    common stock on the last day of the immediately preceding fiscal
    year or (iii) the number of shares determined by the Board
    of Directors.  (2)
    
    The number of shares reserved for issuance under the 1999
    Employee Stock Purchase Plan will be increased on the first day
    of each fiscal year through 2009 by the lesser of
    (i) 1,500,000 shares, (ii) 2% of our outstanding
    common stock on the last day of the immediately preceding fiscal
    year or (iii) the number of shares determined by the Board
    of Directors. 129




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##### Table of Contents



2000
    Non-Executive Stock Option Plan
      Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.  Transaction
    with Related Persons
    Policy
    Regarding Transactions with Related Persons
    Director
    Independence
    Item 14.
    Principal
    Accounting Fees and Services.   130




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##### Table of Contents



2006


2005(In thousands)Audit Fees(1):Core audit fees

$
2,519


$
1,136Audit fees related to restatement
    and independent stock option investigation


3,944



Tax Fees(2)


44



243All other Fees(3)


0



30Total

$
6,507


$
1,409     (1)
    
    Audit fees represent fees for professional services provided in
    connection with the audit of our financial statements and review
    of our quarterly financial statements and audit services
    provided in connection with other statutory or regulatory
    filings. We have incurred total audit fees for fiscal 2006 of
    $6.5 million, of which approximately $2.5 million was
    for our core audit fees and approximately $3.9 million was
    related to the audit of our restated financial statements and
    the review of the independent investigation into our historical
    stock option practices. Fiscal 2006 Audit fees paid or accrued
    as of December 31, 2006 were approximately
    $2.6 million. We had no Audit-Related fees for fiscal 2006
    or 2005.(2)
    
    Tax fees are for professional services rendered for tax
    compliance, tax advice and tax planning.(3)
    
    All other fees consisted primarily of special consultations.     PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules.  Form 10-K:
      Schedule II-Valuation
 131




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##### Table of Contents



Regulation S-K)
  Number

Description3
.1

Amended and Restated Certificate
    of Incorporation of Foundry Networks, Inc. (Amended and Restated
    Certificate of Incorporation filed as Exhibit 3.2 to
    registrants Registration Statement on Form S-1 (Commission
    File No. 333-82577) and incorporated herein by reference;
    Certificate of Amendment to the foregoing filed as Exhibit 3.1
    to registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000 and incorporated herein by
    reference.)3
.2

Amended and Restated Bylaws of
    Foundry Networks, Inc. (Filed as Exhibit 3.2 to
    registrants Current Report on Form 8-K filed on
    April 24, 2007 and incorporated herein by reference.)10
.1

1996 Stock Plan.*(1)10
.2

Form of Stock Option Agreement
    under registrants 1996 Stock Plan.*(1)10
.3

1999 Employee Stock Purchase Plan,
    as amended.*10
.4

1999 Directors Stock
    Option Plan (including related form agreements), as amended.*10
.5

Form of Indemnification Agreement.
    (2)10
.6

OEM Purchase Agreement dated
    January 6, 1999 between Foundry Networks, Inc. and
    Hewlett-Packard Company, Workgroup Networks Division. (3)10
.7

Reseller Agreement dated July 1,
    1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd.
    (3)10
.8

2000 Non-Executive Stock Option
    Plan.*(4)10
.9

Form of Stock Option Agreement
    under registrants 2000 Non-Executive Stock Option Plan.*(4)10
.10

Lease agreement dated September
    28, 1999, between Foundry Networks, Inc., and Legacy Partners
    Commercial Inc., for offices located at 2100 Gold Street,
    San Jose, CA 95002. (5)10
.11

Confidential Settlement Agreement
    and Release, effective October 25, 2004, by and between Nortel
    Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc.,
    Bobby R. Johnson, Jr., H. Earl Ferguson, deceased, and Jeffrey
    Prince. (6)10
.12

Sublease agreement dated March 25,
    2005, between Foundry Networks, Inc. and Hyperion Solutions
    Corporation, for offices located at 4980 Great America Parkway,
    Santa Clara, CA 95054. (7)10
.13

Form of Restricted Stock Purchase
    Agreement under the registrants 1996 Stock Plan. *(1)10
.14

2006 Stock Incentive Plan.*(8)10
.15

2006 Stock Incentive Plan-Form of
    Stock Grant Agreement *(8)10
.16

2006 Stock Incentive Plan-Form of
    Notice of Stock Option Grant and Stock Option Agreement. *(8)10
.17

2006 Stock Incentive Plan-Form of
    Stock Unit Agreement. *(8)10
.18

2006 Stock Incentive Plan-Form of
    Stock Appreciation Right Agreement. *(8)21
.1

List of Subsidiaries.23
.1

Consent of Independent Registered
    Public Accounting Firm.31
.1

Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.31
.2

Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.32
.1

Certification of Chief Executive
    Officer pursuant to Section 18 U.S.C. Section 1350.32
.2

Certification of Chief Financial
    Officer pursuant to Section 18 U.S.C. Section 1350.     *
    
    Indicates management contract or compensatory plan or
    arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock
    Option Agreement incorporated herein by reference to the exhibit
    filed with registrants Registration Statement on
    Form S-1
    (Commission File No.
    333-82577).
    Copy of 1996 Stock Plan reflecting the amendments approved at
    the 2000 Annual Meeting of Stockholders incorporated by
    reference to registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of 1996 Stock Plan reflecting the amendments for approval
    at the 2002 Annual Meeting of Stockholders incorporated by
    reference to registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of Form of Restricted Stock Purchase Agreement under the
    1996 132




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##### Table of Contents



Stock Plan is incorporated herein by reference to the exhibit
    filed with registrants Annual Report on Form 10-K for
    the year ended December 31, 2005 (Commission File
    No. 000-26689).(2)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577).(3)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577);
    Confidential treatment has been granted by the Securities and
    Exchange Commission with respect to this exhibit.(4)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-8
    filed on October 25, 2000 (Commission File
    No. 333-48560).(5)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended September 30, 1999 (Commission File
    No.
    000-26689).(6)
    
    Incorporated by reference from registrants Annual Report
    on
    Form 10-K
    filed on March 11, 2005 (Commission File
    No. 000-26689).(7)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended March 31, 2005 (Commission File No.
    000-26689).(8)
    
    Copy of 2006 Stock Incentive Plan approved at the 2006 Annual
    Meeting of Stockholders incorporated by reference to the
    exhibits filed with registrants
    Form 8-K
    on June 22, 2006 (Commission File
    No. 000-26689). 133




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##### Table of Contents



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 thereunto duly authorized.
     By:
    /s/  Daniel
    W. Fairfax Daniel W. Fairfax
 Vice President, Finance & Administration
 Chief Financial Officer
 (Principal Financial Officer &
 Principal Accounting Officer)
    POWER OF
    ATTORNEY
  Form 10-K,
  Pursuant to the requirements of the Securities Exchange Act
    of 1934, this report has been signed below by the following
    persons on behalf of the registrant and in the capacities and on
    the dates indicated.
  Signature

Title

Date/s/  Alfred
    J. AmorosoAlfred
    J. Amoroso

Chairman of the Board of Directors

June 8, 2007/s/  Bobby
    R. Johnson,
    Jr.Bobby
    R. Johnson, Jr.

President and Chief Executive
    Officer (Principal Executive Officer)

June 8, 2007/s/  Daniel
    W. FairfaxDaniel
    W. Fairfax

Vice President, Finance & 
    Administration, Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)

June 8, 2007/s/  C.
    Nicholas Keating,
    Jr.C.
    Nicholas Keating, Jr.

Director

June 8, 2007/s/  J.
    Steven YoungJ.
    Steven Young

Director

June 12, 2007/s/  Alan
    L. EarhartAlan
    L. Earhart

Director

June 8, 2007/s/  Celeste
    Volz FordCeleste
    Volz Ford

Director

June 8, 2007  134




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##### Table of Contents



INDEX TO
    EXHIBITS
  Number

Description10
.3

1999 Employee Stock Purchase Plan,
    as amended.10
.4

1999 Directors Stock Option
    Plan, as amended, (including related form agreements).21
.1

List of Subsidiaries.23
.1

Consent of Independent Registered
    Public Accounting Firm.31
.1

Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.31
.2

Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.32
.1

Certification of Chief Executive
    Officer pursuant to Section 18 U.S.C. Section 1350.32
.2

Certification of Chief Financial
    Officer pursuant to Section 18 U.S.C. Section 1350.