UNITED STATESSECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



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Form 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number: 000-26689



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FOUNDRY NETWORKS, INC.

(Exact name of registrant as specified in its charter)



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| | Delaware(State or other
      Jurisdictionof Incorporation or
      organization) |  | 77-0431154(I.R.S. Employer
      Identification No.) | 
| | --------------------------------------------------------------------------------- |  | ---------------------------------------------------- | 

2100 Gold StreetP.O. Box
649100San Jose, CA
95164-9100Website:
www.foundrynetworks.com(Address of principal
executive offices, including zip code)

Registrants telephone number, including area
code:(408) 586-1700

Securities registered pursuant to Section 12(b) of the
Act:None

Securities registered pursuant to Section 12(g) of the
Act:Common Stock, $0.0001 par
value



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x] No [ ]

The aggregate market value of the voting stock held by non-affiliates of
  the registrant was approximately $666,689,642 as of June 28, 2002, based upon
  the closing sale price on the Nasdaq National Market reported for such date.
  Shares of common stock held by each officer and director and by each person
  who owns 5% of more of the outstanding common stock have been excluded in that
  such persons may be deemed to be affiliates. This determination of affiliate
  status is not necessarily a conclusive determination for other purposes.

There were 122,033,038 shares of the registrants common stock issued and
outstanding as of March 24, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Part III (Items 10-13) incorporates information by reference from the
definitive proxy statement for the 2003 Annual Meeting of Stockholders to be
filed hereafter.






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FOUNDRY NETWORKS, INC.TABLE OF
CONTENTS



|               |  |                                                                                                      | Page
|-------------- |  | ---------------------------------------------------------------------------------------------------- | ----
|PART
      I   |  |                                                                                                      |     
|               |  |                                                                                                      |     
|Item
      1.  |  | Business                                                                                             | 3   
|Item
      2.  |  | Properties                                                                                           | 18  
|Item
      3.  |  | Legal Proceedings                                                                                    | 18  
|Item
      4.  |  | Submission of Matters to a Vote of Security
      Holders                                            | 19  
|               |  |                                                                                                      |     
|PART
      II  |  |                                                                                                      |     
|               |  |                                                                                                      |     
|Item
      5.  |  | Market for Registrants Common Equity and Related Stockholder
      Matters                          | 20  
|Item
      6.  |  | Selected Consolidated Financial Data                                                                 | 21  
|Item
      7.  |  | Managements Discussion and Analysis of Financial Condition and
      Results ofOperations           | 21  
|Item 7(A).     |  | Quantitative and Qualitative Disclosures about Market
      Risk                                     | 39  
|Item
      8.  |  | Consolidated Financial Statements and Supplementary
      Data                                       | 40  
|Item
      9.  |  | Change in and Disagreements with Accountants on Accounting and
      FinancialDisclosure             | 67  
|               |  |                                                                                                      |     
|PART
      III |  |                                                                                                      |     
|               |  |                                                                                                      |     
|Item
      10. |  | Directors and Executive Officers of the
      Registrant                                             | 68  
|Item
      11. |  | Executive Compensation                                                                               | 68  
|Item
      12. |  | Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters | 68  
|Item
      13. |  | Certain Relationships and Related
Transactions                                                       | 68  
|Item 14.       |  | Controls and Procedures                                                                              | 68  
|               |  |                                                                                                      |     
|PART
      IV  |  |                                                                                                      |     
|               |  |                                                                                                      |     
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form
      8-K                                | 69  

|SIGNATURES     | 71
|-------------- | --
|               |   
|CERTIFICATIONS | 72

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PART I

In addition to
historical information, this Annual Report on Form 10-K contains forward-looking
statements. These forward-looking statements involve risks, uncertainties and
assumptions. The 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 the sections entitled BusinessResearch and
Development, BusinessCompetition, BusinessIntellectual Property, and
Managements Discussion and Analysis of Financial Condition and Results of
OperationsRisk Factors That May Affect Future Results and Market Price of
Stock. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements opinions only as of the
date hereof. Foundry Networks, Inc., together with its consolidated subsidiaries
(collectivelythe Company or Foundry), undertakes 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
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company in
fiscal year 2003. All public reports filed by the Company with the Securities
and Exchange Commission (the SEC) are available free of charge on the
Companys website atwww.foundrynetworks.comas soon as practicable
after we electronically file such reports with the SEC.

Item 1.Business

Overview

Foundry Networks, founded in 1996, is a leading provider of
next-generation networking products. We provide a comprehensive, end-to-end
suite of high-performance Ethernet Layer 2 and Layer 3 switches, Metro routers
and Internet traffic management products for enterprises, educational
institutions, government agencies, web-hosting companies, application service
providers (ASPs), electronic banking and finance service providers, and Internet
service providers (ISPs). We design, develop, manufacture and market solutions
to meet the needs of high-performance network infrastructures for Layer 2-7
switching and routing and for local area networks (LANs), metropolitan area
networks (MANs), wide area networks (WANs), and the web. Foundrys combined
product breadth allows us to offer global end-to-end solutions within and
throughout a customers networking infrastructure regardless of the
geographically dispersed nature of the entire organization. Our products can be
found from the wiring closets connecting the desktops together within the
enterprise to the mission critical LAN backbone and data center. We provide
robust and high performance routing solutions from the Internet core to the edge
of the Internet service access network and its network of web and application
servers. Our Metro routers deliver the capabilities and performance needed to
provide efficient and reliable core routing services to Internet data centers
around the world. Our Layer 2 and Layer 3 switches provide the intelligence,
speed and cost effectiveness required to support the increasing use of
bandwidth-intensive and Internet-based applications. Our high performance
Internet traffic management systems with network intelligence capabilities allow
enterprises and service providers to build highly available network
infrastructures that direct traffic flow efficiently based on client location,
application type, and administrative policies, while allowing service providers
to offer their customers differentiated services.

Our networking products have been deployed in key enterprise markets that
include automotive, energy, retail, healthcare, banking, trading, insurance,
aerospace, government agencies, technology, motion pictures, video and
animation, transportation, E-commerce, and universities. Our service provider
markets include Metro service providers, Internet service providers, web hosting
and Internet data centers, application service providers, and Internet
exchanges. For enterprises, Foundry provides a complete end-to-end solution with
Foundrys FastIron®, FastIron Edge®, BigIron®, ServerIron®, and EdgeIron
product lines. Our enterprise portfolio of products meets the needs for wiring
closet, data center, and campus solutions coupled with Foundrys network
management and security. For service providers, Foundry offers our
high-performance BigIron switches, NetIron® Metro routers, and ServerIron web
switches. Our switching and routing products can be managed with our IronView®
Network Manager products. Foundrys products support a wide array of interfaces
such as 10/100
Ethernet, 1 Gigabit Ethernet (copper and fiber), 10 Gigabit Ethernet, Packet
over SONET and ATM so that our customers can leverage their existing
infrastructures. We sell our products through a direct sales force, resellers,
and OEM partners. By providing high levels of performance and intelligence
capabilities at

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competitive price
points, we provide comprehensive solutions to address the rapidly growing
enterprise and service provider markets.

Industry
Background

The pervasiveness of computing by businesses, organizations and
individuals, and the need to interconnect computing devices to enable widespread
communication, have given rise to the multi-billion dollar computer networking
industry. The complexity of information traveling over networks has increased
with the adoption of bandwidth-intensive applications that include increasing
amounts of data, voice, video and graphics. The increase in users, coupled with
these new bandwidth-intensive applications, has resulted in enterprises,
web-based businesses, and Internet service providers demanding networking
solutions with superior performance and intelligence capabilities.

Evolution of Market Needs

Organizations initially adopted data networks to connect a limited number
of computers within close proximity, allowing users to share simple, common
services, such as file servers and printers. In these networks, called local
area networks or LANs, traffic patterns were predictable because the majority of
traffic resided within the LAN and remained local to a specific part of the
organization. Widespread Internet usage, the proliferation of client-server
applications and the adoption of new bandwidth-intensive applications have
increased traffic loads and created unpredictable traffic patterns. Today, the
majority of traffic traverses the boundaries of the LAN to networks outside of
the LAN. Such communication traditionally required an organization to utilize
costly long distance carrier services that often provided inadequate
performance. As a result of todays traffic flows, enterprises increasingly
require low cost, high performance networking equipment to enable effective
communications across geographically dispersed networks, known as MANs and WANs.

Increasingly, enterprises are using the web for business activities and
processes. Although mainstream enterprises continue to use E-commerce
capabilities, enterprises are also using the Internet for business-to-business
transactions, internal process reengineering, and supply chain management. The
increasing reliance on the Internet by businesses, government agencies, and
organizations is increasing the demand for cost-effective, high performance
solutions for both internal networks and access to the Internet externally.

Evolution of Network Solutions

Early LANs consisted of hubs, which enabled multiple users to share
network resources, and software-based routers, which supported multiple
protocols to move traffic around the network. Increased use of
bandwidth-intensive applications and a larger number of users strained these
early network infrastructures, making it increasingly difficult for them to
handle new applications while still performing at an acceptable speed. Network
devices known as Layer 2 switches replaced hubs to provide dedicated bandwidth
to users, while Fast Ethernet technology was introduced to provide data
transmission speeds of 100 Mbps, ten times faster than original hubs. Despite
these improvements, the installed base of traditional routers, relying on
software to analyze and route network traffic, were unable to accommodate
increased data speeds and changing traffic patterns and became the new network
bottleneck.

Two new technologies High-speed Ethernet and Layer 3 switchingevolved
in parallel to handle growing and unpredictable traffic patterns and address the
performance needs of bandwidth-intensive applications. Gigabit Ethernet-based
Layer 3 switches combine Gigabit and 10 Gigabit transmission speeds with the
forwarding capabilities of software-based routers. In Layer 3 switches, the
software forwarding capabilities that enabled early routers to move traffic
around the network perform this function in hardware, using application-specific
integrated circuits, or ASICs, that are built into the switch. This integration
enables manufacturers to develop Layer 3 switches at lower costs while improving
network performance.

Ethernet technology has evolved to meet or exceed alternative networking
technologies in terms of distance and resiliency. Foundry offers 10 Gigabit
Ethernet that spans distances up to 150 kilometers (approximately 93 miles).
This allows enterprises and service providers to use Ethernet technology for
metropolitan network communications. Foundry conforms to the IEEE standard for
10 Gigabit Ethernet that includes provision for a WAN physical interface. This
interface is compatible with SONET at Layer 1 and, thus, will offer a compelling
alternative to SONET OC-192c Packet over SONET because of its lower cost and
ease of

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configuration.
Ethernet technology also compares more favorably to alternative networking
technologies because of increases in availability and resiliency. Foundrys
products implement industry standards such as IEEE 802.1w to provide
rapid-spanning tree protocol and metro ring protocols. These protocols provide
sub-second fault-detection, isolation, and automatic cutover -features that are
essential for carrier-class performance.

Ethernet may have started as a local-area networking technology, but it
has evolved to include the features and functions that make it suitable for
large scale metro area networks. Foundry Networks has played a significant role
in advancing the capabilities of Ethernet by introducing products that deliver
the highest levels of performance, availability, and reliability while
implementing innovation.

Next Generation Needs and Solutions

Two trends continue to drive the network infrastructure market. First, as
enterprises and service providers seek to accommodate network user needs, adding
bandwidth alone is not an adequate solution. Due to the increased use of
multiple traffic types for many applications, enterprises and service providers
have an acute need for solutions that provide network intelligence to
distinguish among and prioritize network traffic based on types of traffic,
content being requested and the applications deployed. Particularly for anyone
supporting electronic business on the web, including service providers, network
intelligence allows them to maintain network reliability and offer
differentiated, fee-based quality of service.

Second, as the Internet has evolved, the traffic crossing the WANs has
shifted from primarily voice traffic to primarily data traffic. Not long ago, a
majority of all wide area traffic was voice traffic. Today, due to the success
of the Internet, most of the wide area traffic is data. Historically, the basic
technology used to move traffic within WANs has been SONET, which was primarily
designed to carry voice traffic. As the majority of wide area traffic has
migrated to data, service providers are looking for a technology that is better
suited to handle data traffic.

Gigabit Ethernet, which has emerged as the ubiquitous LAN technology, is
gaining momentum as the solution for MANs. This momentum has been propelled in
part by the relative inexpensiveness and availability of off-the-shelf Ethernet
networking equipment and the large pool of qualified networking specialists that
are proficient in Ethernet technology. 10 Gigabit Ethernet is a key factor in
this momentum for MANs because providers can quickly build out high-speed
networks. The general acceptance and large volume of Ethernet installations in
LANs have, over time, led to improved performance and significantly reduced
prices.

As bandwidth demand increases and bandwidth-intensive applications are
being made available to enterprise and private users, a new class of service
provider is beginning to emerge, the Metro service provider (Metro SP). Foundry
has had significant success in providing our Ethernet solutions for MANs across
the globe. Large enterprises, including government agencies, often have multiple
buildings in a local area and even have offices across the globe. Metro SPs
provide the critical intermediary network between enterprises and long-haul
regional networks. Using long-haul Gigabit Ethernet as the enabling technology,
these service providers deliver new services such as broadband Internet access,
bandwidth-on-demand and virtual LANs across the metro and regional areas to
business and private users. In this application, Gigabit Ethernet provides high
bandwidth, high reliability and high density solutions that enable
multi-services such as voice-over-IP and virtual private networks to be
delivered over a common backbone.

Solutions

We offer a comprehensive suite of Gigabit Ethernet Layer 2 and Layer 3
switches, Metro routers, and Layer 4-7 Internet traffic management products for
enterprises and service providers. Our solutions provide the following benefits:

Breadth of Product Line.We are
one of the few networking companies to provide a full suite of Metro routers,
Gigabit Ethernet Layer 2/3 switches and Layer 4-7 Internet traffic management products
applicable to LANs, MANs, WANs and data center service farm connectivity.
Foundry provides a complete set of end-to-end switching and routing products
enabling deployment of high-performance and high-availability networks for
mission critical applications. Foundrys product portfolio offers
high-performance, high-availability networking infrastructure for enterprises
and service providers.

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Best in Class Products.Our
products meet the needs of customers who desire to enhance or expand their
existing network infrastructure with best in class products. As a point of risk
management and to secure the benefits of competition in the marketplace,
customers desire alternatives. Foundry delivers a broad portfolio of products
while maintaining our focus on bringing to market best in class products.
Foundry partners with strategic partners for related technologies such as voice
over IP so that we can sustain our focus on high-performance networking
infrastructure.

Performance.Our products provide
a high level of performance and a non-blocking architecture across multiple
types of networks. A non-blocking architecture allows all users attached to the
switch to access the network simultaneously without any negative impact on
performance. We believe we currently offer the highest performing, non-blocking
switches in the market. The performance of our products allows enterprises and
service providers to build highly reliable networks that support unpredictable
traffic flows, bandwidth-intensive applications and dynamic end-user needs. This
high performance can be measured in terms of our products ultra-low latency and
wire-speed throughput. This is a crucial element needed for new applications
such as voice over IP and streaming media.

Intelligence.Our products
provide the intelligence required to transport unpredictable traffic and
bandwidth-intensive applications, improving the performance, reliability and
manageability of networks. Our products direct traffic using information about
the application and end-user, enabling enterprises, web-based businesses, and
Internet service providers to control information delivery and realize benefits
such as increased revenue through application-based or availability-based
service fees.

High Availability.Our products
provide basic and advanced features to deliver greater packet level security and
control, increased levels of reliability with expanded fault tolerance, and
better visibility for streamlined network management. With our products,
customers can plan and build more flexible networks that can complement and
bolster user productivity gains. Our products have been independently tested by
Mier Communications and the Tolly Group and found to offer superior availability
and reliability.

Competitive Price Points.Our
products are designed to offer superior performance and network intelligence
capabilities at competitive price points. Unlike low-priced switches that
provide limited functionality, our products offer customers higher value for
their networking equipment investment by providing a comprehensive feature set
while maintaining low price points.

Investment Protection.Our
products incorporate a uniform hardware architecture that is compatible with all
major existing network products without loss of performance or functionality.
Our switching and routing features are standards-based. Our architecture
supports all forms of Gigabit Ethernet (fiber and copper) and the standard for
10 Gigabit Ethernet. As a result, our customers can integrate our products into
their networks without an extensive and expensive replacement of their existing
network components.

Strategy

Our objective is to be a leading provider of next-generation,
high-performance network solutions. We intend to achieve this objective by
providing a broad suite of the most cost-effective, highest-performing network
switching products for enterprises and service providers. Key elements of our
strategy include:

Continue to Deliver Products that Meet the Needs of the High-End
Switching Segment.Foundrys high-performance
Ethernet switches have met with both commercial success and high-levels of
customer satisfaction. Foundry will continue to grow our product offerings to
meet customer business needs with a full range of networking products. We will
continue to grow our high-end enterprise and service provider switch portfolio
to meet the needs for greater bandwidth, more flexible interfaces, advances in
Internet networking protocols, and enhanced security. This commitment has been
demonstrated by our introduction of JetCore ASICs, Gigabit over Copper, and
second-generation 10 Gigabit Ethernet products. We intend to continue to offer
value-added feature sets that provide for redundancy, ease of use and management
of the network, yielding a higher return on investment coupled with a decreasing
total cost of ownership.

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We have successfully introduced products that implement solutions in four
strategic areas and we intend to continue to enhance our product portfolio in
these areas:

10 Gigabit Ethernet - Foundry was the first to deliver a Layer 3 10 Gigabit Ethernet
product and we continue to be the market share leader.
We intend to develop additional 10 Gigabit Ethernet products and expect that 10
Gigabit Ethernet will accelerate the adoption of Ethernet in the LAN, MAN, and
WAN.

Gigabit over Copper - Foundry introduced new Gigabit Ethernet over Copper
products in 2002 and we intend to continue developing products for this growing
market.

Internet Protocol version 6 (IPv6) - We believe this is a growing market.
Foundry has supported IPv6 with a phased-implementation approach. We intend to
pursue this implementation by bringing new products to the market and providing
products that assist with the migration to IPv6.

Voice over Internet Protocol (VoIP) - Over time, we believe network convergence will bring together
the voice and data networks within most enterprise accounts. In March 2003, we introduced a family of Power over Ethernet
products designed to enable VoIP convergence. We intend to develop additional products designed to
capitalize on the VoIP market opportunity.

Security - In this era of heightened attention to security and
reliability, there is a corresponding increase in the need to secure networks.
Foundry provides advanced functionality for protection of the network
infrastructure with IronShield Security built into all Foundry products. We
believe our existing security offerings differentiate us from our competitors
and we intend to further strengthen our security offerings.

Continue to Expand our Metro Router Capabilities to Address this Growing
Market and Deliver a New Level of Price/Performance to the Service
Providers.Foundry will continue to
bring new features and functionality to our Metro router platform and add to our
product offering by incorporating leading-edge features. These new enhancements
include features such as MPLS (Multi-Protocol Label Switching), and VPLS
(Virtual Private LAN Services). We provide a wide range of features for both
MPLS and Layer 2 Metro architectures with industry-leading scalability and
reliability. We were the first to deliver Layer 3 10 Gigabit Ethernet and we
intend to pursue further innovation that will expand our leadership.

Continue to Leverage our Product Capabilities to Address Emerging
Markets.This includes metropolitan area
networking (MAN), Gigabit Ethernet storage area networking (SAN), voice over IP
(VoIP), and content distribution networks. As noted above, the key advantages of
Gigabit Ethernet, such as price, simplicity, ease of use, will allow this
technology to migrate into many new adjacent markets over time. Foundrys
strategy is to position the company to benefit from the acceptance of Gigabit
Ethernet in such environments as MAN, SAN, VoIP, and content distribution.
To accomplish this, we have added the necessary features and enhancements to our
products to provide an ideal solution for these customers. We work with select
partners when additional non-networking hardware or software is needed for
solutions such as VoIP and SAN. This permits us to remain entirely focused on
network infrastructure while providing complete solutions to our customers.

Continue our Market Leadership Position in Internet Traffic Management
Systems.We believe the demand for
Internet traffic management intelligence capabilities will be a very important
growth area for web-based businesses and Internet service providers and an area
of increasing importance to traditional enterprise networks. We intend to
maintain our leadership position in this market by continually improving the
performance and functionality of our Internet traffic management products.
Designed to provide the highest level of performance and network intelligence
capabilities, our products enable web-based businesses and Internet service
providers to rapidly deliver new revenue-generating applications and services to
end-user customers, while providing a high degree of service reliability.

Provide Superior Technology and Lead the Industry in Innovation.We intend to provide superior
technology, based on price, performance and features, through continual
enhancements of existing products and ongoing development of new products that
provide higher levels of performance and intelligence. We also intend to pursue
cost reduction efforts that will allow us to remain highly competitive while
offering customers competitive price points. We intend to ensure that our
hardware and software architectures are flexible and extensible and are designed
to support new technologies such as 10 Gigabit Ethernet.

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Expand Global Sales Organization.We intend to continue the global expansion of our sales
organization utilizing a direct sales organization in the United States and
abroad, strategic channel partners outside the United States and select original
equipment manufacturers. We intend to increase our worldwide sales force and
establish additional channel partner relationships to build greater worldwide
sales presence.

Deliver World Class Service and Support.We intend to expand our service and support infrastructure to
meet the needs of our growing customer base. Our goal is to minimize our
customers network downtime by offering a wide range of service and support
programs to meet individual customer needs, including prompt onsite hardware
repair and replacement, twenty-four hour, seven days-a-week web and telephone
support, parts depots in strategic locations globally, implementation support,
pre-sales service, system software and network management software upgrades, and
technical documentation updates.

Products

We provide a comprehensive line of networking devices designed to meet
the price, performance, reliability, and feature requirements of enterprises and
service providers. During 2002 and the first quarter of 2003, Foundry launched
many new products to expand and deepen the breadth of our product offerings.
These new products address our customers networking needs for mid-range network
edge products, superior port-density, Gigabit over copper, 10 Gigabit Ethernet,
and real-time traffic monitoring. These networking needs are driven by our
customers business needs for ease of network management, options and
alternatives for accommodating growing network traffic, and continued growth in
business-to-business communications. These products include Foundrys:

FastIron 400/800/1500 JetCore-Based Chassis System - 4, 8, 15-slot modular chassis
system that includes JetScope, a total network monitoring and accounting
solution

2-Port 10 Gigabit Ethernet Module - a further expansion of Foundrys
commitment to 10 Gigabit Ethernet

EdgeIron 2402CF and 4802CF - competitively priced Layer 2 wiring closet
switch

24-Port 100BaseFX Modules for Foundrys FastIron, BigIron, and NetIron -
provides superior fiber port density in small form factor

ServerIron 100 Series - mid-range ServerIron products with advanced
features including Gigabit over copper

EdgeIron 24G - competitively priced Gigabit over copper, Layer 2
mid-range switch

FastIron 3208RGC - full featured Layer 2/3 modular system, equipped with 32 Gigabit
copper 100/1000
auto-sensing ports, 8 mini-GBIC gigabit Ethernet ports, redundant-ready
management module, and an expansion slot that can be used for 10 Gigabit
Ethernet or other modules

FastIron Edge Switch 2402, 4802, and 9604 - a new family of Layer 2,
fixed configuration switches, purpose-built to provide superior port-density and
upgradeable to full multi-protocol Layer 3 stackable products

EdgeIron 10GC2F - competitively priced mid-range Gigabit Ethernet
aggregation switch, specifically designed to address the fast-growing Gigabit
over copper switch market.

Our product suite can be classified by the solutions each product line
offers.

FastIron Enterprise Switches

Foundrys FastIron family of Layer 2/3 switches offers the widest range of choice
for wiring closet and data center applications. The FastIron product family
provides excellent port functionality, capacity, and value for enterprise
networks. With interchangeable management interface modules, the FastIron family
provides superior investment protection, while offering seamless growth,
scalability, and performance. With a simple software upgrade, the FastIron
switches can provide full Layer 3 capabilities including built-in support for
IP,

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IPX, AppleTalk,
routing information protocol (RIP), and open shortest path first (OSPF). The
FastIron family is designed for reliable wiring closet deployments, with support
for 4,096 virtual local area networks (VLAN), hot-swappable interface modules
and power supplies, and rapid spanning tree (RST) protocol for sub-second
convergence.

The product line includes Layer 3 upgradeable 24-, 48-, and 96-port
workgroup switches (including built-in Gigabit over copper and mini-GBIC
interfaces). These can provide up to 672 10/100 and 8 ports of Gigabit Ethernet
simultaneously. A host of new interface modules are available that can scale up
to 232 ports of Gigabit Ethernet in a single chassis.

The Foundry FastIron families include:

FastIron Layer 2/3 Enterprise Modular Switches (4, 8, & 15-slot
chassis)

FastIron 4802

FastIron Edge Switch 2402/4802/9604 10/100 Switches with Gigabit Ethernet Uplink

FastIron 3208RGC Gig-over-Copper

FastIron Edge Switch 12G

FastIron Edge 2402POE and 4802POE switches with Power over
Ethernet

BigIron Layer 3 Backbone Switches

Foundrys BigIron Layer 3 switches offer 10/100, Gigabit Ethernet and 10 Gigabit Ethernet
for leading Layer 2 scalability for Metro, and Layer 3 scalability for ISPs and
large enterprise LAN backbones. BigIron switches are powered by Foundrys
feature-rich IronWare operating systems that include extensive security,
multicast, and multi-protocol feature sets. With carrier-class redundancy,
fine-grain bandwidth management, and wire-speed network monitoring and
accounting features, the BigIron is the product of choice for demanding service
provider and enterprise environments.

Our BigIron switches allow Metro service providers to build
cost-effective Layer 2 and Layer 3 Metro networks based on long-haul Ethernet.
This delivers high performance transparent LAN services (TLS) and Internet
connectivity to enterprise customers. BigIron switches scale the enterprise LAN
backbone connections to allow high performance Gigabit over copper to the server
and desktop. With long haul Gigabit Ethernet and mini-GBIC based optics
flexibility, BigIron is an ideal choice for connecting enterprise campuses
together with high-performance Ethernet to improve employee communications and
collaboration.

The Foundry BigIron family includes:

BigIron 4000 - 4-slot modular switch

BigIron 8000 - 8-slot modular switch

BigIron 15000 - 15-slot modular switch

EdgeIron Layer 2 Switches

Foundrys EdgeIron family of 10/100 and 10/100/1000 Layer 2 switches delivers interface
flexibility, wire-speed performance, superior port density, and a complete
standard Layer 2 feature set to address the mid-range needs of enterprises. Only
1 rack unit in height, the EdgeIron switches are an excellent choice for wiring
closet, small backbone, server farm, and desktop applications in
high-performance local area networks. The EdgeIron family features an
auto-sensing 100-240V AC power supply, making it simple to deploy in a variety
of environments. The AC power supply is optimized for low power consumption.
EdgeIron switches have built-in temperature sensors to monitor cooling and alert
network operators when the temperature exceeds user-specified levels.

The Foundry EdgeIron family includes:

EdgeIron 2402CF and 4802CF - 24 and 48 ports of 10/100, plus 2-ports of
Gigabit Ethernet that can be copper or fiber

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EdgeIron 24G - 24 ports of Gigabit Ethernet over Copper

NetIron Metro Routers

Foundrys NetIron Metro routers allow Metro and Internet service
providers to generate incremental revenue and lower costs with new services
based on scalable, packet-switched IP networks. Our NetIron routers offer
Internet-strength scalability, network equipment building systems (NEBS) Level
3 carrier-class reliability, and industry leading port density in compact,
high-performance modular systems. Our NetIron routers, equipped with MetroLink
interface modules, provide a wide range of media connectivity options, including
Packet over SONET/SDH, ATM, 10/100 Mbps Ethernet, long-reach Gigabit Ethernet (up to 150km), and
10 Gigabit Ethernet.

With Foundrys IronShield security including wire-speed extended access
control lists (ACL), ASIC-based bandwidth provisioning, and JetScope for
scalable network accounting and monitoring, NetIron routers make it easy to
build, manage, and provision IP networks. NetIron routers are an ideal platform
for building and extending Layer 2 Metro networks using multi-protocol label
switching (MPLS), Draft-Martini, and virtual private LAN switching (VPLS) for
point-to-point and multi-point secure virtual private networks (VPN).

With 232 Gigabit Ethernet or 14 10 Gigabit Ethernet ports in a compact
15-slot chassis delivering up to 480 Gbps of non-blocking total switching
capacity, NetIron routers empower service providers to harness the power of IP
networks for new revenue generating services.

The Foundry NetIron family includes:

NetIron 400 - 4-slot Metro router

NetIron 800 - 8-slot Metro router

NetIron 1500 - 15-slot Metro router

NetIron 4802 - a 48-port 10/100 Ethernet and 2 ports of Gigabit Ethernet- Layer 3 Switch with
support for IPv6

ServerIron Layer 4-7 Traffic Management Switches

Foundrys ServerIron family of Layer 4-7 web switches is an industry
leader in load balancing servers, firewalls, caches, and data centers with
high-performance Layer 4 through Layer 7 switching with integrated Layer 2/3 functionalities. Our
modular ServerIron products have been the market leader for the past three
years. ServerIron switches enable network managers to control and manage todays
growing application, transaction, and e-commerce traffic flows. ServerIron
switches improve the availability, scalability, and manageability of servers and
firewalls, with IronShield security against multiple forms of denial of service
attacks. TrafficWorks IronWare, Foundrys comprehensive Layer 4-7
traffic management software suite, powers ServerIron switches.

Our ServerIron switches deliver Internet traffic management functions
including local and global server load balancing, firewall load balancing,
transparent cache switching, application redirection, packet filtering and
prioritization, and support for content-based switching such as cookie-, URL-,
and SSL Session ID-based switching. ServerIron provides the foundation for
high-service availability, disaster recovery, location and server transparency,
and backbone cost control.

The Foundry ServerIron families include:

ServerIron/XL - Fixed configuration web switch

ServerIron 100-series - Fixed configuration web switch with Gigabit over
Copper, fiber, or 10/100 ports

ServerIron 400 - 4-slot modular switch

ServerIron 800 - 8-slot modular switch

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IronView Network Manager Software

Foundrys IronView®Network Manager (INM) software allows todays networks to run at maximum
efficiency by allowing network managers to effectively track and perform
configuration changes and software updates and to quickly identify and resolve
network failures. Our IronView Network Manager empowers network managers to
seamlessly control changes to complex network-wide functions such as access
control lists (ACLs), virtual LANs (VLANs), software and configuration updates,
and network alarm and event controls. INM dramatically simplifies network
provisioning, diagnostics, and resolution, thus reducing total cost of ownership
and increasing our customers return on investment.

Foundrys INM also solves one the most important requirements in
maintaining a network: documenting the network. Our INM comes with online static
and dynamic reports used for auditing software revisions of network devices,
asset inventories, and network configuration inventories of items such as MAC
addresses, VLANs, and IP addresses. These reports, which can be exported to
typical office applications such as spreadsheets, are updated
automatically.

Foundrys JetScope, an integral part of Foundrys INM, includes support
for sFlow (RFC 3176) to deliver hardware-based and real time network traffic
monitoring and accounting. Network managers can perform real time fault and
performance management, capacity planning, intrusion detection, security policy,
and network traffic accounting on all ports from Layer 2 through Layer 7 without
any impact to switching and routing performance.

Hardware and
Software Architecture

JetCore ASIC

Foundry is a leader in achieving performance breakthroughs with
application-specific integrated circuits (ASICs). In June 2001, we introduced
JetCore, our third generation ASICs, which builds on our previous success with
IronCore I and IronCore II ASIC chipsets. In 1997, IronCore I was launched as
the first Layer 3 ASIC in the industry. This ASIC provided Layer 2, 3, and 4
access control lists (ACLs) and quality of service (QoS).

IronCore became the foundation for all of Foundrys products prior to
2002. It allowed us to provide customers with consistent performance,
reliability and features, as well as the ability to leverage their networking
equipment investment. The IronCore chassis architecture consists of a high-speed
data highway that incorporated a backplane and crosspoint switching fabric and
supports up to fifteen interface modules. The crosspoint switching fabric allows
all lines of communication to intersect with one another. Our implementation of
the crosspoint switching fabric includes custom-designed, high speed ASICs that
provide throughput of up to 480 Gigabits and 178 million packets per second.
This amount of throughput allows each module connected to the switch to support
simultaneous communication among all workstations connected to the switch, while
all workstations connected to the switch can operate at maximum performance.
These features of IronCore allow enterprises, web-based businesses, and Internet
service providers to have dedicated access to the network at any time, using any
application at the maximum speed.

JetCore extends Foundrys proven expertise in ASIC design and innovation.
JetCore compliments IronCore by providing bandwidth management on-demand,
advanced Layer 2 and 3 features, enhanced QoS, jumbo frames, and new network
management features and functions. The JetCore ASIC also integrates sFlow, an
Internet Engineering Task Force (IETF) draft standard for network traffic
monitoring and accounting. JetCore is backward compatible to IronCore.

With Foundrys JetCore-powered switching and routing products, we deliver
leading network monitoring and traffic accounting capabilities, including
accurate network traffic accounting, from Layer 2 up to Layer 7, integration
with industry-leading accounting and billing applications, intrusion detection
and full visibility of any network traffic, precise network policing of network
traffic everywhere, and identification of network bottlenecks within a network
and complete packet header decoding from Layer 2 through Layer 7.

IronWare and Internet IronWare Software

As previously mentioned, our products incorporate a uniform hardware
architecture. Foundry is able to leverage this hardware architecture with
feature and functionality innovations implemented through software.

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The ability to
provide these enhancements through software affords our customers considerable
investment protection. Customers are often able to adopt new technology or
migrate to more advanced networking by upgrading their software rather than
replacing their hardware. During 2002, Foundry delivered several releases of our
IronWare software to implement new industry standards and increase network
availability, performance, and security. Also in 2002, Foundry delivered a new
operating system release for Foundrys ServerIron family called TrafficWorks
IronWare. This release extended the capabilities of the ServerIron product
family by enhancing the features and functions for security and
high-availability.

Sales and
Marketing

Our sales strategy includes a domestic and international field sales
organization, domestic and international resellers, OEM relationships, and
marketing programs.

Domestic field sales.Our domestic
field sales organization establishes and maintains direct relationships with key
accounts and strategic customers. To a lesser extent, our field organization
also works with resellers to assist in communicating product benefits to
end-user customers and proposing networking solutions. As of December 31, 2002,
our domestic sales organization consisted of 166 sales representatives and systems
engineers.

Domestic resellers.Our domestic
resellers include regional networking system resellers and vertical resellers
who focus on specific markets, such as small Internet service providers. We
provide sales and marketing assistance and training to our resellers, who in
turn provide first level support to end-user customers. We intend to leverage
our relationship with key resellers to penetrate select vertical markets.

International sales.Internationally,
product fulfillment and first level support is provided by resellers and
integrators. Our international resellers include Mitsui in Japan, Samsung in
Korea, Shanghai Gentek and GTI in China, Spot Distribution in the United
Kingdom, and Pan Dacom and GE Compunet in Germany. As of December 31, 2002, our
international field organization included 82 sales representatives and system
engineers who conduct sales, marketing, and support activities. Our sales
organization abroad establishes and maintains direct relationships with
resellers, integrators and end-users. Foundrys export sales represented 38%,
35%, and 30% of net revenues in 2002, 2001, and 2000, respectively. In 2002, one
customer, Mitsui in Japan, accounted for 11% of our revenues. Outside of the
United States, one country, Japan, accounted for 11% of our revenues in 2002. No
customer individually accounted for greater than 10% of our revenues in 2001 or
2000. We intend to expand our international presence through additional
personnel and through the addition of key resellers and integrators.

OEM/Co-Branding.We have
OEM/Co-Branding relationships established with Hewlett-Packard, Hitachi, Lucent,
Digital China and NEC. Our OEMs market and sell our products on a private label
basis through their worldwide sales forces and also purchase our products for
use in their own internal networks. The agreements with our OEMs provide that
the OEMs may postpone, cancel, increase or decrease any order prior to shipment
without penalty.

Marketing programs.We have numerous
marketing programs designed to inform existing and potential customers, the
press, industry standard analyst groups, as well as resellers and OEMs, about
the capabilities and benefits of our company and products. Our marketing efforts
also support the sale and distribution of our products through our field
organizations and channels. Our marketing efforts include advertising, public
relations, participation in industry trade shows and conferences, public
seminars and Webcasts, participation in independent third-party product tests,
presentations, and our web site.

Customer Service
and Support

Throughout the past year, Foundry has maintained its leadership in
customer service by increasing the scope and coverage of its global customer
service offerings.

Our service and support organization maintains and supports our products
sold by our field organization to end-users. Our service and support
organization provides 24-hour assistance, including telephone, Internet and
worldwide web support. Our customer service offerings also include parts depots
in strategic locations globally, implementation support, and pre-sales service.
Our resellers and OEMs are responsible for installation, maintenance and support
services to their customers.

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We provide all customers with our standard, limited one-year hardware and
90-day software warranty. We also have four levels of customer service offerings
to meet specific support needs called Titanium, Gold, Silver, and Bronze. Our
Titanium service program provides the most comprehensive support and includes
advance hardware replacement within 4 hours delivered by a trained technician
for on-site support. The Gold service program is targeted towards customers who
have trained internal resources to maintain their network 24x7. Our Gold program
is designed to provide all the tools needed by these trained resources to
maximize the uptime of their network. Our Silver service program is tailored for
customers who typically purchase spares inventory as a part of their overall
contingency plan. The Bronze service program is targeted towards budget
conscious customers who are looking for basic telephone and web-based support
and run a 9 to 5 operation.

Foundry is committed to excellence in customer satisfaction worldwide. In
2002, we launched two new service programs in partnership with our resellers. In
the European Union and Japan, we provide our Partner Support Advantage program
for qualified resellers. In other countries outside of North America, qualified
resellers may enroll in the Partner Support Essential program. These programs
establish our resellers as the first-line of customer support. Resellers must
meet eligibility requirements including personnel that have earned the Foundry
Networks Certified Network Engineering designation. Resellers have 24 by 7 by
365 access to Foundry Technical Assistance Center, software updates and
upgrades, and advance hardware replacement. Customers benefit from local
technical support with global resources always available.

We have regional Centers-of-Excellence in San Jose, Boston, New York,
Chicago, Denver, Herndon, Irvine, London, Hong Kong, Toronto and Tokyo. These
Centers of Excellence include executive briefing centers and serve as major
customer demonstration centers, regional technical support centers, and
equipment depot centers. The Centers of Excellence are fully equipped to
demonstrate Foundrys award-winning, high-performance product lines including
NetIron Metro routers, BigIron Layer 3 switches, FastIron Enterprise switches,
and ServerIron Layer 4-7 traffic management switches. They also support
interoperability testing, provide hands-on training for customers, and showcase
Foundrys end-to-end LAN, MAN and WAN solutions. These Centers of Excellence
allow Foundry to deliver superior customer service to our customers and expand
service offering to the rapidly growing worldwide installed base.

Manufacturing

We operate under a modified turn-key process utilizing strategic
manufacturing partners that are ISO 9000 certified and have global manufacturing
capabilities. We maintain control and procurement responsibility for all
proprietary components. All designs, documentation, selection of approved
suppliers, quality control, and configuration are performed at our facilities.
Our manufacturing operations consist of quality assurance of subassemblies and
the performance of final assembly and test. Our manufacturing process also
includes the configuration of hardware and software in unique combinations to
meet a wide variety of individual customer requirements. We use automated
testing equipment and burn-in procedures, as well as comprehensive inspection
and testing to assure the quality and reliability of our products. Our approach
to manufacturing provides the flexibility of outsourcing while maintaining
quality control of delivered products to customers. We have selected this
approach to ensure our ability to respond to rapid growth and sudden market
shifts.

We currently have three manufacturing partners. Celestica, located in San
Jose, California, and Flash Electronics in Fremont assemble and test printed
circuit boards. Sanmina, also located in San Jose, assembles and tests printed
circuit boards and our backplane products. All three companies are ISO certified
and have global manufacturing facilities providing full back-up capability and
local content for foreign sales if required. We perform all prototype and
pre-production procurement and component qualification with support from our
manufacturing partners. Any interruptions in the operations of these
manufacturing partners or delays in their shipment of products could negatively
impact our ability to meet scheduled product deliveries to our customers. Our
agreements with our contract manufacturers allow them to procure long lead-time
component inventory on our behalf based upon a rolling production forecast
provided by Foundry with lead times of up to 6 months. Foundry is
contractually obligated to the purchase of long lead-time component inventory
procured by our contract manufacturers in accordance with the forecast, unless
Foundry gives notice of order cancellation at least 90 days prior to the
delivery date. If actual demand of our products is below the projections, we may
have excess inventory as a result of our purchase commitments of long lead-time
components with our contract manufacturers.

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We design all ASICs, printed circuit boards and sheet metal while working
closely with semiconductor partners on future component selection and design
support. All materials used in our products are processed through a full
qualification cycle and controlled by use of an Approved Vendor Listing that
must be followed by our sources. We perform extensive testing of all of our
products including in-circuit testing of all printed circuit board assemblies,
full functional testing, elevated temperature burn-in and power cycling at
maximum and minimum configuration levels. Please see Risk FactorsOur reliance
on third-party manufacturing vendors to manufacture our products may cause a
delay in our ability to fill orders for a review of certain risks associated
with our manufacturing operations.

We currently purchase several components from a single source, including
certain integrated circuits, power supplies and long-range optics, which we
believe are readily available from other suppliers. Our proprietary ASICs, which
provide key functionality in our products, are fabricated in foundries operated
by Texas Instruments and Fujitsu, Ltd. An alternative supply for these ASICs
would require an extensive development period.

We acquire these components through purchase orders and have no long-term
commitments regarding supply or price from these suppliers. The material terms
of these orders typically involve the quantity of supply ordered by us, the
purchase price of the components, lead time and the shipping arrangements. In
the event one of these suppliers materially delays its supply to us or one of
them terminates its relationship with us, we may not be able to find an
alternate supplier on a timely basis and, as a result, our business could be
harmed.

Backlog

Our backlog represents orders confirmed with a purchase order for
products to be shipped generally within 90 days to customers with approved
credit status. Orders are subject to cancellation, rescheduling by customers or
product specification changes by the customers. Although we believe that the
backlog orders are firm, orders may be cancelled by the customer without
penalty. For this reason, we believe that our backlog at any given date is not a
reliable indicator of future revenues.

Research and
Development

Our future success depends on our ability to enhance existing products
and develop new products that incorporate the latest technological developments.
We work with customers and prospects, as well as partners and industry research
organizations, to identify and implement new solutions that meet the current and
future needs of enterprises, web-based businesses, and Internet service
providers. Whenever possible, our products are based on industry standards to
ensure interoperability. We intend to continue to support emerging industry
standards integral to our product strategy.

Our research and development operation involves parallel development
activities that utilize both custom and commercial silicon which enables us to
quickly bring new products and features to market. We are currently developing
new switching solutions that provide new levels of performance, scalability and
functionality for the LAN, MAN and LAN/WAN. We also have engineering efforts
focused on cost reduction. We had 153 engineers at the end of 2002 compared to
135 engineers at the end of 2001 and 89 in 2000. Our research and development
expenses were $34.9 million in 2002, $33.9 million in 2001 and $27.5 million in
2000, or 11.6%, 10.9% and 7.3% of net revenues, respectively.

Competition

We believe that we perform favorably in the key competitive factors that
impact our markets, including technical expertise, pricing, new product
innovation, product features, service and support, brand awareness and
distribution. Our products have won numerous awards. We intend to remain competitive
through ongoing investment in research and development efforts to enhance
existing products and introduce new products. We will seek to expand our market
presence through aggressive marketing and sales efforts and through the
continued implementation of cost reduction efforts. However, our market is still
evolving and we may not be able to compete successfully against current and
future competitors.

The market in which we operate is highly competitive. Cisco Systems
maintains a dominant position in this market and several of its products compete
directly with our products. Ciscos substantial resources and market dominance
have enabled it to reduce prices on its products within a short period of time
following the

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introduction of
these products, which reduces the margins and therefore, the profitability of
its competitors. Purchasers of networking solutions may choose Ciscos products
because of its longer operating history, broader product line and strong
reputation in the networking market. In addition, Cisco may have developed or
could in the future develop new technologies that directly compete with our
products or render our products obsolete. We believe that our technology and the purpose-built features of our products
make them unique and allow us to compete effectively against Cisco and other competitors. Although
we believe that we are currently among the top providers of networking solutions, we cannot assure you that we
will be able to compete successfully against Cisco, currently the market leader in network infrastructure solutions.

In addition to Cisco, we compete with other companies, such as Extreme
Networks, Juniper Networks, Riverstone Networks, Nortel Networks, and Enterasys
Networks. Some of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and larger installed
customer bases than we do. Furthermore, companies that do not offer a directly
competitive product to our products could develop new products or enter into
agreements with other networking companies to provide a product that competes
with our products or provides a more complete solution than we can offer.
Additionally, we may face competition from unknown companies and emerging
technologies that may offer new LAN, MAN and WAN solutions to enterprises and
service providers.

Intellectual
Property

Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. Our proprietary technology
includes our ASICs, our IronCore and JetCore hardware architecture, our
IronWare software, and certain mechanical designs. Different variations and
combinations of these proprietary technologies are implemented across our
product offerings. We rely on a combination of patent, copyright, trademark and
trade secret laws and contractual restrictions on disclosure to protect our
intellectual property rights in these proprietary technologies.

We provide software to customers under license agreements included in the
packaged software. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in some jurisdictions. Despite our
efforts to protect our proprietary rights through confidentiality and license
agreements, unauthorized parties may attempt to copy, imitate, or otherwise
obtain and use our products or technology. These precautions may not prevent
misappropriation or infringement of our intellectual property. Monitoring
unauthorized use of our products is difficult and the steps we have taken may
not prevent misappropriation of our technology, particularly in some foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.

Our industry is increasingly characterized by the existence of a large
number of patents and frequent claims and related litigation regarding patent
and other intellectual property rights. In particular, leading companies in the
networking market may have extensive patent portfolios.

From time to time third parties have asserted exclusive patent, copyright
and trademark rights to technologies and related standards that are important to
us. Such third parties may assert claims or initiate litigation against us or
our manufacturers, suppliers or customers alleging infringement of their
proprietary rights with respect to our existing or future products. In March
2001, Nortel filed a lawsuit against Foundry in the United States District Court
for the District of Massachusetts alleging that certain of the Companys
products infringe several of Nortels patents, and seeking injunctive relief as
well as unspecified damages. Nortel has also brought suit, on the same or
similar patents, against a number of other networking companies. Foundry has
analyzed the validity of Nortels claims and believes that Nortels suit is
without merit. Foundry is committed to vigorously defending itself against these
claims. On October 9, 2002, the Company filed a lawsuit against Nortel in the
United States District Court, Northern District of California alleging that certain
of Nortels products infringe a Foundry patent as well as allegations concerning
breach of contract. The Company is seeking injunctive relief as well as damages.
Irrespective of the merits of the Companys position, we may incur
substantial expenses in defending against third party claims. In the event of a
determination adverse to the Company, the Company could incur substantial
monetary liability, and be required to change its business practices. Either of
these could have a material adverse effect on the Companys financial position,
results of operations, or cash flows.

Employees

As of December 31, 2002, we had 584 employees, including 305 in sales and
marketing, 153 in engineering, 73 in manufacturing and 53 in general and
administrative. None of our employees is represented by a labor union, with the
exception of several foreign employees who are required by local country
employment laws to have labor union representation. We have never experienced a
work stoppage and believe our employee relations are good.

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Foundry Networks is committed to its responsibility to maintain
employment practices that promote affirmative action and equal opportunity in
hiring, promotions, compensation and employee development without regard to
race, color, religion, sex, national origin, age, disability, sexual
orientation, marital status or veteran status.

Executive
Officers and Directors

The names and ages of our executive officers and directors as of December
31, 2002 are as follows:



|Name                           |  | Age |  | Position                                                                            
|------------------------------ |  | --- |  | ------------------------------------------------------------------------------------
|                               |  |     |  |                                                                                     
|Bobby R.
      Johnson, Jr.    |  | 46  |  | President,
      Chief Executive Officer, and Chairman of the Board of
    Directors
|                               |  |     |  |                                                                                     
|Lee
      Chen                 |  | 49  |  | Vice
      President, Software Engineering and Quality Assurance                    
|                               |  |     |  |                                                                                     
|Timothy D.
      Heffner       |  | 53  |  | Vice
      President, Finance and Administration, and Chief Financial
      Officer 
|                               |  |     |  |                                                                                     
|Karl D.
      Triebes          |  | 36  |  | Vice
      President, Hardware Engineering                                          
|                               |  |     |  |                                                                                     
|Ken K.
      Cheng             |  | 47  |  | Vice
      President, Marketing and Product and Program Management                  
|                               |  |     |  |                                                                                     
|Lawrence L.
      Akin         |  | 54  |  | Vice President
      of Worldwide Sales                                             
|                               |  |     |  |                                                                                     
|Paul L.
      Twombly          |  | 51  |  | Vice President
      of Customer Service                                            
|                               |  |     |  |                                                                                     
|Richard W.
      Bridges       |  | 54  |  | Vice
      President, Manufacturing                                                 
|                               |  |     |  |                                                                                     
|Andrew K.
      Ludwick        |  | 57  |  | Director                                                                            
|                               |  |     |  |                                                                                     
|Alfred J.
      Amoroso        |  | 53  |  | Director                                                                            
|                               |  |     |  |                                                                                     
|C. Nicholas
      Keating, Jr. |  | 61  |  | Director                                                                            
|                               |  |     |  |                                                                                     
|J. Steven
      Young          |  | 41  |  | Director                                                                            

Bobby R. Johnson, Jr.co-founded Foundry and
has served as President, Chief Executive Officer and Chairman of the Board of
Directors of Foundry since its inception in May 1996. From August 1993 to
October 1995, Mr. Johnson co-founded and served as President, Chief
Executive Officer and Chairman of the Board of Directors of Centillion Networks,
Inc., a provider of local area network switches. From September 1991 to February
1993, Mr. Johnson was Vice President and General Manager of Internetworking
Hardware for Network Equipment Technologies, a wide area networking company.
Mr. Johnson holds a B.S. with honors from North Carolina State University.

Lee Chenhas served as Vice President,
Software Engineering and Quality Assurance since October 1999. From June 1996 to
September 1999, Mr. Chen served as Director of Software Engineering for
Foundry. From January 1995 to February 1996, Mr. Chen was the Vice
President of Engineering of OTS, a software consulting company. From August 1993
to December 1995, Mr. Chen was co-founder of Centillion Networks.
Mr. Chen holds a M.S. from San Jose State University. On March 1, 2003,
Mr. Chen resigned from his role as Vice President and became a senior non-officer employee, with non-management responsibilities
similar to that of an academic fellowship.

Timothy D. Heffnerhas served as Vice
President, Finance and Administration and Chief Financial Officer of Foundry
since November 1996. From September 1994 to November 1996, Mr. Heffner was
Director of Finance for Centillion Networks and for the Centillion Business Unit
of Bay Networks. From January 1994 to September 1994, Mr. Heffner was Chief
Financial Officer of Digital Generation Systems, a network services company.
Mr. Heffner holds a B.S. from San Jose State University.

Karl D. Triebeshas served as Vice President
of Hardware Engineering of Foundry since June 2001. From May 2000 to June 2001,
Mr. Triebes was Vice President of Engineering at Alcatel U.S.A, a
telecommunications company. From December 1999 to May 2000, he was Assistant
Vice President of Newbridge Networks Corp., a networking company subsequently
acquired by Alcatel. From January 1997 to December 1999, he was Vice President
of Systems and Software of Stanford Telecommunications, Inc. Mr. Triebes
holds a B.S. from San Diego State University.

Ken K. Chenghas served as Vice President of
Marketing of Foundry since December 1999 and as Vice President of Product and
Program Management of Foundry since July 1998. From December 1993 to July 1998,
Mr. Cheng was Senior Vice President and Chief Operating Officer of Digital
Generation Systems, a network

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services company.
From December 1988 to December 1993, Mr. Cheng was Director of LAN/WAN
Internetworking Hardware for Network Equipment Technologies. Mr. Cheng
holds a B.S. from Queens University and an M.B.A. from Santa Clara University.

Lawrence L. Akinhas served as Vice President
of Worldwide Sales since October 2002. From April 2001 to September 2002,
Mr. Akin was Vice President of Sales for the Americas of Foundry. From
November 2000 to March 2001, Mr. Akin served as Vice President of Sales
Operations of Foundry. From April 1989 to May 1999, Mr. Akin was Vice
President of North American enterprise sales at 3Com Corporation, a computer
networking company. From June 1982 to March 1989, Mr. Akin held various
sales management positions at ROLM/IBM, a telecommunications company.
Mr. Akin holds a B.S. degree from the University of Colorado.

Paul L. Twomblyhas served as Foundrys Vice
President of Customer Support since April 2001. From October 1999 to May 2001,
Mr. Twombly was Senior Vice President of Global Client Services at Nice
Systems Ltd., a major worldwide provider of CRM systems. From January 1998 to
August 1999, Mr. Twombly was Vice President of Customer Service at
Warpspeed Communications, a telecommications company. From April 1990 to January
1998, Mr. Twombly was Vice President of Customer Service at Voysys
Corporation, an OEM provider of telecommunications products. Mr. Twombly
holds a B.S. degree from Northwestern University.

Richard W. Bridgeshas served as Foundrys
Vice President of Manufacturing since August 2001. From May 1999 to July 2001,
Mr. Bridges was Vice President of Operations for Ramp Networks, a provider
of Internet security appliances subsequently acquired by Nokia. From October
1994 to March 1999, Mr. Bridges was Director and subsequently Vice
President of Materials Management for Plantronics Inc., a manufacturer of
lightweight communications headsets. Mr. Bridges holds a B.S. degree from
Stanford University.

Andrew K. Ludwickhas served as a member of
the Board of Directors of Foundry since May 1999. From September 1995 to October
1997, Mr. Ludwick was Chief Executive Officer of Bay Networks, a networking
company. From July 1985 to September 1995, he was founder, President and Chief
Executive Officer of SynOptics, an internetworking company. Mr. Ludwick
holds a B.A. from Harvard College and an M.B.A. from Harvard Business
School.

Alfred J. Amorosohas served as a member of
the Board of Directors of Foundry since October 2000. Since July 2002,
Mr. Amoroso has also served as President, Chief Executive Officer and Vice
Chairman of Meta Group, an information technology research and advisory firm.
From October 1999 until its merger with IBM in January 2002, Mr. Amoroso
served as President, Chief Executive Officer and a director of CrossWorlds
Software, Inc. From May 1997 to October 1999, he served as General Manager of
IBM global services Asia Pacific. From 1993 to 1997, he held various other
management positions at IBM, including General Manager of the worldwide
insurance business unit, General Manager of the North American insurance
business unit and President of the insurance consulting practice. Before joining
IBM, Mr. Amoroso held various positions at Price Waterhouse, now
PricewaterhouseCoopers, from 1985 to 1993 including lead technology partner and
partner in charge of the worldwide insurance consulting practice.
Mr. Amoroso holds a B.S. in systems engineering and M.S. in operations
research from Polytechnic Institute of Brooklyn.

C. Nicholas Keating, Jr.has served as a member of the Board of Directors of Foundry since October
2000. Since October 2000, Mr. Keating has been the President and Chief
Executive Officer of IP Infusion Inc., an Internet protocol software development
company. He had previously been appointed a member of the Board of Directors of
IP Infusion Inc. in July 2000. From February 1999 to January 2001, he was
President and Chief Executive Officer of US Search.com Inc., a Web-based
supplier of information products and services. From January 1994 to February
1999 he was a business advisor to a number of companies in the networking,
software and semiconductor industries. From May 1987 until December 1993,
Mr. Keating served as Vice-President of Network Equipment Technologies, a
wide area networking company. In addition to IP Infusion, Inc., Mr. Keating
also serves as a director of Network Equipment Technologies. Mr. Keating
holds a B.A. and M.A. from American University and was a Fulbright Scholar.

J. Steven Younghas served as a member of the
Board of Directors of Foundry since October 2000. Mr. Young co-founded and
has served as the Chairman of the Board of Directors of Found, Inc., an
e-infrastructure technology solution provider, since February 1999.
Mr. Young also serves as a member of the boards of directors of a number of
private companies. From May 1987 to June 2000, Mr. Young was the
quarterback of the San Francisco 49ers. Mr. Young holds a B.S and J.D. from
Brigham Young University.

17

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Item 2.Properties

Our headquarters for corporate administration, research and development,
sales and marketing, and manufacturing occupy approximately 97,000 square feet
of space in San Jose, California. We also lease space in various other
geographic locations, domestically and internationally, for sales and service
personnel. In addition to smaller sales offices, we have regional offices in the
following locations:



|                               |                              |                        
|------------------------------ | ---------------------------- | -----------------------
|                               |                              |                        
|AMERICAS                       | EMEA                         | APAC                   
|                               |                              |                        
|San Jose,
      California     | London,
      England        | Tokyo,
      Japan     
|Irvine,
      California       | Munich,
      Germany        | Singapore              
|Salt Lake
      City, Utah     | Paris,
      France          | Hong
      Kong        
|Chicago,
      Illinois        | Amsterdam,
      Netherlands | Sydney,
      Australia
|Fort
      Lauderdale, Florida | Milan,
      Italy           | Beijing,
      China   
|New York City,
      New York  |                              |                        
|Herndon,
      Virginia        |                              |                        
|Toronto,
      Canada          |                              |                        
|                               |                              |                        

We believe that our existing facilities are adequate to meet current
requirements, and that suitable additional or substitute space will be available
as needed to accommodate any further physical expansion of corporate operations
and for any additional sales offices. Our principal web server equipment and
operations are maintained in our corporate headquarters in San Jose, California.

Item 3.Legal Proceedings

In December 2000, several similar shareholder class action lawsuits were
filed against Foundry and certain of its officers in the United States Court for
the Northern District of California, following Foundrys announcement in
December 2000 of its anticipated financial results for the fourth quarter ended
December 31, 2000. The lawsuits were subsequently consolidated by the Court,
under the captionIn re Foundry Networks, Inc. Securities
Litigation, Master File No. C-00-4823-MMC, lead
plaintiffs were selected as required by law and such plaintiffs filed a
consolidated amended complaint which alleged violations of federal securities
laws and purported to seek damages on behalf of a class of shareholders who
purchased Foundrys common stock during the period from September 7, 2000 to
December 19, 2000. On October 26, 2001, the Court granted the Companys motion
to dismiss the consolidated amended complaint without prejudice to amend. On
December 13, 2001, attorneys for lead plaintiffs filed a second amended
complaint. On June 6, 2002, the Court granted Foundrys motion to dismiss the
second amended complaint, but without prejudice and with leave to amend. On July
8, 2002, attorneys for lead plaintiffs filed a third amended complaint. On August
5, 2002, we filed a motion to dismiss that complaint. On February 14, 2003, the Court
dismissed the third amended complaint, once again, without prejudice and with
leave to amend. On March 17, 2003, attorneys for lead plaintiffs filed a fourth
amended complaint (FAC) which the Company is in the process of reviewing. The Company anticipates filing a motion to dismiss the
plaintiff's FAC by the April 7, 2003 deadline. The Company
believes the lawsuit is without merit and intends to defend itself vigorously.

A class action lawsuit was filed on November 27, 2001 in the United States
  District Court for the Southern District of New York on behalf of purchasers
  of Foundry common stock alleging violations of federal securities laws. *Kassin
  v. Foundry Networks, Inc. et al.,* No. 01-CV-10640 (SAS) (S.D.N.Y.), related
  to*Initial Public Offering Securities Litigation,* No. 21 MC 92 (SAS)
  (S.D.N.Y.). The case is brought purportedly on behalf of all persons who purchased
  the common stock of the Company from September 27, 1999 through December 6,
  2000. The complaint names as defendants, the Company, three of its officers,
  and investment banking firms that served as underwriters for the Companys
  initial public offering in September 1999. The complaint alleges violations
  of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the
  Securities Exchange Act of 1934, on the grounds that the prospectus incorporated
  in the registration statement for the offering failed to disclose, among other
  things, that (i) the underwriters had solicited and received excessive and undisclosed
  commissions from certain investors in exchange for which the underwriters allocated
  to those investors material portions of the shares of the Companys stock
  sold in the initial public offering, and (ii) the underwriters had entered into
  agreements with customers whereby the underwriters agreed to allocate shares
  of the Companys stock sold in the initial public offering to those customers
  in exchange for which the customers agreed to purchase additional shares of
  the Companys stock in the aftermarket at pre-determined prices. No specific
  damages are claimed. We

18

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are aware that
similar allegations have been made in lawsuits relating to more than 300 other
initial public offerings conducted in 1999 and 2000. Those cases have been
consolidated for pretrial purposes before the Honorable Judge Shira A.
Scheindlin. Motions to dismiss the case were filed on behalf of all the defendants in all of the cases.
On February 19, 2003, Judge Scheindlin issued a ruling on the motions.
In ruling on motions to dismiss, the Court must treat the allegations in the
Complaint as if they were true solely for purposes of deciding the motions. The
court denied the motion to dismiss the claims against the Company alleged under
the Securities Act of 1933. The same ruling was made in all but 10 of the other
cases. The Court dismissed the claims alleged under the Securities Exchange Act
of 1934, Section 10(b), against the Company and one of the individual defendants
and dismissed all of the controlling person claims alleged under that Act
against all of the Foundry Networks individual defendants. The Court denied the
motion to dismiss the Section 10(b) claims against the remaining Foundry
Networks individual defendants on the basis that those defendants sold the Companys
stock during the class period alleged in the complaint and that those
allegations were sufficient purely for pleading purposes to allow those claims
to move forward. A similar ruling was made with respect to 62 of the individual
defendants in the other cases.

Management believes that the remaining allegations in these class action
lawsuits against the Company and its officers are without merit and management
intends to contest them vigorously. However, these litigations are in the
preliminary stage, and their outcome cannot be predicted. The litigation process
is inherently uncertain. If the outcome of the litigation is adverse to the
Company and if, in addition, the Company was required to pay significant
monetary damages in excess of available insurance, its business could be
significantly harmed.

From time to time the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights, patents and other intellectual property rights. In
addition, from time to time, third parties assert patent infringement claims
against the Company in the form of letters, lawsuits and other forms of
communication. In March 2001, Nortel filed a lawsuit against Foundry in the
United States District Court for the District of Massachusetts alleging that
certain of the Companys products infringe several of Nortels patents and
seeking injunctive relief as well as unspecified damages. Nortel has also
brought suit, on the same or similar patents, against a number of other
networking companies. Foundry has analyzed the validity of Nortels claims and
believes that Nortels suit is without merit. Foundry is committed to vigorously
defending itself against these claims. On October 9, 2002, the Company filed a lawsuit against Nortel in the United States
District Court, Northern District of California alleging that certain of Nortels products infringe a Foundry patent as well as allegations concerning breach of contract. The Company is seeking injunctive relief as well as damages. Irrespective of the merits of the
Companys position, we may incur substantial expenses in defending against third
party claims. In the event of a determination adverse to the Company, the
Company could incur substantial monetary liability, and be required to change
its business practices. Either of these could have a material adverse effect on
the Companys financial position, results of operations, or cash flows.

Item 4.Submission Of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.

19

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PART II

Item 5.Market For Registrants Common Equity and Related
Stockholder Matters

Price Range of
Common Stock

The Companys common stock commenced trading on the Nasdaq National
Market on September 28, 1999 and is traded under the symbol FDRY. As of
December 31, 2002, there were approximately 472 holders of record of the common
stock. The following table sets forth for the periods indicated, the high and
low closing sale prices for the common stock as reported on the Nasdaq National
Market.



|               |  | High |       | Low |  
|-------------- |  | ---- | ----- | --- | -
|               |  |      |       |     |  
|2002           |  |      |       |     |  
|Fourth quarter |  | $    | 10.23 |     | $
|Third quarter  |  | $    | 9.50  |     | $
|Second quarter |  | $    | 7.44  |     | $
|First quarter  |  | $    | 9.30  |     | $
|               |  |      |       |     |  
|2001           |  |      |       |     |  
|Fourth quarter |  | $    | 11.59 |     | $
|Third quarter  |  | $    | 21.14 |     | $
|Second quarter |  | $    | 22.05 |     | $
|First quarter  |  | $    | 23.50 |     | $

Dividend
Policy

The Company has never paid cash dividends on its capital stock. The
Company currently anticipates that it will retain its future earnings, if any,
to fund the development and growth of its business and, therefore, does not
anticipate paying cash dividends in the foreseeable future.

Unregistered
Securities Sold in 2002

The Company did not make any unregistered sales of the Companys common
stock during 2002.

20

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Item 6.Selected Consolidated Financial Data

The selected consolidated financial data set forth below should be read
together with the consolidated financial statements and related notes,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the other information contained in this Form 10-K.



|                                                |  | Year Ended December 31,               |        
|----------------------------------------------- |  | ------------------------------------- | -------
|                                                |  |                                       |        
|                                                |  | 2002                                  |        
|                                                |  |                                       |        
|                                                |  | (In thousands, except per share data) |        
|Consolidated Statement of Operations Data:      |  |                                       |        
|Revenues, net                                   |  | $                                     | 300,742
|Cost of revenues                                |  | 140,192                               |        
|                                                |  |                                       |        
|Gross margin                                    |  | 160,550                               |        
|                                                |  |                                       |        
|Operating expenses:                             |  |                                       |        
|Research and development                        |  | 34,933                                |        
|Sales and marketing                             |  | 82,924                                |        
|General and administrative                      |  | 14,451                                |        
|Amortization of deferred stock compensation     |  | 1,071                                 |        
|                                                |  |                                       |        
|Total operating expenses                        |  | 133,379                               |        
|                                                |  |                                       |        
|Income (loss) from operations                   |  | 27,171                                |        
|Interest income                                 |  | 5,025                                 |        
|Write-down of minority investment               |  |                                      |        
|                                                |  |                                       |        
|Income (loss) before provision for income taxes |  | 32,196                                |        
|Provision for income taxes                      |  | 9,659                                 |        
|                                                |  |                                       |        
|Net income (loss)                               |  | $                                     | 22,537 
|                                                |  |                                       |        
|Basic net income (loss) per share               |  | $                                     | 0.19   
|Diluted net income (loss) per share             |  | $                                     | 0.18   
|Weighted average sharesbasic                   |  | 119,482                               |        
|Weighted average sharesdiluted                 |  |                                       | 123,780



|                                     |  | December 31, |        
|------------------------------------ |  | ------------ | -------
|                                     |  |              |        
|                                     |  | 2002         |        
|                                     |  |              |        
|Consolidated Balance Sheet Data:     |  |              |        
|Cash and cash equivalents            |  | $            | 187,719
|Short-term investments               |  | 138,734      |        
|Working capital                      |  | 390,543      |        
|Total assets                         |  | 451,535      |        
|Long-term obligations                |  |             |        
|Total stockholders equity (deficit) |  |              | 398,099

______________

(Note 1)On October 1, 1999, Foundry completed its initial public
offering.

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 Selected Financial Data and
our financial statements and related notes appearing elsewhere in this Form
10-K. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. The 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 the
sections entitled BusinessResearch and Development, BusinessCompetition,
BusinessIntellectual Property, and Managements Discussion and Analysis of
Financial Condition and Results of OperationsRisk Factors

21

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That May Affect
Future Results and Market Price of Stock. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect managements
opinions only as of the date hereof. The Company undertakes 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 the Company files from time to time with
the Securities and Exchange Commission (the SEC), including the Quarterly
Reports on Form 10-Q to be filed by the Company in fiscal year 2003. All public
reports filed by the Company with the Securities and Exchange Commission are
available free of charge on the Companys website at www.foundrynetworks.com as
soon as practicable after we electronically file such reports with the
SEC.

Overview

Founded in 1996, Foundry designs, develops, manufactures and markets a
comprehensive, end-to-end suite of high performance Ethernet Layer 2 and
Layer 3 switches, Metro routers and Internet traffic management products for
enterprises, educational institutions, government agencies, web-hosting
companies, application service providers (ASPs), electronic banking and finance
service providers, and Internet service providers (ISPs). Our product suite
includes the NetIron family of Metro routers, FastIron family of Ethernet edge
switches, EdgeIron Layer 2 Ethernet switches, BigIron family of Gigabit Ethernet
core switches and ServerIron family of Ethernet Layer 4-7 Internet traffic
management switches. In June 2001, we introduced a series of new products which
incorporate the JetCore ASIC chipset which consists of different ASICs that
provide various combinations of 10/100 or Gigabit Ethernet ports to deliver advanced switching and
routing functionalities. Built on 0.18 micron technology, the JetCore chipset
represents the third major ASIC development from Foundry in a four year span.
Purpose-built to meet the feature, performance and scalability needs of the
high-bandwidth enterprise, Metro and Internet networks, Foundrys JetCore
chipset is the foundation of Foundrys next-generation switching and routing
platforms.

For the past two years, we have operated in a difficult economic environment,
  particularly in the U.S., as our customers reduced or deferred spending on capital
  equipment. For the year ended December 31, 2002, we generated net income of
  $22.5 million or $0.18 per diluted share on revenues of $300.7 million. These
  results compare to net income of $2.9 million or $0.02 per diluted share on
  revenues of $311.2 million in 2001. The 3% decrease in revenues reflects the
  negative impact of difficult economic conditions on our revenues mitigated,
  in part, by greater customer acceptance of our new product offerings based on
  the JetCore ASIC which stabilized the revenue decline we experienced since 2001.
  Despite slightly lower revenues in 2002, we generated significantly higher net
  income in 2002 as a result of our efforts to carefully manage our headcount,
  control discretionary spending, and aggressively manage our accounts receivable
  and inventories. We completed 2002 with quarter-over-quarter revenue growth
  and remained profitable throughout 2002 despite the challenging economic environment.
  The depressed economic conditions and political instability in Asia and the
  Middle East have created and may continue to create a reluctance by our customers
  to resume or increase capital spending. Despite the uncertainty of the current
  business environment, we remain focused on our long-term strategy of maintaining
  profitability and positive cash flows by focusing on innovation, competitively
  pricing our products and prudent financial management.

Despite the weak economic environment,
Foundry has continued to deliver on its business model, which centers on the introduction of industry leading products and careful expense control. Our execution
on this model allowed the Company to improve its financial results on a quarter-over-quarter basis throughout 2002,
increasing revenue, and improving gross margins and operating profits. Management remains committed to improving the Companys financial performance,
however, there is no certainty we will be able to maintain or further improve results.

Critical
Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance
with generally accepted accounting principles requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during
the period reported. By their nature, these estimates and judgments are subject
to an inherent degree of uncertainty. Management bases their estimates and
judgments on historical experience, market trends, and other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. Management
believes the following critical accounting policies, among others, affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. These and other significant accounting policies are more
fully described in Note 2 to the consolidated financial statements included in
this Form 10-K.

22

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Revenue Recognition

We derive a significant amount of revenue from sales of stackable and
chassis-based networking equipment, with the remaining revenue generated from
customer support fees, training and installation services. Foundrys revenue
recognition policy follows SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. Specifically, Foundry recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectibility is reasonably assured.
Product revenue is generally recorded at the time of shipment when title and
risk of loss passes to the customer, unless we have future obligations for
installation or have to obtain customer acceptance, in which case revenue is not
recorded until such obligations have been satisfied or customer acceptance has
been received. Revenue is not recognized when the customer has a right of return
or when undelivered products or services are essential to the functionality of
delivered products.

At the time revenue is recognized, Foundry establishes an accrual for
estimated warranty expenses associated with its sales, recorded as a component
of cost of revenue. Foundrys standard warranty period extends 12 months from
the date of sale and the warranty accrual represents the best estimate of the
amounts necessary to settle future and existing claims on products sold as of
the balance sheet date. While Foundry believes that the warranty accrual is
adequate and that the judgment applied is appropriate, such estimates could
differ materially from actual warranty costs in the future. If the Companys
actual warranty costs are greater than the accrual, cost of revenues will
increase in the future. Foundry also provides a reserve for estimated customer
returns. This provision is based on the historical returns, analysis of credit
memo data and return policies. Sales to Foundrys resellers do not provide for
rights of return and the contracts with Foundrys original equipment
manufacturers do not provide for rights of return except in the event Foundrys
products do not meet specifications or there has been an epidemic failure, as
defined in the agreements. If the historical data used by the Company to
calculate the estimated sales returns and allowances does not properly reflect
future returns, revenue could be misstated.

Support services are offered under renewable, annual fee-based contracts
or as part of multiple element arrangements. When support services
are sold under multiple element arrangements, the Company allocates revenue to
each element based upon its relative fair value and recognizes the revenue for
each element when the revenue recognition criteria have been met for each element.
Fair value is generally determined based on the price charged when the element is sold separately.
Revenue from customer support contracts is
deferred and recognized ratably over the contractual period, generally one to
five years. A total of $20.2 million of support revenue was deferred on the
accompanying balance sheet as of December 31, 2002. Other service revenue for
training and installation services is recognized as services are rendered.

Allowance for Doubtful Accounts

We actively manage our accounts receivable to minimize credit risk. We
typically sell to customers for which there is a history of successful
collection. New customers are subjected to a credit review process, which
evaluates the customers financial position and ability to pay. New customers
are typically assigned a credit limit based on a formulated review of their
financial position. Such credit limits are only increased after a successful
collection history with the customer has been established. We continually
monitor and evaluate the collectibility of our trade receivables based on a
combination of factors. We record specific allowances for doubtful accounts when
we become aware of a specific customers inability to meet its financial
obligation to us such as in the case of bankruptcy filings or deterioration of
financial position. Estimates are used in determining our allowances for all
other customers based on factors such as current trends, the length of time the
receivables are past due and historical collection experience. We mitigate some
collection risk by requiring some international customers to secure letters of
credit or bank guarantees prior to placing an order with us. While we believe
that our allowance for doubtful accounts receivable is adequate and that the
judgment applied is appropriate, such amounts estimated could differ materially
from what will actually transpire in the future.

23

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Inventories

The networking industry is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements, and
evolving industry standards. Our inventory purchases and commitments are made in
order to build inventory to meet future shipment schedules based on forecasted
demand for our products. We perform a detailed assessment of inventory each
period, which includes a review of, among other factors, demand requirements,
product life cycle and development plans, component cost trends, product pricing
and quality issues. Based on this analysis, we record adjustments to inventory
for excess, obsolescence or impairment, when appropriate, to reflect inventory
at net realizable value. Revisions to our inventory adjustments may be required
if actual demand, component costs or product life cycles differ from our
estimates.

We subcontract substantially all of our manufacturing to
companies that assemble and test our products. Our agreements with some of these
companies allow them to procure long lead-time component inventory on our behalf
based upon a rolling production forecast provided by Foundry with lead times of
up to 6 months. Foundry may be contractually obligated to the purchase of long
lead-time component inventory procured by certain contract manufacturers in
accordance with the forecast, unless Foundry gives notice of order cancellation
at least 90 days prior to the delivery date. As of December 31, 2002, the
Company was potentially committed to purchase approximately $26.1 million of
such inventory. If actual demand of our products is below the projections, we
may have excess inventory as a result of our purchase commitments of long
lead-time components with our contract manufacturers.

Deferred Tax Asset Valuation Allowance

We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. Significant management judgment is required in determining any
valuation allowance recorded against our net deferred tax assets. Management
makes an assessment of the likelihood that our deferred tax assets will be
recovered from future taxable income, and to the extent that recovery is not
believed to be more likely than not, a valuation allowance is established. For
the years ended December 31, 2002 and 2001, we did not record a valuation
allowance to reduce our deferred tax assets because we believe the amount is
more likely than not to be realized. In the event Foundry is unable to realize
some or all of its deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such determination
was made. Our net deferred tax assets as of December 31, 2002 and 2001 were
$28.6 million and $29.7 million, respectively.

Legal Contingencies

We are subject to the possibility of loss contingencies in the normal
course of our business, including those related to intellectual property and
securities litigation. A loss contingency is accrued when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated.
We continually reassess the likelihood of any adverse judgments or outcomes to
our contingencies, as well as potential ranges of probable losses, and will
recognize a liability, if any, for these contingencies based on a careful
analysis of each issue with the assistance of outside legal counsel and other
experts. For further detail, see Note 3 of Notes to Consolidated Financial
Statements for a description of our legal proceedings.

24

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Results of
Operations

Net Revenues

The following table shows product and service net revenues for the years
ended December 31, 2002, 2001, and 2000 (in thousands):



|                   |  | Year Ended December 31, |        
|------------------ |  | ----------------------- | -------
|                   |  |                         |        
|                   |  | 2002                    |        
|                   |  |                         |        
|Net revenues:      |  |                         |        
|Product            |  | $                       | 264,998
|Service            |  | 35,744                  |        
|                   |  |                         |        
|Total net revenues |  | $                       | 300,742
|                   |  |                         |        

Product net revenues were $265.0 million, $281.4 million, and $361.6 million
  in 2002, 2001, and 2000, respectively, representing a decrease of 6% in 2002
  and a decrease of 22% in 2001. The decreases were the result of reductions to
  our average selling prices in response to competitive pressures as a result
  of the continued economic slowdown. These adverse effects continued in 2002,
  but their effect on product revenues in 2002 were lessened, to an extent, by
  increased sales volume due to strong customer acceptance of our new JetCore-based
  product offerings that began shipping in 2002.

Service revenues consist primarily of revenue from customer support
contracts, and to a lesser extent, from providing professional and educational
services. Service net revenues were $35.7 million, $29.8 million and $15.6
million and accounted for 12%, 10% and 4% in 2002, 2001 and 2000, respectively.
The increases were due to a higher installed base of our networking equipment
each year as customers purchased new support contracts associated with their
equipment purchases and renewed their maintenance contracts on existing
equipment. Customer support contracts range from 1-5 years, but a majority are
for one-year periods. Revenues from support contracts are recognized ratably over
the service period.

25

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For the year ended December 31, 2002, one customer accounted for greater
than 10% of our revenues. Sales to Mitsui in Japan accounted for 11% of our
revenues in 2002. For the years ended December 31, 2001 and 2000, no customer
accounted for greater than 10% of our revenues. Domestic sales within the United
States accounted for 62%, 65%, and 70% in 2002, 2001 and 2000, respectively.
Outside of the United States, one country, Japan, accounted for 11% of revenues
in 2002. No individual country outside of the United States accounted for
greater than 10% of revenues in 2001 or 2000.

Gross
Margins

The following table shows gross margins for product and service revenues
and the related gross margin percentages for the years ended December 31, 2002,
2001, and 2000 (in thousands):



|                   |  | Year Ended December 31, |        
|------------------ |  | ----------------------- | -------
|                   |  |                         |        
|                   |  | 2002                    |        
|                   |  |                         |        
|Gross margins:     |  |                         |        
|Product            |  | $                       | 130,350
|Service            |  | 30,200                  |        
|                   |  |                         |        
|Total gross margin |  | $                       | 160,550
|                   |  |                         |        

Our cost of product revenues consists primarily of material, labor, manufacturing
  overhead, warranty costs, and the provision for inventory. Product gross margins
  were $130.4 million, $131.2 million, and $230.2 million in 2002, 2001, and 2000
  or 49%, 47%, and 64% of product net revenues, respectively. The increase in
  product gross margin as a percentage of product revenues in 2002 was due to
  lower inventory provisions of $16.4 million in 2002 compared to $24.9 million
  in 2001 and the mix of products sold. The significant decrease in product gross
  margin as a percentage of product revenues from 2000 to 2001 was due to a combination
  of decreased product revenues, as a result of lower average selling prices in
  response to competitive pressures, and significantly higher inventory provisions
  in response to the depressed economic environment and a major product line transition
  in the fourth quarter of 2001. The provision for inventory increased from $13.6
  million in 2000 to $24.9 million in 2001, of which $9.3 million was recorded
  in fourth quarter 2001 to specifically reserve for excess inventories as a result
  of our product realignment and transition from our IronCore ASICs-based product
  lines to the new and more powerful products incorporating our next generation
  JetCore ASICs. During 2002, we physically disposed of $9.2 million of the previously
  reserved obsolete products as a result of the product transition.

Our cost of service revenues consists primarily of costs of
  providing services under customer support contracts. These costs include
  service material costs, labor, and manufacturing overhead. Service
  gross margins were 84% in 2002 and 73% in 2001, and 81% in 2000. Service gross
  margin decreased in 2001 due to the write-off
  of service inventory that was outstanding at customer sites. Many
  of these customers ceased operations during 2001 due to the economic recession
  and, as a result, Foundry was unable to recover the service inventory.

Our gross margins have sequentially improved in each quarter of 2002. The
  rate of gross margin improvement has been and may continue to be adversely affected
  by heightened price competition, component shortages, increases in material
  or labor costs, excess, obsolete, and impaired inventory charges, changes in channels
  of distribution, customer, product and geographic mix, or an increase in product
  costs. See also Risk Factors That May Affect Future Results and Market
  Price of Stock Our gross margins may decline over time and the average
  selling prices of our products may decrease as a result of competitive pressures
  and other factors.

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Research and
Development, Sales and Marketing, and General and Administrative
Expenses

The following table shows research and development, sales and marketing,
and general and administrative expenses for the years ended December 31, 2002,
2001, and 2000 (in thousands):



|                           |  | Year Ended December 31, |       
|-------------------------- |  | ----------------------- | ------
|                           |  |                         |       
|                           |  | 2002                    |       
|                           |  |                         |       
|                           |  |                         |       
|Research and Development   |  | $                       | 34,933
|Sales and Marketing        |  | $                       | 82,924
|General and Administrative |  | $                       | 14,451

Research and development expenses consist primarily of salaries and
related personnel expenses, prototype materials and expenses related to the
development of our ASICs, software development and testing costs, and the
depreciation of property and equipment related to research and development
activities. Research and development expenses were $34.9 million, $33.9 million
and $27.5 million in 2002, 2001 and 2000 or 12%, 11%, and 7% of revenue,
respectively. The $1.0 million increase in research and development expenses
from 2001 to 2002 was due to an increase in headcount from an average of 118
engineers during 2001 to 147 during 2002 offset by a reduction in prototype
expenses as a result of the completion of the development of our next generation
JetCore ASICS in 2001. The increase in research and development expenses of $6.4
from 2000 to 2001 was due to headcount increases and increased expenditures on
the design and development of new products, in particular, the development of
JetCore ASICs in 2001. We believe continued investment in product enhancements
and new product development is critical to attaining our strategic objectives,
and as a result, we expect research and development expenses to continue to
increase in absolute dollars.

Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
support functions, as well as trade shows, advertising, promotional expenses and
the cost of facilities. Sales and marketing expenses were $83.0 million, $90.8
million and $67.8 million in 2002, 2001 and 2000 or 28%, 29% and 18% of
revenue, respectively. The decrease in absolute dollars from 2001 to 2002 was
primarily due to a reduction in the average size of our direct sales force from
289 in 2001 to 249 in 2002. The increase in absolute dollars from 2000 to 2001
was primarily due to increases in the average size of our direct sales force
from 205 in 2000 to 289 in 2001, and increased marketing and advertising
investments associated with the introduction of new products. We believe that
continued investment in sales and marketing is critical to our success and
expect these expenses to slightly increase in absolute dollars in 2003 as we
initiate additional sales and marketing programs to support our
products.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel,
facilities, bad debt, legal, and other general corporate expenses. General and
administrative expenses were $14.5 million, $27.2 million and $10.5 million in
2002, 2001 and 2000 or 5%, 9% and 3% of revenue, respectively. The
increase in absolute dollars in 2001 was primarily due to certain charges such
as $2.8 million for the write-down of a note receivable from a stockholder, $1.1
million of costs related to facilities consolidation, and increases in legal and
facilities expenses. Included in general and administrative expenses was the
provision for doubtful accounts receivable which totaled $344,000 in 2002,
$9.1 million in 2001 and $4.7 million in 2000. The increase in the
provision during 2001 was due to the adverse impact of the economic recession on
our customer base. We expect general and administrative expenses will increase
slightly in 2003, compared to 2002.

Amortization of deferred stock compensation.In connection with the grant of stock options to employees
and a director, we recorded deferred stock compensation in the aggregate amount
of $17.3 million in 1999, and $0.3 million in 2000, representing the difference
between the exercise price and the deemed fair market value of our common stock
on the date these stock options were granted. We recorded no additional deferred
stock compensation in 2002 or 2001. Deferred stock compensation is reflected
within stockholders equity and is being amortized to operations over the
respective vesting period of the options. We recorded amortization of deferred
stock compensation expense of approximately $1.1 million, $2.7 million and $6.2
million for fiscal 2002, 2001

27

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and 2000,
respectively. At December 31, 2002, we had approximately $0.2 million remaining
to be amortized in 2003.

Interest income.   Interest income is
earned on funds we keep on deposit in interest bearing money market and
short-term investment accounts. Foundry had interest income of $5.0 million,
$8.7 million and $11.2 million in 2002, 2001 and 2000, respectively. Interest
income has decreased due to continually declining interest rates since January
2001. See Item 7A Quantitative and Qualitative Disclosures about Market Risk
for a description of our investment policy.

Write-down of minority investment.   In
February 2001, Foundry made a $2.5 million minority investment in a development
stage private company, who was also a customer. Total sales to this customer
were insignificant. In December 2001, the Company determined that the investments
decline in fair market value was other than temporary based on certain
factors such as the value of the most recent round of financing, market and
industry conditions and financial condition of and business outlook for the
company. Accordingly, Foundry wrote-down the minority investment in its entirety
in the accompanying consolidated statement of income for the year ended December
31, 2001.

Income taxes.The effective tax rates
for each of the years ended December 31, 2002, 2001 and 2000 was 30%, 38% and
38%, respectively. The amounts reflect the federal statutory and state tax
rates, offset by research and development tax credits, foreign sales corporation
tax benefits, and tax-exempt interest income.

The Companys income taxes payable for federal and state purposes have
been reduced, and the deferred tax assets increased, by the tax benefits
associated with taxable dispositions of employee stock options. When an employee
exercises a stock option issued under a nonqualified plan or has a disqualifying
disposition related to a qualified plan, the Company receives an income tax
benefit calculated as the difference between the fair market value of the stock
issued at the time of the exercise and the option price, tax effected. These
benefits were credited directly to stockholders equity and amounted to $4.8
million, $10.5 million and $57.9 million for the years ended December 31, 2002,
2001, and 2000, respectively.

Management believes that the Company will likely generate sufficient
taxable income in the future to realize the tax benefits
arising from its existing deferred tax assets. Therefore, no valuation allowance
was required as of December 31, 2002, and 2001.

Liquidity and
Capital Resources

At December 31, 2002, Foundry had cash and cash equivalents and
short-term investments totaling $326.5 million as compared to $274.7
million at December 31, 2001, an increase of $51.8 million.

Cash provided by operating activities was $48.9 million, $32.6 million
and $86.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Cash provided by operating activities in 2002 consisted of net
income of $22.5 million adjusted for non-cash items of $24.9 million, and net
cash provided by changes in operating assets and liabilities of $1.5 million.
Non-cash items of $24.9 million in 2002 consisted primarily of a provision for
inventory of $16.4 million, depreciation of $4.9 million, and the tax benefit
from stock option exercises totaling $4.8 million. Cash provided by operating
activities in 2001 was comprised of $2.9 million adjusted for non-cash items of
$44.2, and net cash used for changes in operating assets and liabilities of
$14.5 million. The increase in cash provided by operating activities in 2002 was
primarily due to higher net income generated in 2002. The decrease in cash
provided by operating activities in 2001 was due to the economic recession which
resulted in significantly lower net income of $2.9 million. Cash provided by operating
activities of $86.0 million in 2000 was a result of significantly higher net
income of $88.1 million, a non-cash tax benefit from stock option exercises of
$55.3 million offset by $48.4 million of inventory purchases and an increase in
accounts receivable of $44.1 million.

Cash provided primarily by net maturities of short-term investments was
$32.8 million in 2002. This compares to cash utilized primarily in the net
purchase of short-term investments of $100.5 million and $49.2 million in 2001
and 2000, respectively. The fluctuations in investing activities were due to the
shift between the Companys purchases of short-term investments and cash
generated from the maturities of these short-term investments. All investments
are classified as held-to-maturity. During 2002, the Company reinvested
significantly more of the proceeds from short-term investments into highly
liquid cash equivalents rather than into other short-term investments as
compared to 2001 and 2000. See Item 7A Quantitative and Qualitative Disclosures about Market Risk
for a description of our investment policy.

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Financing activities in 2002 generated $8.1 million of cash, arising from
the issuance of common stock to employees through stock option exercises and the
employee stock purchase plan. In 2001, we utilized $2.6 million for
financing activities, which comprised primarily of $15.0 million used for the
repurchase of Foundry common stock in the open market offset by $12.4 million of
proceeds from the issuance of common stock to employees. Financing activities in
2000 generated $11.2 million primarily from the issuance of common stock to
employees, and to a lesser extent, the collection of stockholder promissory
notes.

The following table summarizes our contractual obligations at December
31, 2002 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods (in thousands):



|                                                     |  | Total  |        | Less Than 1Year |        | 1-3 Years |        | GreaterThan 3
Years | 
|---------------------------------------------------- |  | ------ | ------ | --------------- | ------ | --------- | ------ | ------------------- | 
|                                                     |  |        |        |                 |        |           |        |                     | 
|Operating leases                                     |  | $      | 19,000 |                 |        | $         | 4,500  |                     | 
|Purchase commitments with our contract manufacturers |  | 26,099 |        |                 | 26,099 |           |        |                    | 
|                                                     |  |        |        |                 |        |           |        |                     | 
|                                                     |  |        |        |                 |        |           |        |                     | 
|Total contractual cash obligations                   |  | $      | 45,099 |                 |        | $         | 30,599 |                     | 
|                                                     |  |        |        |                 |        |           |        |                     | 

Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that our existing cash balances and anticipated funds
from operations, will satisfy our cash requirements for at least the next
12 months. Key factors impacting our cash flows include our ability to
effectively manage our working capital, in particular inventory and accounts
receivable, as well as future demand for our products and related pricing. We
may incur higher capital expenditures in the near future, when market conditions
improve and if we expand our operations. Although we do not have any current
plans or commitments to do so, from time to time, we may also consider the
acquisition of products and businesses complementary to our business. Any
acquisition or investment may require additional capital.

Recently Issued
Accounting Standards

Accounting for
Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure (SFAS 148) that amends
SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123) to provide
alternative methods of transition for a voluntary change to SFAS 123s fair
value method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entitys accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. The Statements amendment of the transition and annual disclosure
requirements of SFAS 123 are effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. We do no expect the adoption of SFAS 148 to have a material effect on our
financial position, results of operations, or cash flows. Foundry has elected to
continue to follow the intrinsic value method of accounting as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, to account for employee stock options.

Guarantors
Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements or interim or annual periods
ending after

29

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December 15, 2002
and are applicable to Foundrys product warranty liability (see Note 3 below to
the Consolidated Financial Statements). Foundrys adoption of FIN 45 is not
expected to have a material impact on its results of operations and financial
position.

Revenue
Arrangements with Multiple Deliverables

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Foundry is currently
evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its
results of operations and financial condition.

Accounting for
Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Foundrys adoption of SFAS 146 is not expected to have a
significant impact on its operating results and financial condition.

Risk Factors
That May Affect Future Results and Market Price of Stock

We may not be
able to maintain profitability.

We generated net income of $22.5 million for the year ended December 31,
2002 on revenues of $300.7 million. As of December 31, 2002, we had retained
earnings of $116.0 million. When economic conditions improve, we may incur
increased costs and expenses related to sales and marketing, including expansion
of our direct sales operation and distribution channels, product development,
customer support, expansion of our corporate infrastructure, and facilities
expansion. We base our operating expenses on anticipated revenue trends and a
high percentage of our expenses are fixed in the short term. As a result, any
significant shortfall in revenue relative to our expectations could cause a
significant decline in our quarterly operating results. In order to be
profitable, we must generate and sustain substantially higher revenue while
maintaining reasonable cost and expense levels. We may not be able to sustain or
increase profitability on a quarterly or annual basis in the future.

Weak economic
and market conditions and geopolitical turmoil may adversely affect our
revenues, gross margins and expenses.

Our quarterly revenue and operating results have and may continue to
fluctuate due to the effects of general economic conditions in the United States
and globally, and, in particular, market conditions in the communications and
networking industries. In the last several years, our operating results have
been adversely affected as a result of the overall economic slowdown and reduced
capital spending by businesses. We are uncertain about the extent and length of
the economic downturn. Additionally, the current political turmoil in many parts
of the world, including terrorist and military actions, may continue to weaken
the global economy. If the economic conditions in the United States and globally
do not improve, or if we experience a worsening in the global economic slowdown,
we may continue to experience material negative effects on our business,
operating results and financial condition.

Because our
financial results are difficult to predict, we may not meet quarterly financial
expectations, which could cause our stock price to decline.

Our quarterly revenue and operating results are difficult to predict,
especially in recent periods, and may fluctuate significantly from quarter to
quarter. Delays in generating or recognizing forecasted revenue could cause our
quarterly operating results to be below the expectations of public market
analysts or investors, which could cause the price of our common stock to fall.
In addition, demand for our products may fluctuate as a result of seasonality,
particularly in Europe.

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We may experience a delay in generating or recognizing revenue for a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenue for that quarter and are generally cancelable at any time
prior to shipment. Therefore, we depend on obtaining orders in a quarter for
shipment in that quarter to achieve our revenue objectives. In addition, the
failure to ship products by the end of a quarter may negatively affect our
operating results. Our reseller agreements typically provide that the reseller
may delay scheduled delivery dates without penalty. Further, our customer
purchase orders and reseller agreements sometimes provide that the customer or
reseller may cancel orders within specified time frames without significant
penalty.

Because of the uncertain nature of the economic environment and rapidly
changing market we serve, period-to-period comparisons of operating results may
not be meaningful. In addition, you may not be able to rely on the results for
any period as an indication of future performance. In the future, our revenue
may remain flat, decrease or grow. As a consequence, operating results for a
particular quarter are extremely difficult to predict.

Although our
customer base has increased substantially, we still depend on large, recurring
purchases from certain customers, and a loss, cancellation or delay in purchases
by these customers could negatively impact our revenue.

Sales to our ten largest customers accounted for 37% and 38% of total
revenues in 2002 and 2001, respectively. The loss of continued orders from our
more significant customers could cause our revenue and profitability to suffer.
Our ability to attract new customers will depend on a variety of factors,
including the cost-effectiveness, reliability, scalability, breadth and depth of
our products.

While our financial performance may depend on large, recurring orders
from certain customers and resellers, we do not generally have binding
commitments from them. For example:

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;

our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements;
and

our reseller agreements provide for discounts based on expected or actual
volumes of products purchased or resold by the reseller in a given
period.

Because our expenses are based on our revenue forecasts, a substantial
reduction or delay in sales of our products to, or unexpected returns from
customers and resellers, or the loss of any significant customer or reseller
could harm our business. Although our largest customers may vary from period to
period, we anticipate that our operating results for any given period will
continue to depend on large orders from a small number of customers.

Intense
competition in the market for network solutions could prevent us from
maintaining or increasing revenue and sustaining profitability.

The market for network solutions is intensely competitive. In particular,
Cisco Systems Inc. maintains a dominant position in this market and several of
its products compete directly with our products.
Ciscos substantial resources and market dominance have enabled it to reduce prices on its products within a short period of time following the introduction of these products, which reduces the margins and, therefore, the profitability of its competitors. Purchasers of networking solutions may choose Ciscos products because of its longer operating history, broader product line and strong reputation in the networking market. In addition, Cisco may have developed or could in the future develop new technologies that directly compete with our products or render our products obsolete. Although we are currently among the top providers of network infrastructure solutions, we cannot assure you that we will be able to compete successfully against Cisco, currently the leading provider in the networking market.

We also compete with other companies, such as Extreme Networks, Juniper
Networks, Riverstone Networks, Nortel Networks, and Enterasys Networks. Some of
our current and potential competitors have greater market leverage, longer
operating histories, greater financial, technical, sales, marketing and other
resources, more name recognition and larger installed customer bases.
Additionally, we may face competition from unknown companies and emerging
technologies that may offer new LAN, MAN and LAN/WAN solutions to enterprises
and ISPs. Furthermore, a number of these competitors may merge or form strategic
relationships that would enable them to apply greater resources and sales
coverage than we can and to offer, or bring to market earlier, products that are
superior to ours in terms of features, quality, pricing or other
factors.

In order to remain competitive, we must, among other things, invest
significant resources in developing new products with superior performance at
lower prices than our competitors, and we must enhance

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our current products
and maintain customer satisfaction. In addition, we must make certain our sales
and marketing capabilities allow us to effectively compete against our
competitors. If we fail to do so, our products may not compete favorably with
those of our competitors and our revenue and profitability could
suffer.

Our ability to
increase our revenue depends on expanding our direct sales operation and
reseller distribution channels and continuing to provide excellent customer
support.

If we are unable to effectively develop and retain our sales and support
staff or establish and cultivate relationships with our indirect distribution
channels, our ability to grow and increase revenue could be harmed.
Additionally, if our resellers are not successful in their sales efforts, sales
of our products may decrease and our operating results could suffer. Some of our
resellers also sell products that compete with our products. As a result, we
cannot assure you that our resellers will market our products effectively or
continue to devote the resources necessary to provide us with adequate sales,
marketing and technical support.

In an effort to gain market share and support our customers, we may need
to expand our direct sales operation and customer service staff to support new
and existing customers. The timing and extent of any such expansion is uncertain
in light of the current economic environment. Expansion of our direct sales
operation and reseller distribution channels may not be successfully implemented
and the cost of any expansion may exceed the revenue generated.

We must continue
to introduce new products with superior performance in a timely manner in order
to sustain and increase our revenue.

The networking industry is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements, and
evolving industry standards. Therefore, we need to introduce new products in a
timely manner that offer substantially greater performance and support a greater
number of users per device, all at lower price points to remain competitive. The
process of developing new technology is complex and uncertain, and if we fail to
develop or obtain important intellectual property and accurately predict
customers changing needs and emerging technological trends, our business could
be harmed. We must commit significant resources to develop new products before
knowing whether our investments will eventually result in products that the
market will accept. After a product is developed, we must be able to forecast
sales volumes and quickly manufacture a sufficient mix of products and
configurations that meet customer requirements, all at low costs.

The current life cycle of our products is typically 18 to 24 months. The
introduction of new products or product enhancements may shorten the life cycle
of our existing products, replace sales of some of our current products, thereby
offsetting the benefit of even a successful product introduction, and may cause
customers to defer purchasing our existing products in anticipation of the new
products. This could harm our operating results by decreasing sales, increasing
our inventory levels of older products and exposing us to greater risk of
product obsolescence. In addition, we have experienced, and may in the future
experience, delays in developing and releasing new products and product
enhancements. This has led to, and may in the future lead to, delayed sales,
increased expenses and lower quarterly revenue than anticipated. During the
development of our products, we have also experienced delays in the prototyping
of our ASICs, which in turn has led to delays in product
introductions.

Some of our
customers depend on the growth of the Internet for all or substantially all of
their revenue. If the Internet does not expand as expected, our business will be
adversely affected.

A portion of our business and revenue depends on the use of the Internet
and on the deployment of our products by customers that depend on the growth of
the Internet. Spending on Internet infrastructure has decreased significantly,
which has had a material adverse effect on our business. To the extent that the
economic slowdown and reduction in capital spending continue to adversely affect
spending on Internet infrastructure or if the Internet does not expand as a
widespread communications medium and commercial marketplace, the growth of the
market for Internet infrastructure equipment may not continue and the demand for
our products could be harmed.

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Hewlett-Packard
is our most significant OEM. Our business could be harmed if our relationship
with Hewlett-Packard is terminated.

Hewlett-Packard (HP), currently our most significant OEM, accounted for
5% of revenue for each of the years ended December 31, 2002 and 2001. If HP
chooses to reduce or terminate its OEM relationship with Foundry, our revenue
and ability to market and sell our products to certain prospective customers may
be harmed.

The United States government is an increasingly important customer,
but there is no guarantee of  future contract awards.

As part of the changing economic environment, the United States government has become an increasingly important customer for the networking
industry and Foundry in particular. The process of becoming a qualified government
vendor takes considerable time and effort, and the timing of contract awards is hard to predict.
Our failure to win any significant contract award may have a material adverse effect on our financial results as we increase our dependence on U.S. government sales.

Our gross margins
may decline over time and the average selling prices of our products may
decrease as a result of competitive pressures and other factors.

Our industry has experienced erosion of average product selling prices
due to a number of factors, particularly competitive and macroeconomic pressures
and rapid technological change. The average selling prices of our products has
decreased in the past and may continue to decrease in response to competitive
pressures, increased sales discounts, new product introductions by our
competitors or other factors. Both we and our competitors sometimes lower sales
prices in order to gain market share or create more demand. Furthermore, as a
result of the recent disruption in the technology sector coupled with more broad
macro-economic factors, both we and our competitors may pursue more aggressive
pricing strategies in an effort to maintain sales levels. Such intense pricing
competition could cause our gross margins to decline and may adversely affect
our business, operating results or financial condition.

Our gross margins may be adversely affected if we are unable to reduce
manufacturing costs and effectively manage our inventory levels. Although
management continues to closely monitor inventory levels, declines in demand for
our products could result in additional provision for inventory. Additionally,
our gross margins may be negatively affected by fluctuations in manufacturing
volumes, component costs, the mix of product configurations sold and the mix of
distribution channels through which our products are sold. For example, we
generally realize higher gross margins on direct sales to the end user than on
sales through resellers or our OEMs. As a result, any significant shift in
revenue through resellers or our OEMs could harm our gross margins. If product
or related warranty costs associated with our products are greater than we have
experienced, our gross margins may also be adversely affected.

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.

We believe our future success will depend in large part upon our ability
  to identify, attract and retain highly skilled managerial, engineering, sales
  and marketing, finance and manufacturing personnel. In spite of the economic
  downturn, competition for these personnel can be intense, especially in the
  San Francisco Bay Area, and we may experience some difficulty hiring employees
  in the timeframe we desire, particularly engineers. Volatility or lack of positive
  performance in our stock price may also adversely affect our ability to retain
  key employees, all of whom have been granted stock options. In order to improve
  productivity, the Company has historically used stock options to motivate
  and retain its employees. Some of the proposals currently under consideration
  by the accounting profession regarding the accounting treatment of stock options could limit our ability
  to continue to use stock options as an incentive and retention tool. We may
  not succeed in identifying, attracting and retaining personnel. The loss of
  the services of any of our key personnel, the inability to identify, attract
  or retain qualified personnel in the future or delays in hiring required personnel,
  particularly engineers and sales personnel, could make it difficult for us to
  manage our business and meet key objectives, such as timely product introductions.

Our success also depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing, finance
and manufacturing personnel, many of whom would be difficult to replace. In
particular, we believe that our future success depends on Bobby R. Johnson, Jr.,
President, Chief Executive Officer and Chairman of the Board. We do not have
employment contracts or key person life insurance covering any of our
personnel.

Our presence 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.

Our success will depend, in part, on increasing international sales and
expanding our international operations. Our international sales primarily depend
on our resellers, including Pervasive Networks and Spot Distribution Ltd. in
Europe, Mitsui in Japan, Shanghai Gentek and GTI in China and Samsung in Korea.
The failure of our resellers to sell our products internationally would limit
our ability to sustain and grow our

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revenue. In
particular, our revenue from Japan depends primarily on Mitsuis ability to sell
our products and on the strength of the Japanese economy, which has been weak in
recent years.

There are a number of risks arising from our international business,
including:

potential recessions in economies outside the United States;

longer accounts receivable collection cycles;

seasonal reductions in business activity;

higher costs of doing business in foreign countries;

difficulties in managing operations across disparate geographic
areas;

difficulties associated with enforcing agreements through foreign legal
systems;

political instability and export restrictions;

potential adverse tax consequences;

unexpected changes in regulatory requirements;

military conflict and terrorist activities.

One or more of such factors may have a material adverse effect on our
future international operations and, consequently, on our business, operating
results and financial condition.

Generally, international sales are denominated in U.S. dollars. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive on a price basis in
international markets. In the future, we may elect to invoice some of our
international customers in local currency, which could subject us to
fluctuations in exchange rates between the U.S. dollar and the local
currency.

We purchase
several key components for our products from several sources; if these
components are not available, our revenues may be harmed.

We purchase several key components used in our products from several sources
  and depend on supply from these sources to meet our needs. The inability of
  any supplier to provide us with adequate supplies of key components or the loss
  of any of our suppliers may cause a delay in our ability to fulfill orders and
  may have a material adverse effect on our business and financial condition.

Our principal limited-sourced components include dynamic and static
random access memories, commonly known as DRAMs and SRAMs, ASICs, printed
circuit boards, optical components, microprocessors and power supplies. We
acquire these components through purchase orders and have no long-term
commitments regarding supply or price from these suppliers. From time to time,
we have experienced shortages in allocations of components, resulting in delays
in filling orders. We may encounter shortages and delays in obtaining components
in the future which could impede our ability to meet customer orders.

We depend on anticipated product orders to determine our material
requirements. Lead times for limited-sourced materials and components can be as
long as six months, vary significantly and depend on factors such as the
specific supplier, contract terms and demand for a component at a given time.
Inventory management remains an area of focus as we balance the need to maintain
strategic inventory levels to ensure competitive lead times with the risk of
inventory obsolescence due to rapidly changing technology and customer
requirements. If orders do not match forecasts or if we do not manage inventory
effectively, we may have either excess or inadequate inventory of materials and
components, which could negatively affect our operating results and financial
condition.

Our reliance on
third-party manufacturing vendors to manufacture our products may cause a delay
in our ability to fill orders.

We subcontract substantially all of our manufacturing to
companies that assemble and test our products. Our agreements with some of these
companies allow them to procure long lead-time component inventory on our behalf
based upon a rolling production forecast provided by Foundry with lead times of
up to

34

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6 months.
Foundry may be contractually obligated to the purchase of long lead-time
component inventory procured by our contract manufacturers in accordance with
the forecast, unless Foundry gives notice of order cancellation at least 90 days
prior to the delivery date. If actual demand of our products is below the
projections, we may have excess inventory as a result of our purchase
commitments of long lead-time components with our contract manufacturers. We do
not have long-term contracts with these manufacturers.

We have experienced delays in product shipments from our contract
manufacturers, which in turn delayed product shipments to our customers. We may
in the future experience similar delays or other problems, such as inferior
quality and insufficient quantity of product, any of which could harm our
business and operating results. We intend to regularly introduce new products
and product enhancements, which will require us to rapidly achieve volume
production by coordinating our efforts with our suppliers and contract
manufacturers. We attempt to increase our material purchases, contract
manufacturing capacity and internal test and quality functions to meet
anticipated demand. The inability of our contract manufacturers to provide us
with adequate supplies of high-quality products, the loss of any of our contract
manufacturers, or the inability to obtain raw materials, could cause a delay in
our ability to fulfill orders.

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 miss our revenue
expectations.

Some of our products have a relatively high sales price, and often
represent a significant and strategic decision by a customer. The decision by
customers to purchase our products is often based on their internal budgets and
procedures involving rigorous evaluation, testing, implementation and acceptance
of new technologies. As a result, the length of our sales cycle in these
situations can be as long as 12 months and may vary substantially from customer
to customer. While our customers are evaluating our products and before they may
place an order with us, we may incur substantial sales and marketing expenses
and expend significant management effort. Consequently, if sales forecasted from
a specific customer for a particular quarter are not realized in that quarter,
we may not meet our revenue expectations.

The timing of
the adoption of industry standards may negatively impact widespread market
acceptance of our products.

Our success depends in part on both the adoption of industry standards
for new technologies in our market and our products compliance with industry
standards. Many technological developments occur prior to the adoption of the
related industry standard. The absence of an industry standard related to a
specific technology may prevent market acceptance of products using the
technology. We intend to develop products using new technological advancements,
such as MPLS Draft-Martini, and may develop these products prior to the adoption
of industry standards related to these technologies. As a result, we may incur
significant expenses and losses due to lack of customer demand, unusable
purchased components for these products and the diversion of our engineers from
future product development efforts. Further, we may develop products that do not
comply with a later-adopted industry standard, which could hurt our ability to
sell these products. If the industry evolves to new standards, we may not be
able to successfully design and manufacture new products in a timely fashion
that meet these new standards. Even after industry standards are adopted, the
future success of our products depends upon widespread market acceptance of
their underlying technologies. At least one networking equipment standards body
has reportedly stopped all work on a standard in response to assertions by
Nortel that it controls the patent rights to certain industry standards.
Attempts by third parties to impose licensing fees on industry standards could
undermine the adoption of such standards and lessen industry
opportunities.

If we fail to
protect our intellectual property, our business and ability to compete could
suffer.

Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. Our proprietary technology
includes our ASICs, our IronCore and JetCore hardware architecture, our
IronWare software, and certain mechanical designs. We rely on a combination of patent, copyright, trademark and
trade secret laws and contractual restrictions on disclosure to protect our
intellectual property rights in these proprietary technologies. Although we have
patent applications pending, there can be no assurance that patents will be
issued from pending applications, or that claims allowed on any future patents
will be sufficiently broad to protect our technology.

35

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We provide software to customers under license agreements included in the
packaged software. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in some jurisdictions. Despite our
efforts to protect our proprietary rights through confidentiality and license
agreements, unauthorized parties may attempt to copy or otherwise obtain and use
our products or technology. These precautions may not prevent misappropriation
or infringement of our intellectual property. Monitoring unauthorized use of our
products is difficult and the steps we have taken may not prevent
misappropriation of our technology, particularly in some foreign countries where
the laws may not protect our proprietary rights as fully as in the United
States.

We may be
subject to intellectual property infringement claims that are costly to defend
and could limit our ability to use certain technologies in the
future.

The networking industry is increasingly characterized by the existence of
a large number of patent claims and related litigation regarding patent and
other intellectual property rights. In particular, some companies in the
networking industry claim extensive patent portfolios. As a result of the
existence of a large number of patents and rapid rate of issuance of new patents
in the networking industry, it is not economically practical for a company of
our size to determine in advance whether a product or any of its components may
infringe patent rights claimed by others.

From time to time third parties
have asserted exclusive patent, copyright and trademark rights to technologies
and related standards that are important to us. Such third parties may assert
claims or initiate litigation against us or our manufacturers, suppliers or
customers alleging infringement of their proprietary rights with respect to our
existing or future products. In March 2001, Nortel filed a lawsuit against
Foundry in the United States District Court for the District of Massachusetts
alleging that certain of the companys products infringe several of Nortels
patents and seeking injunctive relief as well as unspecified damages. Nortel has
also brought suit, on the same or similar patents, against a number of other
networking companies. Foundry has analyzed the validity of Nortels claims and
believes that Nortels suit is without merit. Foundry is committed to vigorously
defending itself against these claims. On October 9, 2002, the Company filed a lawsuit against Nortel in the United
States District Court, Northern District of California alleging that certain of Nortels
products infringe a Foundry patent as well as allegations concerning breach of contract. The Company
is seeking injunctive relief as well as damages. Irrespective of the merits of
the companys position, we may incur substantial expenses in defending against
third party claims. In the event of a determination adverse to us, we could
incur substantial monetary liability, and be required to change our business
practices. Either of these could have a material adverse effect on our financial
position, results of operations, or cash flows.

In difficult economic times, certain companies often attempt to realize revenues from their patent portfolios by establishing licensing programs.  Some of these companies have contacted Foundry regarding a license.  Foundry carefully reviews any license requests, but is unwilling to license any technology it does not require for its product portfolio.  Any asserted license demand can require considerable effort to review and respond.  Moreover, a denial by us of a license request could result in threats of litigation or actual litigation, which, if initiated, could harm our business.

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.

Our products are complex and may contain undetected defects or errors,
particularly when first introduced or as new enhancements and versions are
released. Despite our testing procedures, these defects and errors may be found
after commencement of commercial shipments. Any defects or errors in our
products discovered in the future or failures of our customers networks,
whether caused by our products or another vendors products could result
in:

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 errors.

If we do not
adequately manage our systems and processes, our business may be harmed.

Our ability to successfully implement our business plan requires an
effective planning and management process. Our current or planned personnel
systems, procedures and controls may not be adequate to support our future
operations. We need to continue to improve existing and implement new
operational and

36

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financial systems,
procedures and controls. Any delay in the implementation of or disruption in the
transition to new or enhanced systems, procedures or controls, could harm our
ability to accurately forecast sales demand, manage our supply chain and record
and report financial and management information on a timely and accurate
basis.

Our products may
not meet the standards required for their sale, which may harm our business.

In the United States, our products must comply with various regulations
and standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop may be required to
comply with standards established by telecommunications authorities in various
countries as well as those of certain international bodies. Although we believe
our products are currently in compliance with domestic and international
standards and regulations in countries we currently sell to, there is no
assurance that our existing and future product offerings will continue to comply
with evolving standards and regulations. If we fail to obtain timely domestic or
foreign regulatory approvals or certification, we may not be able to sell our
products where these standards or regulations apply, which may prevent us from
sustaining our revenue or maintaining profitability.

We may engage in
acquisitions that could result in the dilution of our stockholders, cause us to
incur substantial expenses and harm our business if we cannot successfully
integrate the acquired business, products, technologies or
personnel.

Although Foundry focuses on internal product development and growth, we
may learn of acquisition prospects that would complement our existing business
or enhance our technological capabilities as part of our business strategy.
Future acquisitions by us could result in large and immediate write-offs, the
incurrence of debt and contingent liabilities or amortization expenses related
to goodwill and other intangible assets, any of which could negatively affect
our results of operations. Furthermore, acquisitions involve numerous risks and
uncertainties, including:

difficulties in the assimilation of products, operations, personnel and
technologies of the acquired companies;

diversion of managements attention from other business
concerns;

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.

Although we do not currently have any agreements or plans with respect to
any material acquisitions, we may make acquisitions of complementary businesses,
products or technologies in the future. We may not be able to successfully
integrate any businesses, products, technologies or personnel that might be
acquired in the future, and our failure to do so could harm our
business.

We may need to
raise capital, but the availability of additional financing is uncertain.

We believe that our existing working capital and cash from future
operations will enable us to meet our working capital requirements for at least
the next 12 months. However, if cash from future operations is insufficient, or
if cash is used for acquisitions or other currently unanticipated uses, we could
be required to raise substantial additional capital. Additional capital, if
required, may not be available on acceptable terms, or at all. If we are unable
to obtain additional capital, we may be required to reduce the scope of our
planned product development and marketing efforts, which could harm our
business, financial condition and operating results. To the extent that we raise
additional capital through the sale of equity or convertible debt securities,
the issuance of such securities could result in dilution to our existing
stockholders and could cause our stock price to decline. If additional funds are
raised through the issuance of debt securities, these securities would have
rights, preferences and privileges senior to holders of common stock. The terms
of debt securities could impose restrictions on our operations and could cause
our stock price to decline.

37

---

We face
litigation risks.

We are a party to lawsuits in the normal course of our business.
Litigation in general, and intellectual property and securities litigation in
particular, can be expensive, lengthy and disruptive to normal business
operations. Moreover, the results of complex legal proceedings are difficult to
predict. We believe that we have defenses in the lawsuits pending against us as
indicated in Part I. Item 3 Legal Proceedings, and we are vigorously
contesting these allegations. Responding to the allegations has been, and
probably will be, expensive and time-consuming for us. An unfavorable resolution
of the lawsuits could adversely affect our business, results of operations, or
financial condition.

Our stock price
has been volatile historically, which may make it more difficult to resell
shares when needed at attractive prices.

The trading price of our common stock has been and may continue to be
subject to wide fluctuations. Our stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products by us or our
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable, and news reports relating to trends in our
markets. In addition, the stock market in general, and technology companies in
particular, have experienced extreme volatility that often has been unrelated to
the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock, regardless of our
operating performance. Additionally, volatility or lack of positive performance
in our stock price may adversely affect our ability to retain key employees, all
of whom have been granted stock options.

If we are
required to record stock option grants as compensation expense on our income
statement, our profitability may be reduced significantly.

There is an ongoing debate among regulators and companies regarding the
  expensing of stock options. The current methodology for expensing such stock
  options is based on, among other things, the historical volatility of the underlying
  stock. As noted above, our stock price has been historically volatile. Therefore,
  the adoption of an accounting standard requiring companies to expense stock
  options would negatively impact our profitability and may adversely impact our
  stock price. Such adoption could also limit our ability to continue to use stock
  options as an incentive and retention tool.

Management
beneficially owns approximately 18.9% of our stock; their interests could
conflict with yours; significant sales of stock held by them and Foundrys
employees could have a negative effect on Foundrys stock price.

Foundrys directors and executive officers beneficially own approximately
18.9% of our outstanding common stock as of December 31, 2002. As a result of
their ownership and positions, our directors and executive officers collectively
are able to significantly influence all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Our employees who own Foundry common stock are also collectively
able to significantly influence such matters. Such concentration of ownership
may have the effect of delaying or preventing a change in control of Foundry. In
addition, sales of significant amounts of shares held by Foundrys employees,
directors and executive officers, or the prospect of these sales, could
adversely affect the market price of Foundrys common stock.

Anti-takeover
provisions could make it more difficult for a third party to acquire us.

Our board of directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of common stock
may be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of Foundry without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. We
have no present plans to issue shares of preferred stock. Further, certain
provisions of our charter documents, including provisions eliminating the
ability of stockholders to take action by written consent and limiting the
ability of stockholders to raise matters at a meeting of stockholders without
giving advance notice, may have the effect of delaying or preventing changes in
control or management

38

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of Foundry, which
could have an adverse effect on the market price of our stock. In addition, our
charter documents do not permit cumulative voting, which may make it more
difficult for a third party to gain control of our board of
directors.

Our operations
could be significantly hindered by the occurrence of a natural disaster,
terrorist acts or other catastrophic event, or power shortages.

Our operations are susceptible to outages due to fire, floods, power
loss, power shortages, telecommunications failures, break-ins and similar
events. In addition, our headquarters and contract manufacturers are located in
Northern California, an area susceptible to earthquakes. In recent years, the
western United States (and California in particular) has experienced episodes of
diminished electrical power supply. As a result of these episodes, our
contractors facilities and certain of our operations or facilities may be
subject to rolling blackouts or other unscheduled interruptions of electrical
power. As a result of this energy crisis, these contractors may be unable to
manufacture sufficient quantities of our products or they may increase their
service fees. In addition, since Silicon Valley is an important industrial area
for the United States, we may be subject to acts of terrorism, which could cause
a material disruption in our operations. The prospect of such unscheduled
interruptions may continue for the foreseeable future and we are unable to
predict either their occurrence, duration or cessation. We do not have multiple
site capacity for all of our services in the event of any such occurrence.
Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, break-ins, and similar disruptions from
unauthorized tampering with our computer systems. We may not carry sufficient
business interruption insurance to compensate us for losses that may occur as a
result of any of these events. Any such event could have a material adverse
effect on our business, operating results, and financial condition.

Item 7A.Quantitative and Qualitative Disclosures about
Market Risk.

Foundrys investments are made in accordance with an investment policy
approved by the Board of Directors. The primary objective of the Companys
investment activities is to preserve capital while maximizing yields without
significantly increasing risk. Our exposure to market risk for changes in
interest rates relates primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio. We generally place
our investments with high credit quality issuers and, by policy, limit the
amount of credit exposure to any one issuer or fund. A hypothetical 100 basis
point decline or increase in short-term interest rates would reduce or increase the annualized earnings
on our $326.5 million of cash equivalents and short-term investments at December
31, 2002 by approximately $3.3 million. Our investment portfolio as of December
31, 2002 includes only marketable securities with original maturities of less
than one year and with secondary or resale markets to ensure portfolio
liquidity.

We have no investments denominated in foreign country currencies and
therefore are not subject to foreign currency risk on such investments. Due to
the nature of our short-term investments, we have concluded that there is no
material market risk exposure. Therefore, no quantitative tabular disclosures
are required.

Currently, all of our sales and expenses are denominated in U.S. dollars,
with the exception of Canadas operations denominated in Canadian dollars, and,
as a result, we have not experienced significant foreign exchange gains and
losses to date. We do not currently enter into forward exchange contracts to
hedge exposures denominated in foreign currencies or any other derivative
financial instruments for trading or speculative purposes. However, in the event
our exposure to foreign currency risk increases, we may choose to hedge those
exposures.

39

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Item 8.Consolidated Financial Statements And Supplementary
Data

FOUNDRY NETWORKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



| |  |  | Page
| |  |  | ----

|Report of Ernst & Young LLP, Independent Auditors                                                | 
|------------------------------------------------------------------------------------------------ | 
|                                                                                                 | 
|Report of Arthur Andersen LLP, Independent Public
      Accountants                              | 
|                                                                                                 | 
|Consolidated Balance Sheets as of December 31, 2002 and
      2001                               | 
|                                                                                                 | 
|Consolidated Statements of Income for the Years Ended December 31,
      2002, 2001 and 2000     | 
|                                                                                                 | 
|Consolidated Statements of Stockholders Equity as of December 31,
      2002, 2001 and 2000     | 
|                                                                                                 | 
|Consolidated Statements of Cash Flows for the Years Ended December
      31, 2002, 2001 and 2000 | 
|                                                                                                 | 
|Notes to Consolidated Financial Statements                                                       | 

40

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of
Directors and Stockholders ofFoundry Networks, Inc.:

We have audited the accompanying consolidated balance sheet of Foundry
  Networks, Inc. and subsidiaries as of December 31, 2002, and the related consolidated
  statements of income, shareholders equity, and cash flows for the year
  then ended. Our audit also included the financial statement schedule listed
  in the Index at Item 15(a)(2) for the year ended December 31, 2002. These financial
  statements are the responsibility of the Companys management. Our responsibility
  is to express an opinion on these financial statements based on our audit. The
  financial statements of Foundry Networks, Inc. as of December 31, 2001 and for
  each of the two years in the period ended December 31, 2001 were audited by
  other auditors who have ceased operations and whose report dated January 21,
  2002 expressed an unqualified opinion on those statements before the reclassification
  adjustments described in Note 2.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Foundry
Networks, Inc. and subsidiaries at December 31, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule for the year ended December 31, 2002, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

As discussed above, the financial statements of Foundry Networks, Inc.
  as of December 31, 2001 and for each of the two years in the period ended December
  31, 2001, were audited by other auditors who have ceased operations. As disclosed
  in Note 2, the Company changed the presentation of revenues and cost of revenues
  in 2001 and 2000 to conform to the presentation required in 2002 in accordance
  with Rule 5.03 of Regulation S-X as service revenues exceed 10% of total revenues
  for the year ended December 31, 2002. We audited the reclassification adjustments
  that impacted product revenues, cost of product revenues, service revenues, and
  cost of service revenues. In our opinion, all such adjustments and disclosures
  are appropriate and the adjustments have been properly applied. However, we
  were not engaged to audit, review, or apply any procedures to the 2001 and 2000
  financial statements of the Company other than with respect to such adjustments
  and, accordingly, we do not express an opinion or any other form of assurance
  on the 2001 and 2000 financial statements taken as a whole.



|                                            |  |  |                            
|------------------------------------------- |  |  | ---------------------------
|                                            |  |  | /S/ ERNST & YOUNG
      LLP
|                                            |  |  |                            
|Palo Alto,
      CaliforniaJanuary 23, 2003 |  |  |                            

41

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This is a copy of
the audit report previously issued by Arthur Andersen LLP in connection with
Foundry Networks Inc.s filing on Form 10-K for the year ended December 31,
2001. This audit report has not been reissued by Arthur Andersen LLP in
connection with this filing on Form 10-K. See Exhibit 23.2 for further
discussion. The consolidated balance sheet as of December 31, 2000, the
consolidated statements of income, redeemable convertible preferred stock and
stockholders equity and cash flows for the year ended December 31, 1999 and the
information in the schedule for 1999 referred to in this report have not been
included in the accompanying financial statements or schedule.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Foundry Networks,
Inc.:

We have audited the accompanying consolidated balance sheets of Foundry
Networks, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 2001, and the related consolidated statements of income, redeemable
convertible preferred stock and stockholders equity and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements and the schedule referred to below are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Foundry Networks,
Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 15(a)(2) is
presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



|                                           |  |  | 
|------------------------------------------ |  |  | 
|/S/ ARTHURANDERSENLLP                      |  |  | 
|                                           |  |  | 
|San Jose,
      CaliforniaJanuary 21, 2002 |  |  | 

42

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FOUNDRY NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS(in
thousands)



|                                                                                                                                                                                 |  | December 31, |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                                                                 |  |              |        
|                                                                                                                                                                                 |  | 2002         |        
|                                                                                                                                                                                 |  |              |        
|ASSETS                                                                                                                                                                           |  |              |        
|Current assets:                                                                                                                                                                  |  |              |        
|Cash and cash equivalents                                                                                                                                                        |  | $            | 187,719
|Short-term investments                                                                                                                                                           |  | 138,734      |        
|Accounts receivable, net of allowances for doubtful accounts of
      $5,833 and $6,648 and sales returns of $1,584 and $1,501 at December 31,
      2002 and 2001, respectively |  | 51,896       |        
|Inventories                                                                                                                                                                      |  | 33,479       |        
|Deferred tax assets                                                                                                                                                              |  | 28,560       |        
|Prepaid expenses and other current assets                                                                                                                                        |  | 3,591        |        
|                                                                                                                                                                                 |  |              |        
|Total current assets                                                                                                                                                             |  | 443,979      |        
|                                                                                                                                                                                 |  |              |        
|Property and equipment:                                                                                                                                                          |  |              |        
|Computers and related equipment                                                                                                                                                  |  | 16,463       |        
|Leasehold improvements                                                                                                                                                           |  | 1,620        |        
|Furniture and fixtures                                                                                                                                                           |  | 101          |        
|                                                                                                                                                                                 |  |              |        
|                                                                                                                                                                                 |  | 18,184       |        
|Less: Accumulated depreciation                                                                                                                                                   |  | (11,804      | )      
|                                                                                                                                                                                 |  |              |        
|Net property and equipment                                                                                                                                                       |  | 6,380        |        
|                                                                                                                                                                                 |  |              |        
|Other long-term assets                                                                                                                                                           |  | 1,176        |        
|                                                                                                                                                                                 |  |              |        
|Total assets                                                                                                                                                                     |  | $            | 451,535
|                                                                                                                                                                                 |  |              |        
|                                                                                                                                                                                 |  |              |        
|LIABILITIESANDSTOCKHOLDERSEQUITY                                                                                                                                                |  |              |        
|Current liabilities:                                                                                                                                                             |  |              |        
|Accounts payable                                                                                                                                                                 |  | $            | 11,684 
|Accrued payroll and related expenses                                                                                                                                             |  | 11,748       |        
|Warranty accrual                                                                                                                                                                 |  | 2,305        |        
|Other accrued expenses                                                                                                                                                           |  | 3,597        |        
|Income taxes payable                                                                                                                                                             |  | 3,868        |        
|Deferred support revenue                                                                                                                                                         |  | 20,234       |        
|                                                                                                                                                                                 |  |              |        
|Total current liabilities                                                                                                                                                        |  | 53,436       |        
|                                                                                                                                                                                 |  |              |        
|Commitments and contingencies (Note 3)                                                                                                                                           |  |              |        
|Stockholders equity:                                                                                                                                                            |  |              |        
|Preferred stock, $0.0001 par value:                                                                                                                                              |  |              |        
|Authorized5,000 shares at December 31, 2002 and 2001; None issued
      and outstanding as of December 31, 2002 and 2001                                                        |  |             |        
|Common stock, $0.0001 par value:                                                                                                                                                 |  |              |        
|Authorized300,000 shares at December 31, 2002 and
      2001:Issued and outstanding121,329 and 119,299
      shares at December 31, 2002 and 2001, respectively                |  | 12           |        
|Treasury stock                                                                                                                                                                   |  |             |        
|Additional paid-in capital                                                                                                                                                       |  | 282,699      |        
|Note receivable from stockholder                                                                                                                                                 |  | (480         | )      
|Deferred stock compensation                                                                                                                                                      |  | (231         | )      
|Accumulated other comprehensive income                                                                                                                                           |  | 55           |        
|Retained earnings                                                                                                                                                                |  | 116,044      |        
|                                                                                                                                                                                 |  |              |        
|Total stockholders equity                                                                                                                                                       |  | 398,099      |        
|                                                                                                                                                                                 |  |              |        
|Total liabilities and stockholders equity                                                                                                                                       |  | $            | 451,535
|                                                                                                                                                                                 |  |              |        

The accompanying notes are an integral part of these consolidated
financial statements.

43

---

FOUNDRY NETWORKS, INC.

CONSOLIDATED STATEMENTS OF INCOME(in
thousands, except per share data)



|                                                                             |  | Year Ended December 31, |        
|---------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                             |  |                         |        
|                                                                             |  | 2002                    |        
|                                                                             |  |                         |        
|Net revenues:                                                                |  |                         |        
|Product                                                                      |  | $                       | 264,998
|Service                                                                      |  | 35,744                  |        
|                                                                             |  |                         |        
|Total net revenues                                                           |  | 300,742                 |        
|Cost of revenues:                                                            |  |                         |        
|Product                                                                      |  | 134,648                 |        
|Service                                                                      |  | 5,544                   |        
|                                                                             |  |                         |        
|Total cost of revenues                                                       |  | 140,192                 |        
|                                                                             |  |                         |        
|Gross margin                                                                 |  | 160,550                 |        
|Operating expenses:                                                          |  |                         |        
|Research and development                                                     |  | 34,933                  |        
|Sales and marketing                                                          |  | 82,924                  |        
|General and administrative                                                   |  | 14,451                  |        
|Amortization of deferred stock compensation                                  |  | 1,071                   |        
|                                                                             |  |                         |        
|Total operating expenses                                                     |  | 133,379                 |        
|                                                                             |  |                         |        
|Income (loss) from operations                                                |  | 27,171                  |        
|Interest income                                                              |  | 5,025                   |        
|Write-down of minority investment                                            |  |                        |        
|                                                                             |  |                         |        
|Income before provision for income taxes                                     |  | 32,196                  |        
|Provision for income taxes                                                   |  | 9,659                   |        
|                                                                             |  |                         |        
|Net income                                                                   |  | $                       | 22,537 
|                                                                             |  |                         |        
|Basic net income per share                                                   |  | $                       | 0.19   
|                                                                             |  |                         |        
|Weighted average shares used in computing basic net income per
      share   |  | 119,482                 |        
|                                                                             |  |                         |        
|Diluted net income per share                                                 |  | $                       | 0.18   
|                                                                             |  |                         |        
|Weighted average shares used in computing diluted net income per
      share |  |                         | 123,780
|                                                                             |  |                         |        

The accompanying notes are an integral part of these consolidated
financial statements.

44

---

FOUNDRY NETWORKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(in thousands)



|                                                      |  |              |   |                |  |        |   |             |   |                          |   | NotesReceivableFromStockholders |                            |                  |   | AccumulatedOtherComprehensiveIncome |   |                          |  |               |   |                   |  
|----------------------------------------------------- |  | ------------ | - | -------------- |  | ------ | - | ----------- | - | ------------------------ | - | ------------------------------- | -------------------------- | ---------------- | - | ----------------------------------- | - | ------------------------ |  | ------------- | - | ----------------- | -
|                                                      |  |              |   |                |  |        |   |             |   | AdditionalPaid-inCapital |   |                                 | Deferred StockCompensation |                  |   |                                     |   | TotalStockholdersEquity |  |               |  
|                                                      |  | Common Stock |   | Treasury Stock |  |        |   |             |   | RetainedEarnings         |   |                                 | ComprehensiveIncome        |                 
|                                                      |  |              |   |                |  |        |   |             |   |                          |   |                                
|                                                      |  | Shares       |   | Amount         |  | Shares |   | Amount      |   |                          |   |                                 |                            |                  |   |                                    
|                                                      |  |              |   |                |  |        |   |             |   |                          |   |                                 |                            |                  |   |                                     |   |                          |  |               |   |                   |  
|BALANCES AT DECEMBER 31, 1999                         |  | 114,190      |   | $      11      |  | 1,200  |   | $        (4 | ) | $ 191,623                |   | $         (755                  | )                          | $       (11,771  | ) |                                    |   | $    2,500               |  | $     181,604 |   |                   |  
|Issuance of common stock under stock plans            |  | 4,152        |   | 1              |  |       |   |            |   | 10,552                   |   |                                |                            |                 |   |                                    |   |                         |  | 10,553        |   |                   |  
|Exercise of stock options for notes receivable        |  | 60           |   |               |  |       |   |            |   | 3,270                    |   | (3,270                          | )                          |                 |   |                                    |   |                         |  |              |   |                   |  
|Repayment of notes receivable                         |  |             |   |               |  |       |   |            |   |                         |   | 755                             |                            |                 |   |                                    |   |                         |  | 755           |   |                   |  
|Repurchase of common stock from terminated employees  |  | (326         | ) |               |  |       |   |            |   | (121                     | ) |                                |                            |                 |   |                                    |   |                         |  | (121          | ) |                   |  
|Deferred stock compensation                           |  |             |   |               |  |       |   |            |   | 300                      |   |                                |                            | (300             | ) |                                    |   |                         |  |              |   |                   |  
|Amortization of deferred stock compensation           |  |             |   |               |  |       |   |            |   |                         |   |                                |                            | 6,185            |   |                                    |   |                         |  | 6,185         |   |                   |  
|Reduction in deferred stock compensation              |  |             |   |               |  |       |   |            |   | (306                     | ) |                                |                            | 306              |   |                                    |   |                         |  |              |   |                   |  
|Tax benefit from stock option exercises               |  |             |   |               |  |       |   |            |   | 57,858                   |   |                                |                            |                 |   |                                    |   |                         |  | 57,858        |   |                   |  
|Foreign currency translation adjustments              |  |             |   |               |  |       |   |            |   |                         |   |                                |                            |                 |   | 61                                  |   |                         |  | 61            |   | 61                |  
|Net income                                            |  |             |   |               |  |       |   |            |   |                         |   |                                |                            |                 |   |                                    |   | 88,121                   |  | 88,121        |   | 88,121            |  
|                                                      |  |              |   |                |  |        |   |             |   |                          |   |                                 |                            |                  |   |                                     |   |                          |  |               |   |                   |  
|BALANCES AT DECEMBER 31, 2000                         |  | 118,076      |   | 12             |  | 1,200  |   | (4          | ) | 263,176                  |   | (3,270                          | )                          | (5,580           | ) | 61                                  |   | 90,621                   |  | 345,016       |   | 88,182            |  
|Issuance of common stock under stock plans            |  | 2,975        |   |               |  |       |   |            |   | 12,413                   |   |                                |                            |                 |   |                                    |   |                         |  | 12,413        |   |                   |  
|Non-cash compensation expense for terminated Employee |  |             |   |               |  |       |   |            |   | 265                      |   |                                |                            |                 |   |                                    |   |                         |  | 265           |   |                   |  
|Repurchase of common stock from terminated employees  |  | (230         | ) |               |  |       |   |            |   | (45                      | ) |                                |                            |                 |   |                                    |   |                         |  | (45           | ) |                   |  
|Repurchase of common stock in open market             |  | (1,522       | ) |               |  | 1,522  |   | (14,996     | ) |                         |   |                                |                            |                 |   |                                    |   |                         |  | (14,996       | ) |                   |  
|Issuance of stock repurchased from founder            |  |             |   |               |  | (1,200 | ) | 4           |   |                         |   |                                |                            |                 |   |                                    |   |                         |  | 4             |   |                   |  
|Amortization of deferred stock compensation           |  |             |   |               |  |       |   |            |   |                         |   |                                |                            | 2,708            |   |                                    |   |                         |  | 2,708         |   |                   |  
|Reduction in deferred stock compensation              |  |             |   |               |  |       |   |            |   | (1,570                   | ) |                                |                            | 1,570            |   |                                    |   |                         |  |              |   |                   |  
|Write-down of note receivable from stockholder        |  |             |   |               |  |       |   |            |   |                         |   | 2,790                           |                            |                 |   |                                    |   |                         |  | 2,790         |   |                   |  
|Tax benefit from stock option exercises               |  |             |   |               |  |       |   |            |   | 10,501                   |   |                                |                            |                 |   |                                    |   |                         |  | 10,501        |   |                   |  
|Foreign currency translation adjustments              |  |             |   |               |  |       |   |            |   |                         |   |                                |                            |                 |   | 290                                 |   |                         |  | 290           |   | 290               |  
|Net income                                            |  |             |   |               |  |       |   |            |   |                         |   |                                |                            |                 |   |                                    |   | 2,886                    |  | 2,886         |   | 2,886             |  
|                                                      |  |              |   |                |  |        |   |             |   |                          |   |                                 |                            |                  |   |                                     |   |                          |  |               |   |                   |  
|BALANCES AT DECEMBER 31, 2001                         |  | 119,299      |   | 12             |  | 1,522  |   | (14,996     | ) | 284,740                  |   | (480                            | )                          | (1,302           | ) | 351                                 |   | 93,507                   |  | 361,832       |   | 3,176             |  
|Issuance of common stock under stock plans            |  | 2,067        |   |               |  |       |   |            |   | 8,253                    |   |                                |                            |                 |   |                                    |   |                         |  | 8,253         |   |                   |  
|Repurchase of common stock from terminated employees  |  | (37          | ) |               |  |       |   |            |   | (106                     | ) |                                |                            |                 |   |                                    |   |                         |  | (106          | ) |                   |  
|Issuance of stock repurchased from open market        |  |             |   |               |  | (1,522 | ) | 14,996      |   | (14,996                  | ) |                                |                            |                 |   |                                    |   |                         |  |              |   |                   |  
|Amortization of deferred stock compensation           |  |             |   |               |  |       |   |            |   |                         |   |                                |                            | 1,071            |   |                                    |   |                         |  | 1,071         |   |                   |  
|Tax benefit from stock option exercises               |  |             |   |               |  |       |   |            |   | 4,808                    |   |                                |                            |                 |   |                                    |   |                         |  | 4,808         |   |                   |  
|Foreign currency translation adjustments              |  |             |   |               |  |       |   |            |   |                         |   |                                |                            |                 |   | (296                                | ) |                         |  | (296          | ) | (296              | )
|Net income                                            |  |             |   |               |  |       |   |            |   |                         |   |                                |                            |                 |   |                                    |   | 22,537                   |  | 22,537        |   | 22,537            |  
|                                                      |  |              |   |                |  |        |   |             |   |                          |   |                                 |                            |                  |   |                                     |   |                          |  |               |   |                   |  
|BALANCES AT DECEMBER 31, 2002                         |  | 121,329      |   | $      12      |  |       |   | $          |   | $ 282,699                |   | $         (480                  | )                          | $           (231 | ) | $               55                  |   | $116,044                 |  | $     398,099 |   | $          22,241 |  
|                                                      |  |              |   |                |  |        |   |             |   |                          |   |                                 |                            |                  |   |                                     |   |                          |  |               |   |                   |  

The accompanying notes are an integral part of these consolidated
financial statements.

45

---

FOUNDRY NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS(in
thousands)



|                                                                                        |  | Year Ended December 31, |         
|--------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                        |  |                         |         
|                                                                                        |  | 2002                    |         
|                                                                                        |  |                         |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                         |         
|Net income                                                                              |  | $                       | 22,537  
|Adjustments to reconcile net income to net cash provided by
      operating activities: |  |                         |         
|Depreciation                                                                            |  | 4,936                   |         
|Amortization of deferred stock compensation                                             |  | 1,071                   |         
|Provision for allowance for doubtful accounts                                           |  | 344                     |         
|Provision for allowance for sales returns                                               |  | 1,527                   |         
|Inventory provision                                                                     |  | 16,445                  |         
|Deferred tax assets                                                                     |  | 1,096                   |         
|Write-down of minority investment                                                       |  |                        |         
|Write-down of note receivable from stockholder                                          |  |                        |         
|Non-cash compensation expense                                                           |  |                        |         
|Tax benefit from stock option exercises                                                 |  | 4,808                   |         
|Change in operating assets and liabilities:                                             |  |                         |         
|Accounts receivable                                                                     |  | (1,937                  | )       
|Inventories                                                                             |  | (6,647                  | )       
|Prepaid expenses and other assets                                                       |  | 1,558                   |         
|Accounts payable                                                                        |  | (3,616                  | )       
|Accrued payroll and related expenses                                                    |  | 816                     |         
|Warranty accrual                                                                        |  | (194                    | )       
|Other accrued expenses                                                                  |  | (1,004                  | )       
|Income taxes payable                                                                    |  | 2,675                   |         
|Deferred support revenue                                                                |  | 4,453                   |         
|                                                                                        |  |                         |         
|Net cash provided by operating activities                                               |  | 48,868                  |         
|                                                                                        |  |                         |         
|                                                                                        |  |                         |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                         |         
|Purchase of minority investment                                                         |  |                        |         
|Purchases of short-term investments                                                     |  |                         | (295,267
|Maturities of short-term investments                                                    |  | 333,057                 |         
|Purchases of property and equipment                                                     |  | (5,000                  | )       
|                                                                                        |  |                         |         
|Net cash provided (used) by investing activities                                        |  | 32,790                  |         
|                                                                                        |  |                         |         
|                                                                                        |  |                         |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                         |         
|Proceeds from issuance of common stock                                                  |  | 8,253                   |         
|Repurchases of common stock                                                             |  | (106                    | )       
|Repayment of notes receivable                                                           |  |                        |         
|                                                                                        |  |                         |         
|Net cash provided (used) by financing activities                                        |  | 8,147                   |         
|                                                                                        |  |                         |         
|                                                                                        |  |                         |         
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                        |  | 89,805                  |         
|Effect of exchange rate changes on cash                                                 |  | (296                    | )       
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                            |  | 98,210                  |         
|                                                                                        |  |                         |         
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                  |  | $                       | 187,719 
|                                                                                        |  |                         |         
|                                                                                        |  |                         |         
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                     |  |                         |         
|Issuance of common stock for notes receivable                                           |  | $                       |        
|Reduction in deferred stock compensation due to employee
      terminations             |  |                        |         
|Cash paid for income taxes, net of refunds                                              |  |                         | 976     

The accompanying notes are an integral part of these consolidated
financial statements.

46

---

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.DESCRIPTION OF BUSINESS:

Founded in 1996, Foundry designs, develops, manufactures and markets a
comprehensive, end-to-end suite of high performance Ethernet Layer 2 and Layer 3
switches, Metro routers and Internet traffic management products for
enterprises, educational institutions, government agencies, web-hosting
companies, application service providers (ASPs), electronic banking and finance
service providers, and Internet service providers (ISPs). Our product suite
includes the NetIron family of Metro routers, FastIron family of Ethernet edge
switches, EdgeIron Layer 2 Ethernet switches, BigIron family of Gigabit Ethernet
core switches and ServerIron family of Ethernet Layer 4-7 Internet traffic
management switches.

2.SIGNIFICANT ACCOUNTING POLICIES:

Principles of
Consolidation and Foreign Currency Translation

The Companys consolidated financial statements reflect the operations of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. Assets and liabilities of
foreign operations are translated to U.S. dollars at the exchange rate in effect
at the applicable balance sheet date, and revenues and expenses are translated
using average exchange rates prevailing during that period. Translation
adjustments have not been material to date and are included as a component of
stockholders equity.

Use of Estimates
in Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the period
reported. Actual results could differ from those estimates. Estimates are used
in accounting for, but not limited to, the accounting for inventory provisions,
product warranty, allowances for doubtful accounts, sales returns, income taxes
and depreciation. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined.

Cash Equivalents
and Short-Term Investments

Foundry considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents
consist of commercial paper, government debt securities and cash deposited in
checking and money market accounts.

Foundry accounts for its investments under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Investments in highly liquid
financial instruments with original maturities greater than three months but
less than one year are classified as short-term investments. All of Foundrys
short-term investments are stated at amortized cost and classified as
held-to-maturity.

47

---

Cash equivalents and short-term investments all mature within one year
and consist of the following (in thousands):



|                                      |  | December 31, 2002 |        
|------------------------------------- |  | ----------------- | -------
|                                      |  |                   |        
|                                      |  | AmortizedCost     |        
|                                      |  |                   |        
|Money market funds                    |  | $                 | 393    
|Corporate debt securities             |  | 5,000             |        
|Commercial paper                      |  | 91,869            |        
|Government securities                 |  | 149,415           |        
|                                      |  |                   |        
|                                      |  | $                 | 246,677
|                                      |  |                   |        
|                                      |  |                   |        
|Included in cash and cash equivalents |  | $                 | 107,943
|Included in short-term investments    |  | 138,734           |        
|                                      |  |                   |        
|                                      |  | $                 | 246,677
|                                      |  |                   |        



|                                      |  | December 31, 2001 |        
|------------------------------------- |  | ----------------- | -------
|                                      |  |                   |        
|                                      |  | AmortizedCost     |        
|                                      |  |                   |        
|Money market funds                    |  | $                 | 33,135 
|Commercial paper                      |  | 58,807            |        
|Government securities                 |  | 149,583           |        
|                                      |  |                   |        
|                                      |  | $                 | 241,525
|                                      |  |                   |        
|                                      |  |                   |        
|Included in cash and cash equivalents |  | $                 | 65,001 
|Included in short-term investments    |  | 176,524           |        
|                                      |  |                   |        
|                                      |  | $                 | 241,525
|                                      |  |                   |        

Inventories

Inventories are stated on a first-in, first-out basis at the lower of
cost or market, and include purchased parts, labor and manufacturing overhead.
Inventories consist of the following (in thousands):



|                |  | December 31, |       
|--------------- |  | ------------ | ------
|                |  |              |       
|                |  | 2002         |       
|                |  |              |       
|Purchased parts |  | $            | 12,470
|Work-in-process |  | 17,191       |       
|Finished goods  |  | 3,818        |       
|                |  |              |       
|                |  | $            | 33,479
|                |  |              |       

The networking industry is characterized by rapid technological change,
  frequent new product introductions, changes in customer requirements, and evolving
  industry standards. Our inventory purchases and commitments are made in order
  to build inventory to meet future shipment schedules based on forecasted demand
  for our products. We perform a detailed assessment of inventory each period,
  which includes a review of, among other factors, demand requirements, product
  life cycle and development plans, component cost trends, product pricing and
  quality issues. Based on this analysis, we record adjustments to inventory for
  excess, obsolescence or impairment, when appropriate, to reflect inventory at
  net realizable value. The provision reduces inventory for excess, obsolescence
  or impairment, when appropriate, to reflect inventory at net realizable value.
  Provisions for inventory in the amounts of $16.4 million, $24.9 million, and
  $13.6 million were recorded for the years ended December 31, 2002, 2001, and
  2000, respectively. Our inventory provisions increased in 2001 as a

48

---

result of the economic
  recession, significantly reduced telecommunications and infrastructure capital
  spending and a major product transition in the fourth quarter of 2001. We specifically
  reserved $9.3 million for excess and obsolete inventories in the fourth quarter
  of 2001 related to the transition from our IronCore ASICs-based products to
  the new and more powerful products incorporating our next generation JetCore
  ASIC chipset. During 2002, we physically disposed of $9.2 million of obsolete
  inventory that was previously reserved in the fourth quarter of 2001 related
  to the product transition. Total inventory write-offs were approximately $18.9 million
  in 2002, $8.9 million in 2001, and $4.4 million in 2000. Approximately $6.1
  million and $5.2 million of the Companys purchased parts and work-in-process
  inventories were consigned to contract manufacturers sites as of December
  31, 2002 and 2001, respectively.

Concentrations

Financial instruments that potentially subject Foundry to a concentration
of credit risk principally consist of cash equivalents, short-term investments
and accounts receivable. Foundry seeks to reduce credit risk on financial
instruments by investing almost exclusively in high credit quality issuers and,
by policy, limits the amount of credit exposure to any one issuer or fund.
Exposure to customer credit risk is controlled through credit approvals, credit
limits, continuous monitoring procedures and establishment of an allowance for
doubtful accounts when deemed necessary. We typically sell to customers for
which there is a history of successful collection. New customers are subjected
to a credit review process, which evaluates the customers financial positions
and ability to pay. New customers are typically assigned a credit limit based on
a formulated review of their financial position. Such credit limits are only
increased after a successful collection history with the customer has been
established. Specific allowances for bad debts are recorded when Foundry becomes
aware of a specific customers inability to meet its financial obligation to us
such as in the case of bankruptcy filings or deterioration of financial
position. Estimates are used in determining our allowances for all other
customers based on factors such as current trends, the length of time the
receivables are past due and historical collection experience. Foundry mitigates
some collection risk by requiring some international customers to secure letters
of credit or bank guarantees prior to placing an order with the Company.

Foundry purchases several key components used in the manufacture of
products from several sources and depends on supply from these sources to meet
its needs. In addition, Foundry depends on several contract manufacturers for
major portions of the manufacturing requirements. The inability of the suppliers
or manufacturers to fulfill the production requirements of Foundry could
negatively impact future results.

Property and
Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of the assets. Estimated
useful lives of 2 years are used on computer equipment and related software and
production and engineering equipment. Estimated useful lives of 3 years are used
on furniture and fixtures. Leasehold improvements are amortized over the lease
term.

Impairment of long-lived assets is recognized when events or
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be recoverable. Under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of  (SFAS 121), a long-lived asset classified as held
for sale is initially measured at the lower of its carrying amount or fair
value less costs to sell. In the period that the held for sale criteria is
met, the Company recognizes an impairment charge for any initial adjustment of
the long-lived asset amount. Gains or losses not previously recognized resulting
from the sale of a long-lived asset are recognized on the date of sale. To date,
charges recorded by the Company for the impairment of long-lived assets have not
been significant. The adoption of SFAS 144 did not have a material impact on
Foundrys consolidated financial position, results of operations or cash flows
for the year ended December 31, 2002.

Minority
Investment in 2001

In February 2001, Foundry made a $2.5 million minority investment in a
development stage private company, who was also a customer. Foundry had no sales
to this customer during 2002. Sales to this customer during 2001 and 2000 were
insignificant. Foundrys interest in the company is significantly less than 20%
and, as such, the Company did not have the ability to exercise significant
influence. In December 2001, the Company

49

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determined that the
	investments decline in fair value was other than temporary based on a
number of factors including the value of the most recent round of financing,
general market and industry conditions and the financial condition of and
business outlook for the company. Accordingly, Foundry wrote-down the entire
minority investment and recorded the expense in the accompanying consolidated
statement of income for the year ended December 31, 2001.

Revenue
Recognition

General.Foundrys revenue
recognition policy follows SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. Specifically, Foundry recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectibility is reasonably
assured.

Product Revenues.Revenue is
generally recorded at the time of shipment when title and risk of loss passes to
the customer, unless Foundry has future obligations for installation or has to
obtain customer acceptance, in which case revenue is not recorded until such
obligations have been satisfied or customer acceptance has been received. For
example, revenue is not recognized when undelivered products or services are
essential to the functionality of delivered products. At the time revenue is
recognized, Foundry establishes an accrual for estimated warranty expenses
associated with its sales, recorded as a component of cost of revenues.
Foundrys standard warranty period extends 12 months from the date of sale and
the warranty accrual represents the best estimate of the amount necessary to
settle future and existing claims on products sold as of the balance sheet date.
Foundry also provides a reserve for estimated customer returns. This reserve is
based on historical returns, analysis of credit memo data and return policies.
Sales to Foundrys resellers do not provide for rights of return and the
contracts with Foundrys original equipment manufacturers do not provide for
rights of return except in the event Foundrys products do not meet
specifications or there has been an epidemic failure, as defined in the
agreements.

Service Revenues.Service revenues
  consisted primarily of revenue from customer support contracts and, to a lesser
  extent, professional and educational services. Our suite of customer support
  programs provides customers with access to technical assistance, software updates
  and upgrades, hardware repair and replacement parts. Support services are offered
  under renewable, annual fee-based contracts or as part of multiple element arrangements.
  When support services are sold under multiple element arrangements, the Company
  allocates revenue to each element based upon its relative fair value and recognizes
  the revenue for each element when the revenue recognition criteria have been
  met for each element. Fair value is generally determined based on the price
  charged when the element is sold separately. Revenue from support contracts
  is deferred and recognized ratably over the contractual period, generally one
  to five years.

Service revenues were $36.2 million, $29.8 million and $15.6 million for
2002, 2001 and 2000 or 12%, 10% and 4% of net revenue, respectively. The
increases were due to a larger installed base of our networking equipment as
customers purchased new support contracts associated with their equipment
purchases and renewed their maintenance contracts on existing equipment. A total
of $20.2 million of support revenue was deferred on the accompanying balance
sheet as of December 31, 2002. Revenue from training and installation services
accounted for less than 1% of total revenue for each of the years ended December
31, 2002, 2001 and 2000.

Segment
Reporting

SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information was adopted by Foundry in 1997 and establishes standards for
disclosures about operating segments, products and services, geographic areas
and major customers. Foundry is organized and operates as one operating segment,
the design, development, manufacturing and marketing of high performance Gigabit
Ethernet switches, switching routers, server load balancing and transparent
caching switches. Management uses one measurement for evaluating profitability
and does not disaggregate its business for internal reporting.

50

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For the year ended December 31, 2002, one customer accounted for greater
than 10% of our net revenue. Our reseller, Mitsui in Japan, accounted for 11%
our net revenue in 2002. For the years ended December 31, 2001 and 2000, no
customer individually accounted for greater than 10% of our net revenue.

Foundry sells to various countries in North and South America, Europe,
Asia, and Australia. Foundrys foreign offices conduct sales, marketing and
support activities. Foundrys export sales represented 38%, 35% and 30% of net
revenue in 2002, 2001 and 2000, respectively. Outside of the United States, one
country, Japan, accounted for 11% of revenue in 2002. No individual country
outside of the United States accounted for greater than 10% of revenue in 2001
or 2000.

Advertising
Costs

Foundry expenses all advertising costs as incurred. Advertising expenses
for the years ended December 31, 2002, 2001 and 2000 were $3.8 million, $8.3
million and $7.7 million, respectively.

Software
Development Costs

Foundry accounts for internally generated software development costs in
accordance with SFAS No. 86, Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed. Capitalization of eligible product
development costs begins upon the establishment of technological feasibility,
which Foundry has defined as completion of a working model. Internally generated
costs which were eligible for capitalization, after consideration of factors
such as realizable value, were not material for the years ended December 31,
2002, 2001 and 2000 and, accordingly, all software development costs have been
charged to research and development expense in the accompanying statements of
income.

Computation of
Per Share Amounts

Basic and diluted net income per share (EPS) are presented in conformity
with SFAS No. 128, Earnings Per Share (SFAS 128) for all periods presented. In
accordance with SFAS 128, basic EPS has been calculated using the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase.Diluted EPS has been calculated assuming the
conversion of all potentially dilutive common stock equivalents. Certain common
stock equivalents were excluded from the calculation of diluted EPS because the
exercise price of these options was greater than the average market price of the
common shares and therefore, the effect would have been anti-dilutive.
Anti-dilutive shares for the years ended December 31, 2002, 2001 and 2000 were
15.7 million, 10.4 million and 942,000 shares, respectively.



|                                                      |  | Year Ended December 31,               |        
|----------------------------------------------------- |  | ------------------------------------- | -------
|                                                      |  |                                       |        
|                                                      |  | 2002                                  |        
|                                                      |  |                                       |        
|                                                      |  | (In thousands, except per share data) |        
|Net income                                            |  | $                                     | 22,537 
|Basic:                                                |  |                                       |        
|Weighted average shares outstanding                   |  | 119,861                               |        
|Less: Weighted average shares subject to repurchase   |  | (379                                  | )      
|                                                      |  |                                       |        
|Weighted average shares used in computing basic EPS   |  |                                       | 119,482
|                                                      |  |                                       |        
|Basic EPS                                             |  | $                                     | 0.19   
|                                                      |  |                                       |        
|Diluted:                                              |  |                                       |        
|Weighted average shares outstanding                   |  | 119,861                               |        
|Add: Weighted average dilutive potential shares       |  | 3,919                                 |        
|                                                      |  |                                       |        
|Weighted average shares used in computing diluted EPS |  | 123,780                               |        
|                                                      |  |                                       |        
|Diluted EPS                                           |  | $                                     | 0.18   
|                                                      |  |                                       |        

Stock-Based
Compensation

In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). This
accounting standard permits the use of either a fair value

51

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based method or the
intrinsic value method defined in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB Opinion 25) to account for
stock-based compensation arrangements. Companies that elect to employ the
intrinsic value method provided in APB Opinion 25 are required to disclose the
pro forma net income (loss) that would have resulted from the use of the fair
value based method provided under SFAS 123. As permitted by SFAS 123, Foundry
has elected to determine the value of stock-based compensation arrangements
under the intrinsic value based method of APB Opinion 25. Accordingly, Foundry
only recognizes compensation expense when options are granted with an exercise
price below fair market value at the date of grant. Any resulting compensation
expense is recognized ratably over the vesting period. The following table sets
forth pro forma information as if compensation expense had been determined using
the fair value method under SFAS No. 123. The fair value of these options was
estimated using a Black-Scholes option-pricing model.



|                                                                                                                                  |  | Year Ended December 31,               |        
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                                                                                                  |  |                                       |        
|                                                                                                                                  |  | 2002                                  |        
|                                                                                                                                  |  |                                       |        
|                                                                                                                                  |  | (in thousands, except per share data) |        
|Net income as reported                                                                                                            |  | $                                     | 22,537 
|Add: Total stock-based compensation expense included in reported
      net income, net of tax effect                              |  | 750                                   |        
|Deduct: Total stock-based compensation expense determined under
      fair value method for all awards, net of related tax effect |  |                                       | (78,677
|Pro forma net income (loss)                                                                                                       |  | (55,391                               | )      
|Basic net income per share as reported                                                                                            |  | 0.19                                  |        
|Pro forma basic net income (loss) per share                                                                                       |  | (0.46                                 | )      
|Diluted net income per share as reported                                                                                          |  | 0.18                                  |        
|Pro forma diluted net income (loss) per share                                                                                     |  | (0.45                                 | )      

The weighted average fair value of stock options granted under all stock
option plans during 2002, 2001 and 2000 was $3.41, $8.61 and $45.41 per share,
respectively. Pursuant to the provisions of SFAS No. 123, the compensation cost
associated with options granted in 2002, 2001 and 2000 was estimated on the
grant date using the Black-Scholes model. The Black-Scholes option pricing model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because Foundrys employee stock options have characteristics
significantly different from those of traded shares, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the options. The following weighted-average
assumptions were used to estimate fair value:



|                                |  | Stock Option Plan |   | Employee Stock Purchase Plan |  
|------------------------------- |  | ----------------- | - | ---------------------------- | -
|                                |  |                   |   |                              |  
|                                |  | 2002              |   | 2001                         |  
|                                |  |                   |   |                              |  
|Average risk free interest rate |  | 3.15              | % | 3.84                         | %
|Average expected life of option |  | 3.6 years         |   | 4 years                      |  
|Dividend yield                  |  | 0                 | % | 0                            | %
|Volatility of common stock      |  | 75.0              | % | 111.0                        | %

The weighted-average fair value of shares issued under the 1999 Employee
Stock Purchase Plan for 2002, 2001 and 2000 were $3.81, $10.63 and $14.92 per
share, respectively.

Recent
Accounting Pronouncements

Accounting for
Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure (SFAS 148) that amends
SFAS 123 to provide alternative methods of transition for a voluntary change to
SFAS 123s fair value method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB
Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Statements amendment of the
transition and annual disclosure requirements of SFAS 123 are effective for
fiscal years ending after December 15, 2002. The interim disclosure provisions
are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. We do not expect the adoption of SFAS
148 to have a material effect on our financial position, results of operations,
or cash flows. Foundry has elected to continue to follow the intrinsic value
method of accounting as prescribed by APB Opinion No. 25 to account for employee
stock options.

Guarantors
Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements or interim or annual periods
ending after December 15, 2002 and are applicable to Foundrys product warranty
liability (see Note 3 below to the

52

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Consolidated
Financial Statements). Foundrys adoption of FIN 45 is not expected to have a
material impact on its results of operations and financial position.

Revenue
Arrangements with Multiple Deliverables

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Foundry is currently
evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its
results of operations and financial condition.

Accounting for
Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Foundrys adoption of SFAS 146 is not expected to have a
significant impact on its operating results and financial condition.

3.COMMITMENTS AND CONTINGENCIES:

Product
Warranty

We provide all customers with a standard 1 year hardware and 90-day
software warranty. Customers can upgrade the standard warranty and extend the
warranty for 1-5 years by purchasing any of Foundrys customer support programs.
At the time revenue is recognized, Foundry establishes an accrual for estimated
warranty expenses associated with its sales, recorded as a component of cost of
revenues. The warranty accrual represents the best estimate of the amount
necessary to settle future and existing claims on products sold as of the
balance sheet date. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Companys product liability during the period are as
follows:



|Balance, December 31, 2001 |  | $     | 2,499  |  
|-------------------------- |  | ----- | ------ | -
|Warranties issued          |  | 1,537 |       
|Settlements made           |  |       | (1,731 | )
|                           |  |       |        |  
|Balance, December 31 2002  |  | $     | 2,305  |  
|                           |  |       |        |  

Leases

Rent expense under operating leases was $5.3 million, $7.6 million and
$2.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002, future minimum lease payments under all noncancelable
operating leases are as follows (in thousands):



|                     |  | OperatingLeases |       
|-------------------- |  | --------------- | ------
|                     |  |                 |       
|2003                 |  | $               | 4,500 
|2004                 |  | 4,033           |       
|2005                 |  | 4,026           |       
|2006                 |  | 2,008           |       
|2007                 |  | 2,051           |       
|Thereafter           |  | 2,382           |       
|                     |  |                 |       
|Total lease payments |  | $               | 19,000
|                     |  |                 |       

53

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Purchase
Commitments with Contract Manufacturers

The Company uses contract manufacturers to assemble and test our
products. In order to reduce manufacturing lead times and ensure adequate
inventories. The Companys agreements with some of these contract manufacturers
allow them to procure long lead-time component inventory on the Companys behalf
based upon a rolling production forecast provided by Foundry with lead times of
up to 6 months. Foundry may be contractually obligated to purchase long
lead-time component inventory procured by certain contract manufacturers in
accordance with the forecast, unless Foundry gives notice of order cancellation
at least 90 days prior to the delivery date. As of December 31, 2002, the
Company was potentially committed to purchase approximately $26.1 million of
such inventory.

Litigation

In December 2000, several similar shareholder class action lawsuits were
  filed against Foundry and certain of its officers in the United States Court
  for the Northern District of California, following Foundrys announcement
  in December 2000 of its anticipated financial results for the fourth quarter
  ended December 31, 2000. The lawsuits were subsequently consolidated by the
  Court, under the caption In re Foundry Networks, Inc. Securities Litigation,Master File No. C-00-4823-MMC, lead plaintiffs were
  selected as required by law and such plaintiffs filed a consolidated amended
  complaint which alleged violations of federal securities laws and purported
  to seek damages on behalf of a class of shareholders who purchased Foundrys
  common stock during the period from September 7, 2000 to December 19, 2000.
  On October 26, 2001, the Court granted the Companys motion to dismiss
  the consolidated amended complaint without prejudice and with leave to amend.
  On December 13, 2001, attorneys for lead plaintiffs filed a second amended complaint.
  On June 6, 2002, the Court granted the Companys motion to dismiss the
  second amended complaint, but without prejudice and with leave to amend. On
  July 8, 2002 attorneys for lead plaintiffs filed a third amended complaint.
  On August 5, 2002, the Company filed a motion to dismiss that complaint. On February 14, 2003,
  the Court dismissed the third amended complaint, once again, without prejudice
  and with leave to amend. On March 17, 2003, attorneys for lead plaintiffs filed
  a fourth amended complaint (FAC) which the Company is in the process of reviewing.
  The Company anticipates filing a motion to dismiss the plaintiffs FAC by the April 7, 2003 deadline.
  The Company believes the lawsuit is without merit and intends to defend itself
  vigorously.

A class action lawsuit was filed on November 27, 2001 in the United States
  District Court for the Southern District of New York on behalf of purchasers
  of Foundry common stock alleging violations of federal securities laws. The
  case is now designated asIn re Foundry Networks, Inc.
  Initial Public Offering Securities Litigation,No. 01-CV-10640 (SAS) (S.D.N.Y.),related to In
  re Initial Public Offering Securities Litigation, No.
  21 MC 92 (SAS) (S.D.N.Y.). The case is brought purportedly on behalf of all
  persons who purchased the Companys common stock from September 27, 1999
  through December 6, 2000. The Company and its officers were served with the
  complaint, only after the maximum 120 days for service allowed under the Federal
  Rules of Civil Procedure had elapsed. On or about April 19, 2002, plaintiffs
  electronically served an amended complaint. The amended complaint names as defendants,
  the Company, three of its officers, and investment banking firms that served
  as underwriters for the Companys initial public offering in September
  1999. The amended complaint alleges violations of Sections 11 and 15 of the
  Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of
  1934, on the grounds that the prospectus incorporated in the registration statement
  for the offering failed to disclose, among other things, that (i) the underwriters
  had solicited and received excessive and undisclosed commissions from certain
  investors in exchange for which the underwriters allocated to those investors
  material portions of the shares of the Companys stock sold in the initial
  public offering, and (ii) the underwriters had entered into agreements with
  customers whereby the underwriters agreed to allocate shares of the Companys
  stock sold in the initial public offering to those customers in exchange for
  which the customers agreed to purchase additional shares of the Companys
  stock in the aftermarket at pre-determined prices. The amended complaint also
  alleges that false analyst reports were issued following the IPO. No specific
  damages are claimed. We are aware that similar allegations have been made in
  lawsuits relating to more than 300 other initial public offerings conducted
  in 1999 and 2000. Those cases have been consolidated for pretrial purposes before
  the Honorable Judge Shira A. Scheindlin. Motions to dismiss the case were filed on behalf
  of all the defendants in all of the cases. On February 19, 2003, Judge Scheindlin issued a ruling on the motions.
In ruling on motions to dismiss, the Court must treat the allegations in the
Complaint as if they were true solely for purposes of deciding the motions. The
court denied the motion to dismiss the claims against the Company alleged under
the Securities Act of 1933. The same ruling was made in all but 10 of the other
cases. The Court dismissed the claims alleged under the Securities Exchange Act
of 1934, Section 10(b), against the Company and one of the individual defendants
and dismissed all of the controlling person claims alleged under that Act
against all of the Foundry Networks individual defendants. The Court denied the
motion to dismiss the Section 10(b) claims against the remaining Foundry
Networks individual defendants on the basis that those defendants sold the Companys
stock during the class period alleged in the complaint and that those
allegations were sufficient purely for pleading purposes to allow those claims
to move forward. A similar ruling was made with respect to 62 of the individual
defendants in the other cases.

54

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Management believes that the remaining allegations in the above
referenced class action lawsuits against the Company and its officers are
without merit and management intends to contest them vigorously. The litigation
process is inherently uncertain. If the outcome of the litigation is adverse to
the Company and if, in addition, the Company is required to pay significant
monetary damages in excess of available insurance, its business could be
significantly harmed.

From time to time the Company is subject to other legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights, patents and other intellectual property
rights. In addition, from time to time, third parties assert patent infringement
claims against the Company in the form of letters, lawsuits and other forms of
communication. In March 2001, Nortel filed a lawsuit against Foundry in the
United States District Court for the District of Massachusetts alleging that
certain of the Companys products infringe several of Nortels patents and
seeking injunctive relief as well as unspecified damages. Nortel has also
brought suit, on the same or similar patents, against a number of other
networking companies. Foundry has analyzed the validity of Nortels claims and
believes that Nortels suit is without merit. Foundry is committed to vigorously
defending itself against these claims. On October 9, 2002, the Company filed a
lawsuit against Nortel in the United States District Court, Northern District of
California alleging that certain of Nortels products infringe a Foundry patent
as well as allegations concerning breach of contract. The Company is seeking
injunctive relief as well as damages. Irrespective of the merits of the
Companys position, litigation is always an expensive and uncertain proposition.
In the event of a determination adverse to the Company, the Company could incur
substantial monetary liability, and be required to change its business
practices. Either of these could have a material adverse effect on the Companys
financial position, results of operations, or cash flows.

4.INCOME TAXES:

Foundry accounts for income taxes pursuant to SFAS No. 109, Accounting
for Income Taxes (SFAS 109). SFAS 109 provides for an asset and liability
approach to accounting for income taxes under which deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. As of December 31, 2002 and 2001,
components of the Companys net deferred income tax assets (all current) were as
follows (in thousands):



|                                             |  | December 31, |       
|-------------------------------------------- |  | ------------ | ------
|                                             |  |              |       
|                                             |  | 2002         |       
|                                             |  |              |       
|Deferred Tax Assets:                         |  |              |       
|Accrued vacation pay                         |  | $            | 1,425 
|Inventories valuation                        |  | 11,105       |       
|Warranty                                     |  | 924          |       
|Accounts receivable valuation                |  | 5,452        |       
|Research and development credits             |  | 3,677        |       
|Asset write-down                             |  | 2,120        |       
|Depreciation and other temporary differences |  | 3,857        |       
|                                             |  |              |       
|Total deferred tax assets                    |  | $            | 28,560
|                                             |  |              |       

Management believes that the Company will likely generate sufficient
taxable income in the future to realize the tax benefits
arising from its existing deferred tax assets. Therefore, no valuation allowance
was required as of December 31, 2002 and 2001. As of December 31, 2002, the Companys
state tax credit carryforwards for income tax purposes were approximately $3.7
million. $3.3 million can be carried over indefinitely and $0.4 million will
expire in years 2009 through 2010.

55

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As of December 31, 2002 and 2001, Foundry had no significant deferred tax
liabilities.

The provision for income taxes consists of the following components for
the years ended December 31 (in thousands):



|                  |  | 2002  |       | 2001    |         | 2000   |       
|----------------- |  | ----- | ----- | ------- | ------- | ------ | ------
|                  |  |       |       |         |         |        |       
|Current           |  |       |       |         |         |        |       
|Federal           |  | $     | 7,801 |         | $       | 13,814 |       
|Foreign           |  | 189   |       | 218     |         | 108    |       
|State             |  | 560   |       | 1,274   |         | 10,814 |       
|                  |  |       |       |         |         |        |       
|Total             |  | 8,550 |       | 15,306  |         | 59,991 |       
|Deferred          |  |       |       |         |         |        |       
|Federal           |  | 1,201 |       |         | (11,938 | )      | (5,302
|Foreign and State |  | (92   | )     | (1,599  | )       | (679   | )     
|                  |  |       |       |         |         |        |       
|Total             |  | 1,109 |       | (13,537 | )       | (5,981 | )     
|                  |  |       |       |         |         |        |       
|Total provision   |  | $     | 9,659 |         | $       | 1,769  |       
|                  |  |       |       |         |         |        |       

Income before provision for income taxes consisted of the following (in
thousands):



|              |  | December 31, |       
|------------- |  | ------------ | ------
|              |  |              |       
|              |  | 2002         |       
|              |  |              |       
|United States |  | $            | 31,748
|International |  | 448          |       
|              |  |              |       
|Total         |  | $            | 32,196
|              |  |              |       

The actual provision for income taxes and the corresponding rate differs
from the statutory U.S. federal income tax rate as follows for the years ended
December 31 (in thousands):



|                                           |  | 2002   |        | 2001 |      | 2000   |       
|------------------------------------------ |  | ------ | ------ | ---- | ---- | ------ | ------
|                                           |  |        |        |      |      |        |       
|Provision at U.S. statutory rate of 35%    |  | $      | 11,269 |      | 35.0 | %      | $     
|State income taxes, net of federal benefit |  | 1,657  |        | 5.1  | %    | (211   | )     
|Research and development credits           |  | (1,895 | )      | (5.9 | )%   |        | (1,254
|Nondeductible deferred stock compensation  |  | 424    |        | 1.3  | %    | 1,176  |       
|Foreign Sales Corporation benefit          |  | (620   | )      | (1.9 | )%   | (241   | )     
|Tax exempt interest                        |  | (1,126 | )      | (3.5 | )%   | (1,235 | )     
|Other                                      |  | (50    | )      | (0.1 | )%   | 1,905  |       
|                                           |  |        |        |      |      |        |       
|Total                                      |  | $      | 9,659  |      | 30.0 | %      | $     
|                                           |  |        |        |      |      |        |       

The Companys income taxes payable for federal and state purposes have
been reduced, and the deferred tax assets increased, by the tax benefits
associated with taxable dispositions of employee stock options. When an employee
exercises a stock option issued under a nonqualified plan or has a disqualifying
disposition related to a qualified plan, the Company receives an income tax
benefit calculated as the difference between the fair market value of the stock
issued at the time of the exercise and the option price, tax effected. These
benefits were credited directly to stockholders equity and amounted to $4.8
million, $10.5 million and $57.9 million for the years ended December 31, 2002,
2001 and 2000, respectively.

5.STOCKHOLDERS EQUITY:

Preferred Stock

Foundry is authorized to issue up to 5,000,000 shares of preferred stock,
each with a par value of $0.0001 per share. The preferred stock may be issued
from time to time in one or more series. The board of directors is authorized to
determine the rights, preferences, privileges and restrictions on these shares.
As of December 31, 2002 and 2001, no shares of preferred stock were outstanding.

56

---

Stock Option
Exchange Program

On August 21, 2002, Foundry filed a Tender Offer Statement on Schedule
  TO with the Securities and Exchange Commission related to a voluntary stock
  option exchange program for its employees. Foundrys executive officers
  and directors were not eligible to participate in this program. Under the exchange
  program, employees were given the opportunity to voluntarily cancel unexercised
  vested and unvested stock options previously granted to them in exchange for
  a stock option grant equal to 0.5 times the number of tendered options on or
  about March 21, 2003. However, participants who elected to exchange any options
  were also required to exchange any other options granted to him or her in the
  previous six months. On September 20, 2002, the Company accepted for exchange
  options to purchase 5,744,500 shares of Foundry common stock. The cancelled
  options were exchanged for 2,757,100 replacement stock options on March 24,
  2003 at an exercise price of $7.76 per share. See Note 7 below for information about this subsequent event.

Stock Repurchase
Program

In January 2001, the Board of Directors authorized a stock repurchase
program to acquire up to a total of 5.0 million shares of its outstanding common
stock in the open market from time to time until January 2002. In October 2001
Foundry repurchased and retired approximately 1,522,000 shares of its common
stock for an aggregate purchase price of approximately $15.0 million. Foundry
has reserved these shares for issuance to employees under the 2000 Non-Executive Stock Option Plan.

Note Receivable
from Stockholder

In May 2000, Foundry allowed an employee to exercise stock options in
exchange for a secured promissory note of $3.3 million. The recourse note bears
interest at a rate of 6.4% per annum and is due on the earlier of (i) May 25,
2003, (ii) the date of sale of the shares or (iii) termination of employment. In
December 2001, the Company wrote-down the note by $2.8 million to reflect the
adverse impact of the significant decline in the Companys stock price on the
employees ability to sell the vested stock options at a price at or above the
exercise price as well as general concerns over the collectibility of the note.
The Company determined the fair value of the note was $480,000 based on the fair
market value of the Companys stock in December 2001. Accordingly, the Company
recorded compensation expense of $2.8 million on the accompanying consolidated
statement of income for fiscal 2001. The note is classified as a reduction of
stockholders equity.

Common
Stock

Foundry had 121,328,862 and 119,298,814 shares of common stock issued and
outstanding at December 31, 2002 and 2001, respectively. Included in such
outstanding shares are 32,940,000 shares issued to Foundrys founders in 1996
(the Founders Shares). The Founders Shares vest out of the repurchase option 25%
upon issuance, with the balance vesting ratably each month for the 48 months
after issuance. As of December 31, 2002, all Founders Shares were fully vested.
In June 1999, the Company repurchased 1,200,000 unvested shares from a founder
at $0.003 per share. These treasury shares were used for stock option grants to
employees in 2002.

In January 1999, Foundry granted 1,059,000 nonstatutory stock options to
certain key employees outside of the 1996 Stock Plan at an exercise price of
$0.83 per share. The options vest over a four-year period and expire in January
2009. During fiscal 2002 and 2001, 150,000 and 172,585 shares were exercised,
respectively. As of December 31, 2002, 300,000 shares were outstanding.

57

---

The following shares of common stock have been reserved for future
issuance as of December 31, 2002:



|1996 Stock Plan                             |  | 28,803,042 | 
|------------------------------------------- |  | ---------- | 
|1999 Directors Stock Option Plan           |  | 3,350,000  | 
|1999 Employee Stock Purchase Plan           |  | 4,630,839  | 
|Nonstatutory stock options to key employees |  | 512,000    | 
|2000 Non-Executive Stock Option Plan        |  | 3,686,927  | 
|                                            |  |            | 
|                                            |  | 40,982,808 | 
|                                            |  |            | 

1996 Stock Plan

Under Foundrys 1996 Stock Plan (the Plan), the board of directors
authorized the issuance of 63,235,683 shares of common stock to employees and
consultants as of December 31, 2002, including those issued as of that date.
Nonstatutory options granted under the Plan must be issued at a price equal to
at least 85% of the fair market value of Foundrys common stock at the date of
grant. Incentive stock options granted under the Plan must be issued at a price
at least equal to the fair market value of Foundrys common stock at the date of
grant. Options under the Plan have a term of ten years and vest over a vesting
schedule determined by the board of directors, generally four years. The number
of shares reserved for issuance under the Plan will be increased on the first
day of each fiscal year from 2000 through 2009 by the lesser of (i) 5,000,000
shares; (ii) five percent (5%) of the shares outstanding on the last day of the
immediately preceding fiscal year; or (iii) such lesser amount of shares as is
determined by the Board of Directors.

1999 Directors
Stock Option Plan

The 1999 Directors Stock Option Plan (the Directors Plan) was adopted
by the board of directors in July 1999. As of December 31, 2002, a total of
3,350,000 shares of common stock have been reserved for issuance under the
Directors Plan.

Under the Directors Plan, each non-employee director who becomes a
non-employee director after the effective date of the plan will receive an
automatic initial grant of an option to purchase 225,000 shares of common stock
upon appointment or election and annual grants to purchase 60,000 shares of
common stock. Options granted under the plan will vest at the rate of 1/4th of the total number
of shares subject to the options twelve months after the date of grant and 1/48th of the total number
of shares subject to the options each month thereafter. The exercise price of
all stock options granted under the Directors Plan shall be equal to the fair
market value of a share of common stock on the date of grant of the option.
Options granted under this plan have a term of ten years. In June 2002, the
directors received their annual grants totaling 300,000 stock options at an
exercise price of $18.88 per share. As of December 31, 2002, 1,215,000 options
were outstanding at a weighted average exercise price of $47.37 per share.

58

---

2000
Non-Executive Stock Option Plan

The 2000 Non-Executive Stock Option Plan (the Non-Executive Plan) was
adopted by the board of directors in October 2000. Under the Non-Executive Plan,
the Company may issue non-qualified options to purchase common stock to
employees and external consultants other than officers and directors. As of
December 31, 2002, a total of 3,686,927 shares of common stock have been
reserved for future issuance, of which 1,799,452 shares were outstanding at a
weighted average exercise price of $10.61 per share.

The following table summarizes stock option activity under all stock
option plans during the three years ended December 31, 2002:



|                           |  | OptionsOutstanding |   | WeightedAverageExercisePrice |      
|-------------------------- |  | ------------------ | - | ---------------------------- | -----
|                           |  |                    |   |                              |      
|Balance, December 31, 1999 |  | 15,476,708         |   |                              | $    
|                           |  |                    |   |                              |      
|Granted                    |  | 10,858,400         |   |                              | 72.45
|Exercised                  |  | 3,887,378          |   |                              | 2.63 
|Cancelled                  |  | (661,187           | ) |                              | 28.73
|                           |  |                    |   |                              |      
|Balance, December 31, 2000 |  | 21,786,543         |   |                              | 37.71
|                           |  |                    |   |                              |      
|Granted                    |  | 10,505,050         |   |                              | 11.43
|Exercised                  |  | (2,525,213         | ) |                              | 2.60 
|Cancelled                  |  | (4,305,757         | ) |                              | 37.09
|                           |  |                    |   |                              |      
|Balance, December 31, 2001 |  | 25,460,623         |   |                              | 30.44
|                           |  |                    |   |                              |      
|Granted                    |  | 12,496,950         |   |                              | 6.24 
|Exercised                  |  | (1,472,887         | ) |                              | 3.00 
|Cancelled                  |  | (9,273,434         | ) |                              | 57.14
|                           |  |                    |   |                              |      
|Balance, December 31, 2002 |  | 27,211,252         |   |                              | $    
|                           |  |                    |   |                              |      

As of December 31, 2002, Foundry had issued an aggregate of 68,005,522
shares of common stock to its employees, including 32,940,000 shares issued to
Foundrys four founders. Of the 68,005,522 shares of common stock issued to
employees under all of the Companys stock option plans, 57,737 shares are
subject to repurchase rights at the option of Foundry at $0.83-$59.69 per share
upon cessation of the employees employment. In 2002, 2001 and 2000, Foundry
repurchased 36,769, 230,132 and 326,188 shares, respectively, of unvested common
stock from terminated employees at $0.03-$4.50 per share. As of December 31,
2002, an aggregate of 7,005,716 shares were available for future option grants
to only employees under all plans.

The following table summarizes information about stock options
outstanding and exercisable at December 31, 2002:



|                               |  | Stock Options Outstanding |  | Stock Options Exercisable                              |     
|------------------------------ |  | ------------------------- |  | ------------------------------------------------------ | ----
|                               |  |                           |  |                                                        |     
|Range of
      Exercise Prices |  | SharesOutstanding         |  | Weighted-AverageRemainingContractualLife
      (years) |     
|                               |  |                           |  |                                                        |     
|$0.03-$6.05                    |  | 6,989,201                 |  |                                                        | 7.24
|$6.14-$8.75                    |  | 11,564,253                |  |                                                        | 9.06
|$9.76-$14.85                   |  | 6,040,624                 |  |                                                        | 7.97
|$17.55-$128.00                 |  | 2,617,174                 |  |                                                        | 7.76
|                               |  |                           |  |                                                        |     
|Total                          |  | 27,211,252                |  |                                                        | 8.23
|                               |  |                           |  |                                                        |     

59

---

As of December 31, 2001, there were 11,666,251 options exercisable at a
weighted average exercise price of $28.09 and as of December 31, 2000, there
were 11,214,058 options exercisable at a weighted average exercise price of
$4.75.

1999 Employee
Stock Purchase Plan

The 1999 Employee Stock Purchase Plan (the Purchase Plan) was adopted by
the board of directors in July 1999. As of December 31, 2002, a total of
4,630,839 shares of common stock were reserved for issuance under the Purchase
Plan. The number of shares reserved for issuance under the Purchase Plan will be
increased on the first day of each fiscal year from 2000 through 2009 by the
lesser of (i) 1,500,000 shares, (ii) 2% of Foundrys 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.

The Purchase Plan enables eligible employees to purchase common stock
through payroll deductions, which in any event may not exceed 20% of an
employees compensation, at a price equal to the lower of 85% of the fair market
value of the Companys common stock at the beginning of each offering period or
at the end of each purchase period. During the two purchase periods in 2002,
593,930 shares had been purchased under the Purchase Plan at an average price of
$6.45 per share.

Deferred Stock
Compensation

In connection with the issuance of certain stock options to employees,
Foundry has recorded deferred stock compensation in the aggregate amount of
approximately $17.3 million and $0.3 million in 1999 and 2000, respectively,
representing the difference between the deemed fair value of Foundrys common
stock for accounting purposes and the exercise price of stock options at the
date of grant. We recorded no additional deferred stock compensation in 2002 and 2001.
Foundry is amortizing the deferred stock compensation expense over the vesting
period, generally four years. For the years ended December 31, 2002, 2001 and
2000, amortization expense was approximately $1.1 million, $2.7 million and $6.2
million, respectively. At December 31, 2002, the remaining deferred stock
compensation of approximately $0.2 million will be amortized in 2003. The
amortization expense relates to options granted to employees in all operating
expense categories. The amortization of deferred stock compensation has not been
separately allocated to these categories. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
Approximately $1.6 million of deferred stock compensation expense was reversed
in 2001 as a result of employee terminations. No such reversals were recorded
during 2002.

60

---

Equity
Compensation Plan Information

The following table summarizes information with respect to shares of
Foundrys common stock that may be issued under the Foundrys existing equity
compensation plans as of December 31, 2002.



|Plan
      Category                                               |  | Number of securities to beissued
      upon exercise ofoutstanding
      options(a) |  | Weighted-averageexercise price
      ofoutstanding
      options(b) |   | Number of securities remainingavailable for future issuanceunder
      equity compensationplans (excluding
      securitiesreflected in column
      (a))(c) | 
|----------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | ------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                                                  |  |                                                                                     |  |                                                                     |   |                                                                                                                                                              | 
|Equity compensation plans approved by security
      holders:     |  |                                                                                     |  |                                                                     |   |                                                                                                                                                              | 
|1996 Stock Plan                                                   |  | 23,896,801                                                                          |  |                                                                     | $ | 10.13                                                                                                                                                        | 
|1999 Employee Stock Purchase Plan                                 |  |                                                                                    |  |                                                                     | $ |                                                                                                                                                             | 
|1999 Directors Stock Option Plan                                 |  | 1,215,000                                                                           |  |                                                                     | $ | 47.37                                                                                                                                                        | 
|                                                                  |  |                                                                                     |  |                                                                     |   |                                                                                                                                                              | 
|Equity compensation plans not approved by security
      holders: |  |                                                                                     |  |                                                                     |   |                                                                                                                                                              | 
|2000 Non-Executive Stock Option Plan                              |  | 1,799,452                                                                           |  |                                                                     | $ | 10.62                                                                                                                                                        | 

6.401(k) PLAN:

Foundry provides a tax-qualified employee savings and retirement plan
which entitles eligible employees to make tax-deferred contributions. Under the
401(k) Plan, employees may elect to reduce their current annual compensation up
to the lesser of 20% or the statutorily prescribed limit, which was $11,000 in
calendar year 2002. Employees age 50 or over may elect to contribute an
additional $1,000. The Plan provides for discretionary contributions as
determined by the board of directors each year. As of December 31, 2002, Foundry
has made no matching or discretionary contributions.

Effective January 1, 2003, employees may elect to reduce their current
annual compensation up to the lesser of 100% or the statutorily prescribed
limit, which is $12,000 for calendar year 2003. In January 2003, the board of
directors approved a matching contribution program whereby Foundry will match
dollar for dollar contributed by each employee up to $1,250 per employee for the
2003 calendar year. All matching contributions vested effective January 1, 2003.

7.SUBSEQUENT EVENT (unaudited):
In connection with the Tender Offer filed on August 21, 2002, the Company granted
  replacement stock options totaling 2,757,100 shares on March 24, 2003 to employees
  who relinquished underwater stock options totaling 5,744,500 shares on September
  20, 2002 in exchange for a stock option grant equal to 0.5 times the number
  of tendered options. The replacement stock options were granted with an exercise
  price equal to the fair market value of Foundrys stock on
  March 24, 2003, which was $7.76 per share . In order to receive the replacement stock option grant,
  an employee was required to remain employed with Foundry or one of its subsidiaries
  until March 24, 2003. The replacement options vest on a three-year schedule
  with a six month cliff, meaning 1/6th of the new option shares will vest six
  months from March 24, 2003, and the remaining shares will vest 1/36th per month
  for the remaining 30 months. The stock option exchange program did not result
  in stock compensation expense or variable accounting for replacement awards.
61FOUNDRY NETWORKS, INC.
Supplementary
Financial Data (Unaudited)
The following tables set forth our consolidated statement of operations
data for each of the eight quarters ended December 31, 2002, including such
amounts expressed as a percentage of net revenues. This unaudited quarterly
information has been prepared on the same basis as our audited financial
statements and, in the opinion of management, reflects all adjustments,
consisting only of normal recurring entries, necessary for a fair presentation
of the information for the periods presented. The operating results for any
quarter are not necessarily indicative of results for any future period.

Quarter EndedMar.31,2001
    
    Jun.30,2001
    
    Sep.30,2001
    
    Dec. 31,2001
    
    Mar.31,2002
    
    Jun.30,2002
    
    Sep.30,2002
    
    Dec. 31,2002(in thousands)Statement of Operations Data (unaudited):Revenues, net
    
    $
    82,551
    
    $
    88,569
    
    $
    74,654
    
    $
    65,403
    
    $
    62,420
    
    $
    75,008
    
    $
    76,596
    
    $
    86,718Cost of revenues
    
    38,888
    
    41,318
    
    37,152
    
    40,784
    
    29,841
    
    35,462
    
    35,543
    
    39,346Gross margin
    
    43,663
    
    47,251
    
    37,502
    
    24,619
    
    32,579
    
    39,546
    
    41,053
    
    47,372Operating expenses:Research and development
    
    7,900
    
    8,251
    
    8,436
    
    9,360
    
    8,528
    
    8,855
    
    8,907
    
    8,643Sales and marketing
    
    24,817
    
    23,266
    
    22,130
    
    20,573
    
    20,590
    
    22,571
    
    18,492
    
    21,271General and administrative
    
    5,947
    
    5,095
    
    5,290
    
    10,854
    
    3,011
    
    3,351
    
    4,662
    
    3,427Amortization of deferred stock compensation
    
    1,135
    
    833
    
    592
    
    147
    
    382
    
    306
    
    212
    
    171Total operating expenses
    
    39,799
    
    37,445
    
    36,448
    
    40,934
    
    32,511
    
    35,083
    
    32,273
    
    33,512Income (loss) from operations
    
    3,864
    
    9,806
    
    1,054
    
    (16,315
    )
    68
    
    4,463
    
    8,780
    
    13,860Interest income
    
    2,865
    
    2,304
    
    2,023
    
    1,555
    
    1,475
    
    1,284
    
    1,184
    
    1,082Write-down of minority investment
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    Income (loss) before provision for income taxes
    
    6,729
    
    12,110
    
    3,077
    
    (17,260
    )
    1,543
    
    5,747
    
    9,964
    
    14,942Income tax (expense) benefit
    
    (2,557
    )
    (4,602
    )
    (1,169
    )
    6,559
    
    (494
    )
    (1,724
    )
    (2,959
    )
    (4,482
    )Net income (loss)
    
    $
    4,172
    
    $
    7,508
    
    $
    1,908
    
    $
    (10,701
    )
    $
    1,049
    
    $
    4,023
    
    $
    7,005
    
    $
    10,460Basic net income (loss) per share
    
    $
    0.04
    
    $
    0.06
    
    $
    0.02
    
    $
    (0.09
    )
    $
    0.01
    
    $
    0.03
    
    $
    0.06
    
    $
    0.19Diluted net income (loss) per share
    
    $
    0.03
    
    $
    0.06
    
    $
    0.02
    
    $
    (0.09
    )
    $
    0.01
    
    $
    0.03
    
    $
    0.06
    
    $
    0.1862Mar.31,2001
    
    Jun.30,2001
    
    Sep.30,2001
    
    Dec. 31,2001
    
    Mar.31,2002
    
    Jun.30,2002
    
    Sep.30,2002
    
    Dec. 31,2002(in thousands)Percentage of Revenue (unaudited):Revenues, net
    
    100.00
    %
    100.0
    %
    100.0
    %
    100.0
    %
    100.0
    %
    100.0
    %
    100.0
    %
    100.0
    %Cost of revenues
    
    47.1
    
    46.7
    
    49.8
    
    62.4
    
    47.8
    
    47.2
    
    46.4
    
    45.4Gross margin
    
    52.9
    
    53.3
    
    50.2
    
    37.6
    
    52.2
    
    52.8
    
    53.6
    
    54.6Operating expenses:Research and development
    
    9.6
    
    9.3
    
    11.3
    
    14.3
    
    13.7
    
    11.8
    
    11.6
    
    10.0Sales and marketing
    
    30.0
    
    26.3
    
    29.6
    
    31.5
    
    33.0
    
    30.1
    
    24.1
    
    24.5General and administrative
    
    7.2
    
    5.8
    
    7.1
    
    16.6
    
    4.8
    
    4.5
    
    6.1
    
    3.9Amortization of deferred stock compensation
    
    1.4
    
    0.9
    
    0.8
    
    0.2
    
    0.6
    
    0.4
    
    0.3
    
    0.2Total operating expenses
    
    48.2
    
    42.3
    
    48.8
    
    62.6
    
    52.1
    
    46.8
    
    42.1
    
    38.6Income (loss) from operations
    
    4.7
    
    11.0
    
    1.4
    
    (25.0
    )
    0.1
    
    6.0
    
    11.5
    
    16.0Interest income
    
    3.5
    
    2.6
    
    2.7
    
    2.4
    
    2.4
    
    1.7
    
    1.5
    
    1.2Write-down of minority investment
    
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    Income (loss) before provision for income taxes
    
    8.2
    
    13.6
    
    4.1
    
    (26.4
    )
    2.5
    
    7.7
    
    13.0
    
    17.2Income tax (expense) benefit
    
    (3.1
    )
    (5.2
    )
    (1.6
    )
    10.0
    
    (0.8
    )
    (2.3
    )
    (3.9
    )
    (5.2
    )Net income (loss)
    
    5.1
    %
    8.4
    %
    2.5
    %
    (16.4
    )
    1.7
    %
    5.4
    %
    9.1
    %
    12.0
    %63FOUNDRY NETWORKS, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS(in thousands)

Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EDescription
    
    Balance atBeginningof Period
    
    Charged toCosts
      andExpenses
    
    Deductions(1)
    
    Balance atEnd
      ofPeriodYear ended December 31, 2000:Allowance for doubtful accounts
    
    1,354
    
    4,698
    
    1,791
    
    4,261Allowance for sales returns
    
    615
    
    3,734
    
    2,848
    
    1,501Year ended December 31, 2001:Allowance for doubtful accounts
    
    4,261
    
    9,061
    
    6,674
    
    6,648Allowance for sales returns
    
    1,501
    
    3,595
    
    3,595
    
    1,501Year ended December 31, 2002:Allowance for doubtful accounts
    
    6,648
    
    344
    
    1,160
    
    5,833Allowance for sales returns
    
    1,501
    
    1,527
    
    1,444
    
    1,584______________
(1)Deductions
for allowance for doubtful accounts refers to write-offs and deductions for
allowance for sales returns refers to actual returns.
Item 9.Change in and Disagreements With Accountants on
Accounting and Financial Disclosure
On June 24, 2002, the Companys Board of Directors, upon the
recommendation of the audit committee, authorized the termination of Arthur
Andersen LLP (AA) and the engagement of Ernst & Young LLP.
During the years ended December 31, 2001 and 2000 and the subsequent
interim period through June 24, 2002, there were no disagreements between the
Company and AA on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to AAs satisfaction, would have caused AA to make reference to the
subject matter of the disagreement in connection with its reports; and there
were no reportable events described under Item 304(a)(1)(v) of Regulation
S-K.
The audit reports of AA on the consolidated financial statements of the
Company as of and for the years ended December 31, 2001 and 2000 did not contain
any adverse opinion or disclaimer or opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and the subsequent
interim period through June 24, 2002, the Company did not consult with Ernst &
Young LLP with respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our consolidated financial statements, or any
other matter or reportable events as set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
The Company provided a copy of the above disclosures to AA. Attached as
Exhibit 16.1 is a copy of AAs letter dated June 25, 2002, stating its agreement
with the above statements.64PART III
Item 10.Directors and Executive Officers of the Registrant
The information regarding the Companys executive officers and directors
is set forth above in Item 1 under the caption BusinessExecutive Officers and
Directors. This item also incorporates by reference the information contained
under the caption Section 16(a) Beneficial Ownership Reporting Compliance in
the Companys Proxy Statement for its 2003 Annual Meeting of Stockholders.
Item 11.Executive Compensation
Incorporated by reference from the information under the captions
Proposal No. 1Election of Directors, Compensation of Executive Officers,
Option Grants in Last Fiscal Year, Aggregated Option Exercise in Last Fiscal
Year and Fiscal Year-End Option Values, Change of Control Agreements with
Named Executive Officers, Compensation Committee Report on Executive
Compensation, Transactions with Management, and Performance Graph in the
Proxy Statement.
Item 12.Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Incorporated by reference from the information under the captions
Record Date; Voting Securities, Common Stock Ownership of Certain Beneficial
Owners and Management, and Change of Control Agreements with Named Executive
Officers in the Proxy Statement.
Item 13.Certain Relationships and Related Transactions
Incorporated by reference from the information under the caption
Transactions with Management in the Proxy Statement.
Item 14.Controls and Procedures
Foundry evaluated the design and operation of its disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including Foundrys principal executive officer and principal
financial officer, within the 90-day period prior to the filing of this Annual
Report on Form 10-K. The principal executive officer and principal financial
officer have concluded, based on their review, that Foundrys disclosure
controls and procedures are effective to ensure that information required to be
disclosed by Foundry in reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. No significant changes
were made to Foundrys internal controls or other factors that could
significantly affect these controls subsequent to the date of their
evaluation.65PART IV
Item 15.Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a)The following documents are filed as part of this Form 10-K:
(1)Consolidated Financial Statements and Report of Independent Auditors and
Public Accountants
(2)Financial Statement Schedules
See Item 8. Financial Statements and Supplementary DataSchedule
IIValuation and Qualifying Accounts. Other schedules are omitted because they
are not applicable, or because the information is included in the Financial
Statements or the Notes thereto.
(3)Exhibits (numbered in accordance with Item 601 of 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 Quarterly Report on Form 10-Q for the quarter ended September
      30, 2000 and incorporated herein by reference.)10.1
    1996 Stock
      Plan. (1)10.2
    1999 Employee
      Stock Purchase Plan. (2)10.3
    1999
      Directors Stock Option Plan. (3)10.5
    OEM Purchase
      Agreement dated January 6, 1999 between Foundry Networks, Inc. and
      Hewlett-Packard Company, Workgroup Networks Division. (4)10.6
    Reseller
      Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui
      & Co., Ltd. (4)10.7
    2000
      Non-Executive Stock Option Plan. (5)10.11
    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. (6)16.1
    Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated June 25, 2002. (7)21.1
    List of Subsidiaries23.1
    Consent of Ernst & Young LLP, Independent Auditors23.2
    Notice Regarding Consent of Arthur Andersen LLP99.1
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002______________
(1)Copy of original 1996 Stock Plan incorporated herein by reference to the
exhibit filed with the Company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 the
Company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 the
Companys Definitive Proxy Statement for such meeting (Commission File No.
000-26689).
(2)Incorporated herein by reference to the exhibit filed with the Companys
Registration Statement on Form  S-1 (Commission File No.
333-82577).
(3)Incorporated herein by reference to the exhibit filed with the Companys
Registration Statement on Form  S-1 (Commission File No. 333-82577). Copy
of Directors Plan reflecting the amendment for66approval at the 2002 Annual Meeting of Stockholders incorporated by
reference to the Companys Definitive Proxy Statement for such meeting
(Commission File No. 000-26689).
(4)Incorporated herein by reference to the exhibit filed with the Company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.
(5)Incorporated herein by reference to the exhibit filed with the
Companys Registration Statement on Form S-8 filed on October 25, 2000
(Commission File No. 333-48560).
(6)Incorporated herein by reference to the exhibit filed with the Companys
Form 10-Q for the quarter ended September 30, 1999 (Commission File No.
000-26689).
(7)Incorporated by reference from Foundrys Report on Form 8-K filed on July
3, 2002.
(b)Reports on
Form 8-K.None.67SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FOUNDRYNETWORKS, INC.By:
    /s/ TIMOTHYD.HEFFNERTimothy D. HeffnerVice President,
      Finance & Administration,Chief
      Financial OfficerDate: March 31, 2003
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bobby R. Johnson Jr. and Timothy D.
Heffner, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
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/    BOBBYR. JOHNSON, JR.
    
    President.
      Chief Executive Officer and Chairman of the Board of Directors (Principal
      Executive Officer)
    
    March 31, 2003(Bobby R. Johnson, Jr.)/s/    TIMOTHYD. HEFFNER
    
    Vice
      President, Finance & Administration, Chief Financial Officer
      (Principal Financial and Accounting Officer)
    
    March 31, 2003(Timothy D. Heffner)/s/    ANDREWK. LUDWICK
    
    Director
    
    March 31, 2003(Andrew K. Ludwick/s/    ALFREDJ. AMOROSO
    
    Director
    
    March 31, 2003(Alfred J. Amoroso)/s/    C. NICHOLASKEATING
    
    Director
    
    March 31, 2003(C. Nicholas Keating)/s/    J. STEVENYOUNG
    
    Director
    
    March 31, 2003(J. Steven Young)68CERTIFICATIONS
I, Bobby R. Johnson,
Jr., certify that:
1.I have reviewed this annual report on Form 10-K of Foundry Networks,
Inc.;
2.Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3.Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;
4.The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
c)presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluations as of the
Evaluation Date;
5.The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent
functions):
a)all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any
material weaknesses in internal controls; and
b)any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal controls; and
6.The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31,
2003

/s/ Bobby
      R. Johnson, Jr.Bobby R.
      Johnson, Jr.Chief Executive
      Officerand
  President69CERTIFICATIONS
I, Timothy D.
Heffner, certify that:
1.I have reviewed this annual report on Form 10-K of Foundry Networks,
Inc.;
2.Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3.Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;
4.The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
c)presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluations
as of the Evaluation Date;
5.The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent
functions):
a)all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any
material weaknesses in internal controls; and
b)any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal controls; and
6.The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31,
2003

/s/
      Timothy D. HeffnerTimothy D.
      HeffnerVice President, Finance and
      Administration,Chief Financial
      Officer70INDEX TO EXHIBITS

Number
    Description21.1
    List of
      Subsidiaries23.1
    Consent of
		 Ernst & Young LLP, Independent Auditors23.2
    Notice
      Regarding Consent of Arthur Andersen LLP99.1
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200271