---

UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington,
D.C. 20549   FORM 10-Q

|(Mark One)
|----------

For the quarterly period ended September 30, 2003

OR

|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------

For the transition period from __________________ to __________________

Commission File Number 000-26689   FOUNDRY NETWORKS,
INC. (Exact name of registrant as specified in its charter)

|Delaware                                                      |  |  |  | 77-0431154                         
|------------------------------------------------------------- |  |  |  | -----------------------------------
|(State or other
jurisdiction ofincorporation or
organization) |  |  |  | (I.R.S.
EmployerIdentification No.)

2100 Gold Street P.O. Box 649100 San Jose, CA 95164-9100(Address
of principal executive offices, including zip code)

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

N/A(Former name, former address and former fiscal year, if changed since
last report)

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 that 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes [X]    No [ ]

As of November 10, 2003, there were 130,469,356 shares of the registrants
common stock outstanding, par value $0.0001.

---



FOUNDRY NETWORKS, INC. TABLE OF CONTENTS






|PART
I         |  |    |  | FINANCIAL INFORMATION                                                                                       |  |  | PAGE | 
|-------------- |  | -- |  | ----------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Item 1.        |  |    |  | Financial Statements (Unaudited):                                                                           |  |  |      | 
|               |  |    |  | Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                        |  |  | 3    | 
|               |  |    |  | Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002 |  |  | 4    | 
|               |  |    |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002       |  |  | 5    | 
|               |  |    |  | Notes to Condensed Consolidated Financial Statements                                                        |  |  | 6    | 
|Item 2.        |  |    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  |  | 16   | 
|               |  |    |  | Risk Factors That May Affect Future Results and Market Price of Stock                                       |  |  | 22   | 
|Item 3.        |  |    |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  |  | 31   | 
|Item 4.        |  |    |  | Controls and Procedures                                                                                     |  |  | 32   | 
|PART
II        |  |    |  | OTHER INFORMATION                                                                                           |  |  |      | 
|Item 1.        |  |    |  | Legal Proceedings                                                                                           |  |  | 33   | 
|Item 2.        |  |    |  | Changes in Securities and Use of Proceeds                                                                   |  |  | 34   | 
|Item 3.        |  |    |  | Defaults Upon Senior Securities                                                                             |  |  | 34   | 
|Item 4.        |  |    |  | Submission of Matters to a Vote of Security Holders                                                         |  |  | 34   | 
|Item 5.        |  |    |  | Other Information                                                                                           |  |  | 34   | 
|Item 6.        |  |    |  | Exhibits and Reports on Form 8-K                                                                            |  |  | 35   | 
|SIGNATURES     |  | 37 | 
|CERTIFICATIONS |  |    | 

2

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FOUNDRY NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in
thousands, except par value per share)

|                                                                                                                                                                                   |  |  |  | September 30, 2003 |         | December 31, 2002
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------ | ------- | -----------------
|
|Current
assets:                                                                                                                                                                    |  |  |  |                    |         |                  
|Cash and cash
equivalents                                                                                                                                                          |  |  |  | $                  | 271,522 |                  
|Short-term
investments                                                                                                                                                             |  |  |  |                    | 143,922 |                  
|Accounts
receivable, net of allowances for doubtful accounts of $4,500 and $5,833 and sales returns of $1,870 and $1,584 at September 30, 2003 and December 31,
2002, respectively |  |  |  |                    | 67,688  |                  
|Inventories,
net                                                                                                                                                                   |  |  |  |                    | 28,249  |                  
|Deferred tax
assets                                                                                                                                                                |  |  |  |                    | 28,566  |                  
|Prepaid
expenses and other current assets                                                                                                                                          |  |  |  |                    | 3,740   |                  
|Total current
assets                                                                                                                                                               |  |  |  |                    | 543,687 |                  
|Property and
equipment                                                                                                                                                             |  |  |  |                    | 22,966  |                  
|Less:
Accumulated depreciation                                                                                                                                                     |  |  |  |                    | (15,686 | )                
|Net property
and equipment                                                                                                                                                         |  |  |  |                    | 7,280   |                  
|Long-term
investments                                                                                                                                                              |  |  |  |                    | 40,250  |                  
|Other
long-term assets                                                                                                                                                             |  |  |  |                    | 1,199   |                  
|Total
assets                                                                                                                                                                       |  |  |  | $                  | 592,416 |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                               |  |  |  |                    |         |                  
|Current
liabilities:                                                                                                                                                               |  |  |  |                    |         |                  
|Accounts
payable                                                                                                                                                                   |  |  |  | $                  | 17,375  |                  
|Accrued
payroll and related expenses                                                                                                                                               |  |  |  |                    | 12,338  |                  
|Warranty
accrual                                                                                                                                                                   |  |  |  |                    | 1,920   |                  
|Other accrued
expenses                                                                                                                                                             |  |  |  |                    | 4,950   |                  
|Income taxes
payable                                                                                                                                                               |  |  |  |                    | 6,707   |                  
|Deferred
support revenue                                                                                                                                                           |  |  |  |                    | 30,751  |                  
|Total current
liabilities                                                                                                                                                          |  |  |  |                    | 74,041  |                  
|Commitments
and contingencies (Note 3)                                                                                                                                             |  |  |  |                    |         |                  
|Stockholders equity:                                                                                                                                                              |  |  |  |                    |         |                  
|Preferred
stock, $0.0001 par value:                                                                                                                                                |  |  |  |                    |         |                  
|Authorized5,000 shares at September 30, 2003 and December 31, 2002; None issued and outstanding as of September 30, 2003 and December
31, 2002                                    |  |  |  |                    |        |                  
|Common stock,
$0.0001 par value:                                                                                                                                                   |  |  |  |                    |         |                  
|Authorized300,000 shares at September 30, 2003 and December 31, 2002:                                                                                                             |  |  |  |                    |         |                  
|Issued and outstanding128,641 and 121,329 shares at
September 30, 2003 and December 31, 2002, respectively                                                                        |  |  |  |                    | 13      |                  
|Additional
paid-in capital                                                                                                                                                         |  |  |  |                    | 351,782 |                  
|Note
receivable from stockholder                                                                                                                                                   |  |  |  |                    | (480    | )                
|Deferred
stock compensation                                                                                                                                                        |  |  |  |                    | (16     | )                
|Accumulated
other comprehensive income                                                                                                                                             |  |  |  |                    | 19      |                  
|Retained
earnings                                                                                                                                                                  |  |  |  |                    | 167,057 |                  
|Total
stockholders equity                                                                                                                                                         |  |  |  |                    | 518,375 |                  
|Total
liabilities and stockholders equity                                                                                                                                         |  |  |  | $                  | 592,416 |                  



______________(1)  Derived
from audited consolidated financial statements as of  December 31, 2002.

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

3

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FOUNDRY NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands, except per share data)






|                                                                       |  |  |  | Three Months Ended September 30, |         | Nine Months Ended September 30, | 
|---------------------------------------------------------------------- |  |  |  | -------------------------------- | ------- | ------------------------------- | 
|
|Net
revenues:                                                          |  |  |  |                                  |         |                                 | 
|Product                                                                |  |  |  | $                                | 89,450  |                                 | 
|Service                                                                |  |  |  |                                  | 12,233  |                                 | 
|Total net
revenues                                                     |  |  |  |                                  | 101,683 |                                 | 
|Cost of
revenues:                                                      |  |  |  |                                  |         |                                 | 
|Product                                                                |  |  |  |                                  | 31,754  |                                 | 
|Service                                                                |  |  |  |                                  | 1,688   |                                 | 
|Total cost of
revenues                                                 |  |  |  |                                  | 33,442  |                                 | 
|Gross
margin                                                           |  |  |  |                                  | 68,241  |                                 | 
|Operating
expenses:                                                    |  |  |  |                                  |         |                                 | 
|Research and
development                                               |  |  |  |                                  | 10,432  |                                 | 
|Sales and
marketing                                                    |  |  |  |                                  | 21,428  |                                 | 
|General and
administrative                                             |  |  |  |                                  | 4,852   |                                 | 
|Amortization
of deferred stock compensation                            |  |  |  |                                  | 21      |                                 | 
|Total
operating expenses                                               |  |  |  |                                  | 36,733  |                                 | 
|Income from
operations                                                 |  |  |  |                                  | 31,508  |                                 | 
|Interest and
other income                                              |  |  |  |                                  | 1,475   |                                 | 
|Income before
provision for income taxes                               |  |  |  |                                  | 32,983  |                                 | 
|Provision for
income taxes                                             |  |  |  |                                  | 12,204  |                                 | 
|Net
income                                                             |  |  |  | $                                | 20,779  |                                 | 
|Basic net
income per share                                             |  |  |  | $                                | 0.16    |                                 | 
|Weighted
average shares used in computing basic net income per share   |  |  |  |                                  | 126,796 |                                 | 
|Diluted net
income per share                                           |  |  |  | $                                | 0.15    |                                 | 
|Weighted
average shares used in computing diluted net income per share |  |  |  |                                  | 138,659 |                                 | 

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

4

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FOUNDRY NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)






|                                                                                  |  |  |  | Nine Months Ended September 30, |         
|--------------------------------------------------------------------------------- |  |  |  | ------------------------------- | --------
|
|CASH FLOWS
FROM OPERATING ACTIVITIES:                                             |  |  |  |                                 |         
|Net
income                                                                        |  |  |  | $                               | 51,013  
|Adjustments
to reconcile net income to net cash provided by operating activities: |  |  |  |                                 |         
|Depreciation                                                                      |  |  |  |                                 | 3,882   
|Amortization
of deferred stock compensation                                       |  |  |  |                                 | 215     
|(Reduction
of) provision for doubtful accounts                                    |  |  |  |                                 | (862    
|Inventory
provision                                                               |  |  |  |                                 | 8,901   
|Tax benefit
from stock option exercises                                           |  |  |  |                                 | 21,343  
|Change in
operating assets and liabilities:                                       |  |  |  |                                 |         
|Accounts
receivable                                                               |  |  |  |                                 | (14,930 
|Inventories                                                                       |  |  |  |                                 | (3,671  
|Prepaid
expenses and other assets                                                 |  |  |  |                                 | (178    
|Accounts
payable                                                                  |  |  |  |                                 | 5,691   
|Accrued
payroll and related benefits                                              |  |  |  |                                 | 590     
|Income taxes
payable                                                              |  |  |  |                                 | 2,839   
|Other accrued
liabilities                                                         |  |  |  |                                 | 968     
|Deferred
support revenue                                                          |  |  |  |                                 | 10,517  
|Net cash
provided by operating activities                                         |  |  |  |                                 | 86,318  
|CASH FLOWS
FROM INVESTING ACTIVITIES:                                             |  |  |  |                                 |         
|Purchases of
property and equipment, net                                          |  |  |  |                                 | (4,782  
|Proceeds from
maturities of investments                                           |  |  |  |                                 | 176,662 
|Purchases of
investments                                                          |  |  |  |                                 | (222,100
|Net cash
(used in) provided by investing activities                               |  |  |  |                                 | (50,220 
|CASH FLOW
FROM FINANCING ACTIVITY:                                                |  |  |  |                                 |         
|Issuance of
common stock under employee stock plans                               |  |  |  |                                 | 47,741  
|Cash provided
by financing activity                                               |  |  |  |                                 | 47,741  
|INCREASE IN
CASH AND CASH EQUIVALENTS                                             |  |  |  |                                 | 83,839  
|Effect of
exchange rate changes on cash                                           |  |  |  |                                 | (36     
|CASH AND CASH
EQUIVALENTS, BEGINNING OF PERIOD                                    |  |  |  |                                 | 187,719 
|CASH AND CASH
EQUIVALENTS, END OF PERIOD                                          |  |  |  | $                               | 271,522 

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

5

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FOUNDRY NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Information for the three and nine months ended September 30, 2003 and 2002 is unaudited)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:



Basis of Presentation




The condensed consolidated financial statements
included herein have been prepared by Foundry Networks, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and include the accounts of Foundry Networks, Inc. and its wholly-owned subsidiaries (collectively Foundry or
the Company). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. The information included in
this Quarterly Report on Form 10-Q should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations, Quantitative and Qualitative Disclosures About Market Risk, and the Consolidated Financial Statements and
notes thereto included in Items 7, 7A, and 8, respectively, of the Foundry Networks, Inc. Annual Report on Form 10-K, as amended on June 5,
2003.




The unaudited condensed consolidated financial
statements included herein reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented. These adjustments are of a normal, recurring nature. The results of operations for the
three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for future quarters or for the year
ending December 31, 2003.




Principles of Consolidation and Foreign Currency
Translation




The Companys condensed 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.




Reclassifications




Certain items previously reported in specific
financial captions have been reclassified to conform with the September 30, 2003 presentation.




Use of Estimates in Preparation of Financial
Statements




The preparation of financial statements in
conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates. Estimates are used in
accounting for, but not limited to, allowances for doubtful accounts and sales returns, inventory provisions, product warranty, income taxes and
contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial
statements in the period they are determined.




Cash Equivalents and Marketable
Investments




Foundry considers all highly liquid investments with
original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents consist of commercial paper, corporate and government debt
securities, and cash deposited in checking and money market accounts. Our investment portfolio includes only marketable securities with original
maturities of less than two years and with secondary or resale markets to ensure portfolio liquidity.




Investments in highly liquid financial instruments
with original maturities greater than three months but less than one year are classified as short-term investments. Investments with maturities greater
than one year from the


6

---

balance sheet date are classified as long-term investments. All of Foundrys
short-term and long-term investments are stated at amortized cost and classified as held-to-maturity.



Cash equivalents and investments consist of the
following (in thousands):







|                                      |  |  |  |   |        
|------------------------------------- |  |  |  | - | -------
|
|
|Money market
funds                    |  |  |  | $ | 81,313 
|Corporate
securities                  |  |  |  |   | 74,000 
|Commercial
paper                      |  |  |  |   | 55,945 
|Government
securities                 |  |  |  |   | 188,066
|                                      |  |  |  | $ | 399,324
|Included in
cash and cash equivalents |  |  |  | $ | 215,152
|Included in
short-term investments    |  |  |  |   | 143,922
|Included in
long-term investments     |  |  |  |   | 40,250 
|                                      |  |  |  | $ | 399,324






|                                      |  |  |  |   |        
|------------------------------------- |  |  |  | - | -------
|
|
|Money market
funds                    |  |  |  | $ | 393    
|Corporate
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



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):


|                |  |  |  | September 30, 2003 |        | December 31, 2002
|--------------- |  |  |  | ------------------ | ------ | -----------------
|Purchased
parts |  |  |  | $                  | 8,149  |                  
|Work-in-process |  |  |  |                    | 15,286 |                  
|Finished
goods  |  |  |  |                    | 4,814  |                  
|                |  |  |  | $                  | 28,249 |                  



The networking industry is characterized by rapid
technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Inventory purchases and
commitments are made in order to build inventory to meet future shipment schedules based on forecasted demand for Foundrys products. The Company
performs 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, Foundry records adjustments to inventory for
excess, obsolescence or impairment, when appropriate, to reduce inventory to net realizable value. Provisions for inventory in the
amounts


7

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of $3.2 million and $2.8 million were recorded for the three months ended September
30, 2003 and 2002, respectively, and $8.9 million and $6.7 million for the nine months ended September 30, 2003 and 2002, respectively.



Concentrations




Financial instruments that potentially subject
Foundry to a concentration of credit risk principally consist of cash equivalents, short and long-term investments and accounts receivable. Foundry
seeks to reduce credit risk on financial instruments by investing in high quality debt issuances 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. Sales are typically made to customers for which there is a history of
successful collection. New customers are subjected to a credit review process, which evaluates the customers financial position and ability to
pay. New customers are typically assigned a credit limit based on a 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
customers inability to meet its financial obligation, such as in the case of bankruptcy filings or a deterioration of financial position.
Estimates are used in determining 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 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 Foundrys
production requirements could negatively impact future results.




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.




When sales arrangements contain multiple elements
(i.e., hardware, maintenance and other services), the Company allocates revenue to each element based on the guidance provided by Emerging Issues
Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), which is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 addresses certain aspects of accounting by a vendor for
arrangements under which the vendor will perform multiple revenue generating activities. Foundry adopted EITF 00-21 prospectively and the adoption
of EITF 00-21 did not have a material impact on Foundrys results of operations or financial position.




Product
Revenues.    Revenue is generally recorded at the time of shipment when title and risk of loss pass 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. The Companys arrangements generally do not have significant post delivery obligations. 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 based on historical returns and our return policy. Foundry does not provide for rights of return and
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 consist primarily of revenue from customer support services and, to a lesser extent, installation
and training services. Foundrys suite of customer support programs provides customers with access to technical assistance, software updates and
upgrades, hardware repair and replacement parts. Support
 8  services are
offered under renewable, annual fee-based arrangements or as part of multiple  element
arrangements. Revenue from support services is deferred and recognized ratably over the
service period, generally one to five years. Revenue  from training and installation
services accounted for less than 1% of total revenue in the three and nine months ended
September 30, 2003 and  2002.

Segment Reporting

Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in assessing performance. Foundry is organized as, and operates in one reportable segment: the
design, development, manufacturing and marketing of high performance Gigabit Ethernet switches, switching routers, server load balancing and
transparent caching switches.

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 37% and 36% of revenues for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003
and 2002, export sales represented 33% and 37%, respectively. One individual country outside of the United States, Japan, accounted for 15% and 12% of
revenues in the three and nine months ended September 30, 2003 while no country accounted for greater than 10% of revenues in the same periods in
2002.

For the three months ended September 30, 2003, two
customers accounted for greater than 10% of Foundrys revenues. A reseller in Japan, Mitsui, accounted for 15% while a U.S. government integrator
accounted for 11% of revenues in the third quarter of 2003. For the nine months ended September 30, 2003, Mitsui accounted for 11% while the same U.S.
government integrator accounted for 15% of revenues. No individual customers accounted for over 10% of revenue for the same periods in 2002. Sales to
the U.S. government represented approximately 31% and 15% of Foundrys revenues during the three months ended September 30, 2003 and 2002,
respectively, and 30% and 11% of Foundrys revenues during the nine months ended September 30, 2003 and 2002, respectively.

Computation of Per Share
Amounts

Basic earnings per share (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. Weighted average dilutive potential common stock
includes the dilutive impact of in-the-money stock options, which is calculated based on the average share price for each period using the treasury
stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all in-the-money
stock options are assumed to be used by the Company to repurchase shares. Certain common stock equivalents were excluded from the calculation of
diluted EPS because the exercise price of these common stock equivalents was greater than the average market price of the common shares for the
respective period and, therefore, their inclusion would have been anti-dilutive. For the three months ended September 30, 2003 and 2002, anti-dilutive
shares were 2.2 million and 14.4 million shares, respectively. For the nine months ended September 30, 2003 and 2002, anti-dilutive shares were 3.3
million and 17.3 million shares, respectively.



9

Three Months Ended September 30,
     

     Nine Months Ended September 30,2003
     

     2002
     

     2003
     

     2002(in thousands, except per share data)Net
income
     
     
     

     $
     20,779
     
     

     $
     7,005
     
     

     $
     51,013
     
     

     $
     12,078
Basic:Weighted
average shares outstanding
     
     
     

     
     126,796
     
     

     
     120,208
     
     

     
     123,638
     
     

     
     119,685Less:
Weighted average shares subject to repurchase
     
     
     

     
     
     
     

     
     (209
     )
     

     
     
     
     

     
     (481
     )Weighted
average shares used in computing basic EPS
     
     
     

     
     126,796
     
     

     
     119,999
     
     

     
     123,638
     
     

     
     119,204Basic
EPS
     
     
     

     $
     0.16
     
     

     $
     0.06
     
     

     $
     0.41
     
     

     $
     0.10
Diluted:Weighted
average shares outstanding
     
     
     

     
     126,796
     
     

     
     120,208
     
     

     
     123,638
     
     

     
     119,685Add: Weighted
average dilutive potential common stock
     
     
     

     
     11,863
     
     

     
     4,651
     
     

     
     9,175
     
     

     
     3,902Weighted
average shares used in computing diluted EPS
     
     
     

     
     138,659
     
     

     
     124,859
     
     

     
     132,813
     
     

     
     123,587Diluted
EPS
     
     
     

     $
     0.15
     
     

     $
     0.06
     
     

     $
     0.38
     
     

     $
     0.10
 Recent Accounting
Pronouncements

More-Than Incidental
Software

On July 31, 2003, the Emerging Issues Task Force
(EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on its tentative conclusions on Issue No. 03-5,
Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than Incidental Software (EITF 03-5). EITF 03-5 discusses that software deliverables are within the scope of SOP 97-2 as are
non-software deliverables for which the related software is essential to the functionality of the non-software deliverables. The EITF is effective for
fiscal periods beginning after August 2003. We believe the adoption of EITF 03-5 will not have a material impact on our financial position, results of operations or
liquidity.

Consolidation of Variable Interest
Entities

In January 2003, the FASB issued Interpretation No.
46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable
interest entities (VIEs) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. For variable interests created after January 31, 2003, FIN 46 is effective immediately.
Since January 31, 2003, Foundry has not entered into arrangements with VIEs that would require consolidation of the VIE, nor has Foundry entered into
arrangements which would require disclosure.

In October 2003, FASB deferred the effective date of
FIN 46 for variable interests held by public companies in all entities that were acquired prior to February 1, 2003. The deferral requires that public
companies adopt the provisions of FIN 46 at the end of fiscal periods ending after December 15, 2003. Foundry does not expect the adoption of FIN 46
for VIEs existing prior to February 1, 2003 to have a material impact on its operating results or financial condition.

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 compensation arrangements. SFAS 148
also amends the disclosure provisions of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the
effects of an entitys accounting policy with respect to stock-based compensation on reported net income and earnings per share. SFAS 148s amendment of the
transition and annual disclosure requirements of SFAS 123 are effective for fiscal years ending after December 15, 2002. As permitted by SFAS


10

123, Foundry has elected to continue to follow the intrinsic value method of accounting
for employee stock options as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. 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. Since Foundry has not elected to change to the fair value method of accounting and, therefore does not record compensation expense for
stock-based employee compensation, the transition provisions of SFAS 148 had no impact on Foundrys financial position, results of operations, or
cash flows.

Foundry currently grants stock options under several
stock option plans that allow for the granting of non-qualified and incentive stock options to employees, directors and consultants of Foundry. Stock
options generally vest in increments over three to five years from the date of grant and have a term of ten years. We also have an employee stock purchase plan
that allows eligible employees to purchase common stock at 85% of the lower of the fair market value of the common stock at the beginning of each
offering period or at the end of each purchase period through payroll deductions which may not exceed 20% of an employees
compensation.

The following table illustrates the effect on
reported net income (loss) and earnings (loss) per share as if we had accounted for our employee stock options and employee stock purchase plan under
the fair value method prescribed by SFAS 123.


Three Months Ended September 30,
     

     Nine Months Ended September 30,2003
     

     2002
     

     2003
     

     2002(in thousands, except per share data)Net income as
reported
     
     
     

     $
     20,779
     
     

     $
     7,005
     
     

     $
     51,013
     
     

     $
     12,078Add: Total
stock-based compensation expense included in reported net income, net of tax effect
     
     
     

     
     13
     
     

     
     148
     
     

     
     139
     
     

     
     630Deduct: Total
stock-based compensation expense determined under fair value method for all awards, net of related tax effect
     
     
     

     
     (8,148
     )
     

     
     (13,671
     )
     

     
     (23,201
     )
     

     
     (58,437
     )Pro forma net
income (loss)
     
     
     

     $
     12,644
     
     

     $
     (6,518
     )
     

     $
     27,951
     
     

     $
     (45,729
     )
Basic net
income (loss) per share:As
reported
     
     
     

     $
     0.16
     
     

     $
     0.06
     
     

     $
     0.41
     
     

     $
     0.10Pro
forma
     
     
     

     $
     0.10
     
     

     $
     (0.05
     )
     

     $
     0.23
     
     

     $
     (0.38
     )
Diluted net
income (loss) per share:As
reported
     
     
     

     $
     0.15
     
     

     $
     0.06
     
     

     $
     0.38
     
     

     $
     0.10Pro
forma
     
     
     

     $
     0.09
     
     

     $
     (0.05
     )
     

     $
     0.21
     
     

     $
     (0.37
     )
 Foundry estimates the fair value of its stock
options using the Black-Scholes option valuation model, which is the most commonly used model by companies for purposes of disclosure pursuant to SFAS
123, as amended by SFAS 148. However, the Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. The Black-Scholes 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
the changes in the assumptions can materially affect the fair value estimates, in managements opinion, the Black-Scholes model does not provide a
reliable measure of the fair value of the options. The following weighted-average assumptions were used to estimate the fair value of employee stock
options granted during the three and nine-month periods ended:

11

Three Months Ended September 30,
     

     Nine Months Ended September 30,2003
     

     2002
     

     2003
     

     2002Average risk
free interest rate
     
     
     

     
     2.41
     %
     

     
     2.30
     %
     

     
     2.15
     %
     

     
     3.38
     %Average
expected life of option
     
     
     

     3.8
years
     

     3.3
years
     

     3.8
years
     

     3.5
yearsDividend
yield
     
     
     

     
     0
     %
     

     
     0
     %
     

     
     0
     %
     

     
     0
     %Volatility of
common stock
     
     
     

     
     52
     %
     

     
     75
     %
     

     
     64
     %
     

     
     75
     %
 2.    COMPREHENSIVE INCOME

Comprehensive income is defined in SFAS No. 130,
Reporting Comprehensive Income, as the changes in equity of an enterprise except those resulting from stockholder transactions. Components
of comprehensive income for the three and nine months ended September 30, 2003 and 2002 were insignificant and comprised only of foreign currency
translation adjustments.

3.    COMMITMENTS AND CONTINGENCIES:

Guarantees and Product
Warranties

FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45) requires that
upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that
guarantee. 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 and to indemnification obligations contained in commercial agreements, including customary
intellectual property indemnifications for our products contained in agreements with our resellers and end-users. The adoption of FIN 45 did not have a
material impact on Foundrys results of operations or financial condition.

Foundry provides all customers with a standard one
year hardware and 90-day software warranty. Customers can upgrade the standard warranty and extend the warranty for one to five 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 warranty
liability for the nine months ended September 30, 2003 are as follows:

Balance,
December 31, 2002
     
     
     

     $
     2,305Liabilities
accrued for warranties issued during the period
     
     
     

     
     1,747Warranty
claims settled during the period
     
     
     

     
     (900
     )Changes in
liability for pre-existing warranties during the period, including changes in estimate
     
     
     

     
     (1,232
     )Balance,
September 30, 2003
     
     
     

     $
     1,920
 Foundry offers renewable support arrangements,
including extended warranty contracts, to its customers that range generally from one to five years. Foundry has not separated the extended warranty
revenues from the routine maintenance service revenues, as it is not practical to do so. The change in the Companys deferred support revenue
balance in relation to these arrangements was as follows for the nine months ended September 30, 2003;

Deferred
support revenue at December 31, 2002
     
     
     

     $
     20,234New support
arrangements
     
     
     

     
     44,741Recognition
of support revenue
     
     
     

     
     (34,224
     )Ending
balance at September 30, 2003
     
     
     

     $
     30,751
 12

In the ordinary course of business, the Company
enters into contractual arrangements under which Foundry may agree to indemnify the counter-party to such an arrangement from any losses relating to a
breach of representations and warranties, a failure to perform certain covenants or claims and losses arising from certain external events as outlined
within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. In addition,
Foundry has entered into standard indemnification agreements with each of its directors and officers to indemnify those individuals against claims and
losses that might be incurred by those directors and officers as a result of their service to Foundry. No amounts are reflected within the condensed
consolidated financial statements as of September 30, 2003 related to these indemnifications as, historically, payments made related to these
indemnifications have not been material to Foundrys financial position.

Purchase Commitments with Contract
Manufacturers

The Company uses contract manufacturers to assemble
and test its 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 September 30, 2003, the Company was committed to purchase approximately $56.3 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 of its anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently
consolidated by the District 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. The Company then brought the first of four successful motions to dismiss the complaint. However, while the District Court
granted each of the motions, it also provided plaintiffs leave to amend the complaint. On August 29, 2003 (after 4 prior dismissals with leave to
amend) the District Court granted the Company motion to dismiss the case with prejudice and without leave to amend and, on September 2, 2003, entered
judgment in favor of the Company, dismissing the plaintiffs Fifth Amended Complaint. On September 29, 2003 plaintiff filed a Notice of Appeal of
the judgment with the United States Court of Appeals for the Ninth Circuit, which has directed plaintiff to file its appeal brief by January 15, 2004. The
Company believes that the Districts Court Judgment validates its conviction that the lawsuit is without merit and will defend the District
Courts judgment 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 was designated as In 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 operative amended complaint names as
defendants, the Company and three of its officers (the Foundry Defendants), including its Chief Executive Officer and Chief Financial
Officer; and investment banking firms that served as underwriters for the Companys initial public offering in September 1999. The amended
complaint alleged 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 registration statement for the IPO failed to disclose that (i) the underwriters agreed to allow certain customers to purchase shares
in the IPO in exchange for excess commissions to the paid to the underwriters, and (ii) the underwriters arranged for certain customers to purchase
additional shares in the aftermarket at predetermined prices. The amended complaint also appears to allege that false or misleading analyst reports
were issued. No specific damages are claimed. Similar allegations were made in lawsuits challenging over 300 other initial public offerings conducted
in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants motions to dismiss.
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 motion was denied as to claims under the Securities Act of


13

1933 in the case involving the Company. The same ruling was made in all but 10 of
the other cases. The Court dismissed the claims under Section 10(b) of the Securities Exchange Act of 1934, against the Company and one of the
individual defendants and dismissed all of the Section 20(a) control person claims. The Court denied the motion to dismiss the Section
10(b) claims against the remaining Foundry individual defendants on the basis that those defendants allegedly sold the Companys stock following
the IPO, allegations found 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. The Company has decided to accept a settlement proposal presented to all issuer defendants. Under the
terms of this settlement, plaintiffs will dismiss and release all claims against the Foundry Defendants, in exchange for a contingent payment by the
insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the assignment or surrender of control of
certain claims the Company may have against the underwriters. The settlement, which is still being finalized, will require approval of the Court, which
cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement.

In March 2001, Nortel Networks Corp.
(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.

In May 2003, Lucent Technologies Inc.
(Lucent) filed a lawsuit against Foundry in the United States District Court for the District of Delaware alleging that certain of the
Companys products infringe several of Lucents patents, and seeking injunctive relief, as well as unspecified damages. Lucent has also
brought suit on the same patents (and one additional patent) against one of Foundrys competitors. This matter has been set for trial commencing December 7, 2004. The case is in the early stages of discovery. The parties have made initial disclosures
and exchanged written discovery and documents. Depositions have not yet commenced. Foundry has analyzed the validity of
Lucents claims and believes that Lucents suit is without merit. Foundry is committed to vigorously defending itself against these
claims.

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. Irrespective of the merits of the Companys position, litigation is always an expensive and
uncertain proposition. In accordance with SFAS No. 5, Accounting for Contingencies (SFAS 5), the Company records a liability
when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any such provision would be
adjusted to reflect the impact of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a
particular case. To date, the Company has not recorded such provisions in accordance with SFAS 5. 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. However, the Company believes that
it has valid defenses with respect to the legal matters pending against it. Any unfavorable determination could have a material adverse effect on the
Companys financial position, results of operations, or cash flows.

4.    INCOME TAXES:

Foundry recorded income tax provisions of $28.5
million and $5.2 million for the nine months ended September 30, 2003 and 2002, respectively. The effective tax rate for the nine months ended
September 30, 2003 was 36% compared to 30% for the same period in 2002. The increase in the tax provision was due to significantly higher net income
generated throughout 2003. These rates reflect the federal statutory and state tax rates, offset by research and development tax credits, export sales
incentives, and tax-exempt interest income.

The Companys income taxes payable for federal
and state purposes have been reduced 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


14

exercise and the option price, tax effected. These benefits were credited directly
to stockholders equity and amounted to $21.3 million and $0.4 million for the nine months ended September 30, 2003 and 2002,
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 totaling $28.6 million.
Therefore, no valuation allowance was required as of September 30, 2003.

5.    STOCKHOLDERS EQUITY:

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, which was the fair value of the shares on the grant date. 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 vest six months from March 24, 2003, and the remaining shares 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.



15

Item 2.    Managements Discussion and Analysis of
Financial Condition and Results Of Operations

The following discussion and analysis of our
financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Form
10-Q. 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
section entitled 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. 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 SEC. All public reports filed by the Company with the SEC 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 healthcare, financial services, universities, entertainment, government, technology enterprises, as well as metro and
internet service providers. Our product suite includes the FastIron® family of Layer 2/3 enterprise switches, the IronPoint family of
wireless access points, the BigIron® family of Layer 3 backbone switches, the EdgeIron® family of Layer 2 wiring closet switches, the
NetIron® family of metro routers, the ServerIron® Layer 4-7 traffic management switches, and the IronView Network Management software
system.

In 2002, we introduced a series of new products that
incorporate our JetCore ASIC chipset. JetCore represents the third major ASIC development from Foundry in a four year span. JetCore compliments
our IronCore ASIC by providing bandwidth management on-demand, advanced Layer 2 and 3 features, enhanced quality of service (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. 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. By providing high levels of performance and intelligence capabilities at competitive price points, we provide comprehensive
solutions to address the enterprise and service provider markets.

In 2003, we introduced a new Terabit capacity
architecture. Foundrys Terathon ASIC chipset represents our fourth generation ASIC architecture and will be incorporated into our BigIron
MG8 backbone switch, which shipped in August 2003, and our NetIron 40G metro router, which we expect to ship in the fourth quarter of 2003.
These two new products are capable of delivering wire-speed performance, sophisticated Layer 2/3 switching and routing capabilities, ultra high
reliability and Gigabit Ethernet and 10-Gigabit Ethernet density. In the third quarter of 2003, we introduced our integrated wireless solution with
three components: the IronPoint 200 standards-based multi-mode access points, a SNMP-based IronPoint Wireless Management application suite, as well as
a Wireless LAN software upgrade option for Foundrys FastIron JetCore modular, FastIron Edge and FastIron Edge Power-over-Ethernet switches. We
expect IronPoint will ship in the fourth quarter of 2003.

Foundry completed its third quarter of 2003 with
$101.7 million in revenues and net income of $20.8 million, compared to $95.7 million in revenues and net income of $16.8 million in the second quarter
of 2003. During the third quarter of 2003, Foundrys cash and investments increased by $44.4 million, from $411.3 million at June 30, 2003 to
$455.7 million at September 30, 2003. 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 and in 2003, increasing revenue, and improving gross margins and income from operations. Although the outlook for the overall economy
and the information technology environment continues to be difficult to predict, Foundry remains focused on its long-term strategy of maintaining
profitability and positive cash flows by focusing on innovation, competitively


16

pricing our products and prudent financial management. Management remains committed
to improving the Companys financial performance; however, there is no certainty we will be able to maintain or further improve our
results.

Critical Accounting Policies and
Estimates

The preparation of our condensed consolidated
financial statements in accordance with generally accepted accounting principles in the United States requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed 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 critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2002, as amended on June 5,
2003, affect its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. Management has
discussed the development, selection, and disclosure of these estimates with the Audit Committee of Foundrys Board of Directors. There have been
no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2003.

Results of Operations

Net Revenues

The following table shows product and service net
revenues for the three and nine months ended September 30, 2003 and 2002 (in thousands):




Three Months Ended September 30,
     

     Nine Months Ended September 30,2003
     

     % of Revenues
     

     2002
     

     % of Revenues
     

     2003
     

     % of Revenues
     

     2002
     

     % of RevenuesNet
revenues:Product
     
     
     

     $
     89,450
     
     

     
     88
     %
     

     $
     67,961
     
     

     
     89
     %
     

     $
     253,907
     
     

     
     88
     %
     

     $
     188,368
     
     

     
     88
     %Service
     
     
     

     
     12,233
     
     

     
     12
     %
     

     
     8,635
     
     

     
     11
     %
     

     
     34,626
     
     

     
     12
     %
     

     
     25,656
     
     

     
     12
     %Total net
revenues
     
     
     

     $
     101,683
     
     

     
     100
     %
     

     $
     76,596
     
     

     
     100
     %
     

     $
     288,533
     
     

     
     100
     %
     

     $
     214,024
     
     

     
     100
     %
 Product revenues were $89.5 million and $68.0
million for the third quarter ended September 30, 2003 and 2002, respectively, representing an increase of 32%. For the nine months ended September 30,
2003 and 2002, product revenues were $253.9 million and $188.4 million, respectively, an increase of 35%. The increases were attributable to growth in
the volume of product sales and strong customer acceptance of our higher priced next generation product offerings which offer competitively more
features and enhancements. These third generation products began shipping in June 2002 and incorporate our JetCore ASIC technology. One of these new
products was our fixed configuration FastIron Edge Switch for enterprise customers which has contributed to our increased sales momentum since the
availability of JetCore in June 2002.

Our sales to the U.S. government also increased significantly in 2003,
representing approximately 31% and 30% of our revenues during the three and
nine months ended September 30, 2003, respectively, compared to 15% and 11% for
the same periods in 2002. The increase in U.S. government sales was due to the
expansion of our government sales organization and increased spending by
several government agencies, including the military and intelligence
communities. If the U.S government reduces budgetary spending or if we are
unable to win government contract awards, our revenues and financial results
may be harmed.

Sales to customers outside of the United States
accounted for 37% and 36% of total net revenues for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended
September 30, 2003 and 2002, export sales were 33% and 37%, respectively. The decrease in export sales for the nine-month period as a percentage of
revenues was primarily due to increased sales to the U.S. government. One individual country outside of the United States, Japan, accounted for 15% and
12% of total net revenues in the three and nine months ended September 30, 2003 while no individual country outside of the United States accounted for greater than 10% of revenues in same
periods in 2002.

For the three months ended September 30, 2003, two
customers accounted for greater than 10% of Foundrys total net revenues. A reseller in Japan, Mitsui, accounted for 15% while a U.S. government
integrator accounted


17

for 11% of revenues in the third quarter of 2003. For the nine months ended
September 30, 2003, Mitsui accounted for 11% while the same U.S. government integrator accounted for 15% of revenues. No individual customers accounted
for over 10% of revenue in the same periods in 2002. Sales to the U.S. government represented approximately 31% and 15% of Foundrys revenues
during the three months ended September 30, 2003 and 2002, respectively, and 30% and 11% of revenues during the nine months ended September 30, 2003
and 2002, respectively.

Service revenues consist primarily of revenue from
customer support services, and to a lesser extent, from providing installation and training services. Service revenues were $12.2 million and $8.6
million, accounting for 12% and 11% of total revenues for the third quarter of 2003 and 2002, respectively. For the nine months ended September 30,
2003 and 2002, service revenues were $34.6 million and $25.7 million, respectively, an increase of 35%. The increases in absolute dollars were due to
increased technical support service initiations associated with product sales, which have increased significantly, and support renewals as a result of
our growing customer base. Customer support service arrangements range from one to five years, but the majority are for a one-year period. Revenues from
support services are recognized ratably over the service period. Service revenue will typically experience some variability over time due to various
factors such as the timing of technical support service contract initiations and renewals. A total of $30.8 million and $20.2 million of support
revenue was deferred on the accompanying balance sheets as of September 30, 2003 and December 31, 2002, respectively.

Gross Margins

The following table shows gross margins for product
and service revenues and the related gross margin percentages for the three and nine months ended September 30, 2003 and 2002 (in
thousands):




Three Months Ended September 30,
     

     Nine Months Ended September 30,2003
     

     Gross Margin %
     

     2002
     

     Gross Margin %
     

     2003
     

     Gross Margin %
     

     2002
     

     Gross Margin %Gross
margins:Product
     
     
     

     $
     57,696
     
     

     
     65
     %
     

     $
     33,372
     
     

     
     49
     %
     

     $
     154,283
     
     

     
     61
     %
     

     $
     91,414
     
     

     
     49
     %Service
     
     
     

     
     10,545
     
     

     
     86
     %
     

     
     7,681
     
     

     
     89
     %
     

     
     28,681
     
     

     
     83
     %
     

     
     21,764
     
     

     
     85
     %Total gross
margins
     
     
     

     $
     68,241
     
     

     
     67
     %
     

     $
     41,053
     
     

     
     54
     %
     

     $
     182,964
     
     

     
     63
     %
     

     $
     113,178
     
     

     
     53
     %
 Our cost of product revenue consists primarily of
material, labor, manufacturing overhead, freight, warranty costs, and the provision for inventory. Product gross margins were $57.7 million and $33.4
million for the three months ended September 30, 2003 and 2002 or 65% and 49% of product revenues, respectively, and $154.3 million and $91.4 million
for the nine months ended September 30, 2003 and 2002 or 61% and 49% of product revenues, respectively. The increases in product gross margin as a
percentage of product revenues in 2003 were primarily due to lower material costs, manufacturing cost efficiencies associated with increased sales
volume and increased sales of our high-end modular products which carry higher gross margins than our fixed-configuration, stackable products. To a
lesser extent, our gross margins benefited by $0.9 million and $2.2 million for the three and nine months ended September 30, 2003 related primarily to
evaluation units that were previously reserved and then subsequently purchased by the customer. These gains were offset by inventory provisions of $3.2
million and $2.8 million for the three months ended September 30, 2003 and 2002, respectively, and $8.9 million and $6.7 million for the nine months
ended September 30, 2003 and 2002, respectively.

Our cost of service revenues consists primarily of
costs of providing services under customer support arrangements including service material costs, labor, and overhead. Service gross margins were $10.5
million and $7.7 million or 86% and 89% of service revenue for the three months ended September 30, 2003 and 2002, respectively. For the nine months
ended September 30, 2003 and 2002, service gross margins were $28.7 million and $21.8 million or 83% and 85%, respectively. Service gross margin
increased in absolute dollars due to increases in service revenue for the three and nine months ended September 30, 2003 as compared to the same
periods in 2002. Service gross margin will typically experience some variability over time due to the timing of technical support service initiations
and renewals and additional investments in our customer support infrastructure.

Our gross margins have sequentially improved each
quarter since the first quarter of 2002 as our revenues increased each quarter. However, the rate of gross margin improvement has been and, in the
future, may be adversely affected by heightened price competition, component shortages, increases in
material or labor costs, excess,


18

obsolete, and impaired inventory charges, changes in channels of distribution, customer, product and geographic mix.
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.

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 three and nine months ended September 30, 2003 and 2002 (in
thousands):




Three Months Ended September 30,
     

     Nine Months Ended September 30,2003
     

     % of Revenues
     

     2002
     

     % of Revenues
     

     2003
     

     % of Revenues
     

     2002
     

     % of RevenuesResearch and
Development
     
     
     

     $
     10,432
     
     

     
     10
     %
     

     $
     8,907
     
     

     
     12
     %
     

     $
     30,398
     
     

     
     11
     %
     

     $
     26,291
     
     

     
     12
     %Sales and
Marketing
     
     
     

     
     21,428
     
     

     
     21
     %
     

     
     18,492
     
     

     
     24
     %
     

     
     64,824
     
     

     
     22
     %
     

     
     61,653
     
     

     
     29
     %General and
Administrative
     
     
     

     
     4,852
     
     

     
     5
     %
     

     
     4,662
     
     

     
     6
     %
     

     
     11,799
     
     

     
     4
     %
     

     
     11,024
     
     

     
     5
     %
 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 equipment related to research and development activities. Research and development expenses were $10.4 million and $8.9
million for the three months ended September 30, 2003 and 2002 or 10% and 12% of revenues, respectively. For the nine months ended September 30, 2003
and 2002, research and development expenses were $30.4 million and $26.3 million or 11% and 12% of revenues, respectively. The increases in absolute
dollars were due to a 10% increase in the average headcount during the first nine months of 2003 and increased prototype expenses during 2003 related
to the development of our fourth generation Terathon ASIC chipset.

Sales and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in marketing, sales and customer service functions, as well as trade shows,
advertising, promotional expenses and the cost of facilities. Sales and marketing expenses were $21.4 million and $18.5 million for the three months
ended September 30, 2003 and 2002 or 21% and 24% of revenues, respectively. For the nine months ended September 30, 2003 and 2002, sales and marketing
expenses were $64.8 million and $61.7 million or 22% and 29% of revenues, respectively. The increases in absolute dollars were primarily due to higher
commission expenses as a result of significantly higher sales during the three and nine-month periods ended September 30, 2003 as compared to the same
periods in 2002.

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 $4.9 million and $4.7 million for the three months ended September 30, 2003 and 2002 or 5%
and 6% of revenues, respectively. The slight increase in absolute dollars was due to increases in legal and payroll expenses totaling $1.2 million in
the third quarter of 2003, offset by a decrease of $1.0 million for the provision for doubtful accounts. The decrease of $1.0 million for the provision
for doubtful accounts was a result of improved credit quality of our customers and collection efforts. For the nine months ended September 30, 2003 and
2002, general and administrative expenses were $11.8 million and $11.0 million or 4% and 5% of revenues, respectively. The increase of $0.8 million was
due to increases in legal expenses of $1.7 million and payroll expenses of $1.3 million, offset by a decrease in bad debt expense of $1.4 million and
decreases in other general corporate expenses.

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 of the option and the deemed fair market value of our
common stock on the date these stock options were granted. We have not recorded additional deferred stock compensation since 2000. 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 $21,000 and $212,000 for the three months ended September 30, 2003 and
2002, respectively, and $215,000 and


19

$900,000 for the nine months ended September 30, 2003 and 2002, respectively. At September 30, 2003, we had
approximately $16,000 of deferred stock compensation, which will be fully amortized during the fourth quarter of 2003.

Interest income

Interest income is earned on funds we keep on
deposit in interest bearing money market and investment accounts. Interest income increased to $1.5 million for the three months ended September 30,
2003 compared to $1.2 million for the same period last year, as a result of the Company maintaining higher investment balances in the third quarter of
2003. Interest income for the nine months ended September 30, 2003 and 2002 was $3.8 million and $3.9 million, respectively. The slight decrease was
due to lower yields in 2003 compared to 2002, offset by higher investment balances in 2003. See Item 3 Quantitative and Qualitative Disclosures
about Market Risk for a description of our investment policy.

Income taxes

We recorded income tax provisions of $12.2 million
and $3.0 million for the three months ended September 30, 2003 and 2002, and $28.5 million and $5.2 million for the nine months ended September 30,
2003 and 2002, respectively. The increases in the tax provision were due to significantly higher net income generated throughout 2003. The effective
tax rates for the nine months ended September 30, 2003 and 2002 were 36% and 30%, respectively. These tax rates reflect the federal statutory and state
tax rates, offset by research and development tax credits, export sales incentives, and tax-exempt interest income.

Liquidity and Capital
Resources

At September 30, 2003, Foundry had cash and cash
equivalents and marketable investments totaling $455.7 million as compared to $326.5 million at December 31, 2002, an increase of $129.2
million.

Cash provided by operating activities was $86.3
million and $33.2 million for the nine months ended September 30, 2003 and 2002, respectively. The increase was primarily a result of significantly
higher net income of $51.0 million generated in the nine months ended September 30, 2003 as compared to $12.1 million for the same period in 2002. The
increase in cash provided by operating activities in 2003 was also due to an increase of $20.9 million in the tax benefit from stock option exercises,
$9.2 million in deferred support revenue and an increase of $5.9 million from a decrease in inventory, offset by an increase in accounts receivable of
$26.3 million.

Cash used in investing activities for the nine
months ended September 30, 2003 was $50.2 million, of which $45.4 million was used in the net purchase of investments and $4.8 million was used for the
purchase of fixed assets. This compares to cash provided by investing activities of $12.2 million for the same period in 2002, of which $15.4 million
was provided from net investment maturities, offset by $3.2 million used for the purchase of fixed assets. During 2003, the Company shifted
significantly more cash from money market accounts to short and long-term investments as compared to the same period in 2002 in order to improve its
investment return. See Item 3 Quantitative and Qualitative Disclosures about Market Risk for a description of our investment
policy.

Financing activities generated $47.7 million of cash
for the nine months ended September 30, 2003, as compared to $5.6 million for the same period in 2002. Cash provided by financing activities for both
periods consisted of proceeds from the exercise of employee stock options and purchases under our employee stock purchase plan. The significant
increase in 2003 was due to employees exercising their stock options in larger numbers during 2003 than in 2002.



20

The following table summarizes our contractual
obligations at September 30, 2003 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in
thousands):




Total
     

     Less Than 1 Year
     

     13 Years
     

     Greater Than 3 YearsOperating
office leases
     
     
     

     $
     16,661
     
     

     $
     4,606
     
     

     $
     9,160
     
     

     $
     2,895Purchase
commitments with our contract manufacturers
     
     
     

     
     56,296
     
     

     
     56,296
     
     

     
     
     
     

     
     Total
contractual cash obligations
     
     
     

     $
     72,957
     
     

     $
     60,902
     
     

     $
     9,160
     
     

     $
     2,895
 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.



21

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF
STOCK

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. Additionally, the current political turmoil in many parts of the world, including terrorist and military
actions, may weaken the global economy. If the economic conditions in the United States and globally do not improve, or if they worsen, we may
experience material negative effects on our business, operating results and financial condition. Although we experienced improved sales, gross margins,
and profitability on a quarter-over-quarter basis throughout 2002 and in the nine months ended September 30, 2003 despite the continued weak economic
and capital spending environment, there is no certainty we will be able to maintain or further improve results or ascertain the extent and length of
the economic slowdown.

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.

We may experience a delay in generating or
recognizing revenue for a number of reasons. Unfulfilled 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 increase. 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 45%
and 38% of revenues for the nine months ended September 30, 2003 and 2002, respectively. The loss of continued orders from any of our more significant
customers, such as the U.S. government, Mitsui, America Online, or Hewlett Packard, 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.22

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, Nortel Networks, Enterasys Networks, 3Com, Huawei, and Alcatel. 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 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.

We must continue to introduce new products with
superior performance and features 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.


23

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 are 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.

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. Government agency contracts are frequently awarded only after
formal competitive bidding processes, which are often protracted and may
contain provisions that permit cancellation in the event funds are unavailable
to the government agency. Even if we are awarded contracts, substantial delays
or cancellations of purchases could result from protests initiated by losing
bidders. In addition, government agencies are subject to budgetary processes
and expenditure constraints that could lead to decreased capital expenditures
in certain areas. Our failure to win any significant contract award or the
governments failure to approve a fiscal budget may have a material adverse
effect on our financial results as we increase our dependence on U.S.
government sales.

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 4% and 7% of revenues for the nine months ended September 30, 2003 and 2002, respectively. 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.

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.

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


24

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 may not be able to maintain
profitability.

We generated net income of $51.0 million for the
nine months ended September 30, 2003 on revenues of $288.5 million, and $22.5 million for the year ended December 31, 2002 on revenues of $300.7
million. As of September 30, 2003, we had retained earnings of $167.1 million. In the future, 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.

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 involves
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. For example, our largest reseller, Mitsui
accounted for 15% and 11% of our total net revenues for the three and nine months ended September 30, 2003. The failure of our resellers to sell our
products internationally would limit our ability to sustain


25

and grow our 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;
     
     and widespread medical epidemics, such as SARS.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


26

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 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.

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, JetCore, and Terathon
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.

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.


27

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. In May 2003, Lucent filed a lawsuit against
Foundry in the United States District Court for the District of Delaware alleging that certain of the Companys products infringe several of
Lucents patents, and seeking injunctive relief as well as unspecified damages. Lucent has also brought suit on the same patents (and one other
patent) against one of Foundrys competitors. This matter has been set for trial commencing December 7, 2004. The case is in the early stages of discovery. The parties have made initial disclosures
and exchanged written discovery and documents. Depositions have not yet commenced.  Foundry has analyzed the validity of Lucents claims and believes that Lucents suit is
without merit. Foundry is committed to vigorously defending itself against these claims. 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, some companies have
attempted 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 technology it does not require for its product portfolio.
However, any asserted license demand can require considerable effort to review and respond to. 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.

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 II, Item 1 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.

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 or delay 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, if the adoption of industry standards moves too quickly, 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


28

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 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 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;29

  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.

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.

On October 29, 2003, the Financial Accounting
Standards Board indicated that they will require stock-based employee compensation to be recorded as a charge to earnings effective for financial
statements for fiscal years beginning after December 15, 2004. The various methods for expensing such stock options are based on, among other things,
the 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, which could, in turn, hurt our ability to recruit
employees and retain existing employees. FASB is expected to propose rules for public comment in early 2004 and issue final rules on stock option
expensing in the second half of 2004. We will continue to monitor FASBs progress on the issuance of this standard.

Management beneficially owns approximately 11.7%
of our stock; their interests could conflict with other shareholders; 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 11.7% of our outstanding common stock as of September 30, 2003. 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


30

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 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.

Our operations are susceptible to outages due to
fire, floods, power loss, power shortages, telecommunications failures, break-ins and similar events. In addition, certain of our local and foreign
offices and contract manufacturers are located in areas susceptible to earthquakes and 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 3.    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 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 50 basis point decline or increase
in interest rates would reduce or increase the annualized earnings on our $455.7 million of cash equivalents and investments at September 30, 2003 by
approximately $1.6 million. This hypothetical analysis assumes an immediate parallel shift in the yield curve of plus or minus 50 basis points. Our
investment portfolio includes only securities with original maturities of less than two years 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 investments, we have concluded
that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required.

Currently, a majority of our sales and expenses are
denominated in U.S. dollars and as a result, we have experienced no 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.


31

Item 4.    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 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 as of the end of the period
covered by this Quarterly Report on Form 10-Q. The principal executive officer and principal financial officer have concluded, based on their review,
that Foundrys disclosure controls and procedures, including those of its consolidated subsidiaries, 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 during
the registrants most recent quarter that have materially affected, or are reasonably likely to materially affect, the registrants internal
controls over financial reporting.



32

PART II  OTHER INFORMATION

Item 1.    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 of its anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits
were subsequently consolidated by the District 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. The Company then brought the first of four successful motions to dismiss the complaint. However, while the
District Court granted each of the motions, it also provided plaintiffs leave to amend the complaint. On August 29, 2003 (after 4 prior dismissals with
leave to amend) the District Court granted the Company motion to dismiss the case with prejudice and without leave to amend and, on September 2, 2003,
entered judgment in favor of the Company, dismissing the plaintiffs Fifth Amended Complaint. On September 29, 2003 plaintiff filed a Notice of
Appeal of the judgment with the United States Court of Appeals for the Ninth Circuit, which
has directed plaintiff to file its appeal brief by January 15, 2004. The
Company believes that the Districts Court Judgment validates its conviction
that the lawsuit is without merit and will defend the District Courts judgment
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 was designated as In 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 operative amended
complaint names as defendants, the Company and three of its officers (the Foundry Defendants), including its Chief Executive Officer and
Chief Financial Officer; and investment banking firms that served as underwriters for the Companys initial public offering in September 1999. The
amended complaint alleged 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 registration statement for the IPO failed to disclose that (i) the underwriters agreed to allow certain customers to purchase
shares in the IPO in exchange for excess commissions to the paid to the underwriters, and (ii) the underwriters arranged for certain customers to
purchase additional shares in the aftermarket at predetermined prices. The amended complaint also appears to allege that false or misleading analyst
reports were issued. No specific damages are claimed. Similar allegations were made in lawsuits challenging over 300 other initial public offerings
conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants motions to
dismiss. 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 motion was denied as to claims under the Securities Act of 1933 in the case involving the Company. The same ruling was made in all but
10 of the other cases. The Court dismissed the claims under Section 10(b) of the Securities Exchange Act of 1934, against the Company and one of the
individual defendants and dismissed all of the Section 20(a) control person claims. The Court denied the motion to dismiss the Section
10(b) claims against the remaining Foundry individual defendants on the basis that those defendants allegedly sold the Companys stock following
the IPO, allegations found 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. The Company has decided to accept a settlement proposal presented to all issuer defendants. Under the
terms of this settlement, plaintiffs will dismiss and release all claims against the Foundry Defendants, in exchange for a contingent payment by the
insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the assignment or surrender of control of
certain claims the Company may have against the underwriters. The settlement, which is still being finalized, will require approval of the Court, which
cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement.

In March 2001, Nortel Networks Corp.
(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


33

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.

In May 2003, Lucent Technologies Inc.
(Lucent) filed a lawsuit against Foundry in the United States District Court for the District of Delaware alleging that certain of the
Companys products infringe several of Lucents patents, and seeking injunctive relief, as well as unspecified damages. Lucent has also
brought suit on the same patents (and one additional patent) against one of Foundrys competitors.
This matter has been set for trial commencing December 7, 2004. The case is in the early stages of discovery. The parties have made initial disclosures
and exchanged written discovery and documents. Depositions have not yet commenced. Foundry has analyzed the validity of
Lucents claims and believes that Lucents suit is without merit. Foundry is committed to vigorously defending itself against these
claims.

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. Irrespective of the merits of the Companys position, litigation is always an expensive and
uncertain proposition. In accordance with SFAS No. 5, Accounting for Contingencies (SFAS 5), the Company records a liability
when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any such provision would be
adjusted to reflect the impact of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a
particular case. To date, the Company has not recorded such provisions in accordance with SFAS 5. 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. However, the Company believes that
it has valid defenses with respect to the legal matters pending against it. Any unfavorable determination could have a material adverse effect on the
Companys financial position, results of operations, or cash flows.

Item 2.    Changes in Securities and Use of
Proceeds.

None

Item 3.    Defaults Upon Senior Securities.

None

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

None

Item 5.    Other Information.

None



34

Item 6.    Exhibits and Reports on Form 8-K.

(a)    Exhibits




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)31.1
     
     
     

     Rule
13a-14(a) Certification (CEO)31.2
     
     
     

     Rule
13a-14(a) Certification (CFO)32.1
     
     
     

     Section 1350 Certification (CEO)32.2
     
     
     

     Section 1350 Certification (CFO)
 (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 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).(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).35

(b)    Reports on Form
8-K.

The Registrant furnished a Current Report on Form
8-K dated July 23, 2003 to report the announcement of our financial results for the quarter ended June 30, 2003, pursuant to Item 12 of Form
8-K.



36

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Foundry Networks,
Inc. (Registrant)By:
     /s/ TIMOTHY D. HEFFNERTimothy D. HeffnerVice President, Finance and
Administration, Chief Financial Officer (Principal Financial and Accounting Officer)Date: November 14, 2003



37