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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    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.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0431154
(I.R.S. Employer
Identification No.)
 4980 Great America Parkway
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 207-1700
(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 þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer þ Accelerated filer o Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
 Yes o No þ




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##### 



FOUNDRY NETWORKS, INC.
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    211,386
    
    
    $
    291,511Short-term investments
    
    
    401,282
    
    
    
    280,868Accounts receivable, net of allowances for doubtful accounts of
$2,403 and $2,387 and sales returns of $1,317 and $1,784 at March
31, 2006 and December 31, 2005, respectively
    
    
    84,208
    
    
    
    78,351Inventories
    
    
    36,051
    
    
    
    32,309Deferred tax assets
    
    
    30,614
    
    
    
    29,268Prepaid expenses and other assets
    
    
    12,132
    
    
    
    7,824Total current assets
    
    
    775,673
    
    
    
    720,131Property and equipment, net
    
    
    11,283
    
    
    
    10,986Investments
    
    
    176,946
    
    
    
    173,988Deferred tax assets
    
    
    11,699
    
    
    
    10,351Other assets
    
    
    5,976
    
    
    
    6,468Total assets
    
    $
    981,577
    
    
    $
    921,924LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,392
    
    
    $
    22,307Accrued payroll and related expenses
    
    
    17,131
    
    
    
    23,410Income taxes payable
    
    
    6,887
    
    
    
    10,161Other accrued expenses
    
    
    13,581
    
    
    
    9,545Deferred support revenue
    
    
    46,268
    
    
    
    38,653Total current liabilities
    
    
    107,259
    
    
    
    104,076Deferred support revenue
    
    
    22,707
    
    
    
    21,828Total liabilities
    
    
    129,966
    
    
    
    125,904Commitments and contingencies (Note 3)Stockholders equity:Preferred stock, $0.0001 par value:Authorized
 5,000 shares at March 31, 2006 and December 31, 2005;
None issued and outstanding as of March 31, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $0.0001 par value:Authorized
 300,000 shares at March 31, 2006 and December 31, 2005:Issued and
outstanding  144,706 and 141,149 shares at March 31,
2006 and December 31, 2005, respectively
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    545,575
    
    
    
    500,856Accumulated other comprehensive income (loss)
    
    
    (38
    )
    
    
    44Retained earnings
    
    
    306,060
    
    
    
    295,106Total stockholders equity
    
    
    851,611
    
    
    
    796,020Total liabilities and stockholders equity
    
    $
    981,577
    
    
    $
    921,924
 
 (1)
    
    Derived from December 31, 2005 audited consolidated financial statements.  3




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005(in thousands, except pershare amounts)Net revenuesProduct
    
    $
    96,063
    
    
    $
    68,432Service
    
    
    17,938
    
    
    
    16,204Total net revenues
    
    
    114,001
    
    
    
    84,636Cost of revenues:Product
    
    
    42,186
    
    
    
    28,622Service
    
    
    2,287
    
    
    
    3,313Total cost of revenues*
    
    
    44,473
    
    
    
    31,935Gross profit
    
    
    69,528
    
    
    
    52,701Operating expenses:Research and development
    
    
    17,086
    
    
    
    12,427Sales and marketing
    
    
    30,803
    
    
    
    24,582General and administrative
    
    
    10,684
    
    
    
    5,163Total operating expenses*
    
    
    58,573
    
    
    
    42,172Income from operations
    
    
    10,955
    
    
    
    10,529Interest and other income, net
    
    
    6,947
    
    
    
    3,873Income before provision for income taxes
    
    
    17,902
    
    
    
    14,402Provision for income taxes
    
    
    6,948
    
    
    
    4,465Net income
    
    $
    10,954
    
    
    $
    9,937Basic net income per share
    
    $
    0.08
    
    
    $
    0.07Weighted average shares used in computing basic net income per share
    
    
    142,477
    
    
    
    137,908Diluted net income per share
    
    $
    0.07
    
    
    $
    0.07Weighted average shares used in computing diluted net income per share
    
    
    149,208
    
    
    
    141,758
 
 *
    
    Costs and expenses for the three months ended March 31, 2006 include SFAS 123R stock-based
compensation expense. See Note 1 to the Condensed Consolidated Financial Statements for
additional information.  4




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 Three Months Ended March 31,2006
    
    
    2005(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    10,954
    
    
    $
    9,937Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    2,617
    
    
    
    1,948Stock-based compensation expense
    
    
    9,649
    
    
    
    Inventory provisions
    
    
    2,733
    
    
    
    5,404Deferred tax assets
    
    
    (2,694
    )
    
    
    57Tax benefit from stock option exercises
    
    
    8,181
    
    
    
    1,081Excess tax benefits from stock-based compensation
    
    
    (4,235
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,857
    )
    
    
    25,240Inventories
    
    
    (6,279
    )
    
    
    (7,647
    )Prepaid expenses and other assets
    
    
    (748
    )
    
    
    (784
    )Accounts payable
    
    
    1,085
    
    
    
    (1,072
    )Accrued payroll and related expenses
    
    
    (6,279
    )
    
    
    (8,031
    )Income taxes payable
    
    
    (3,274
    )
    
    
    7,903Other accrued expenses
    
    
    4,036
    
    
    
    (499
    )Deferred support revenue
    
    
    8,494
    
    
    
    (2,176
    )Net cash provided by operating activities
    
    
    18,383
    
    
    
    31,361CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of available-for-sale investments
    
    
    46,050
    
    
    
    75,200Proceeds from maturities of available-for-sale investments
    
    
    38,238
    
    
    
    2,999Purchases of available-for-sale investments
    
    
    (19,050
    )
    
    
    (38,350
    )Purchases of held-to-maturity investments
    
    
    (188,610
    )
    
    
    (61,657
    )Purchases of property and equipment, net
    
    
    (2,456
    )
    
    
    (1,325
    )Net cash used in investing activities
    
    
    (125,828
    )
    
    
    (23,133
    )CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefits from stock-based compensation
    
    
    4,235
    
    
    
    Proceeds from issuances of common stock
    
    
    23,167
    
    
    
    8,919Net cash provided by financing activities
    
    
    27,402
    
    
    
    8,919INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (80,043
    )
    
    
    17,147Effect of exchange rate changes on cash
    
    
    (82
    )
    
    
    130CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    291,511
    
    
    
    112,274CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    211,386
    
    
    $
    129,551SUPPLEMENTAL CASH FLOW INFORMATION:Cash (paid for) refund from income taxes, net
    
    $
    (4,740
    )
    
    $
    4,919
  5




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FOUNDRY NETWORKS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Information for the three months ended March 31, 2006 and 2005 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Principles of Consolidation
  Reclassifications
  Use of Estimates
  Cash Equivalents and Investments
    6




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March 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    84,462
    
    
    $
    
    
    
    $
    
    
    
    $
    84,462Government-sponsored enterprise securities
    
    
    86,162
    
    
    
    9
    
    
    
    (16
    )
    
    
    86,155Available-for-sale:Auction rate municipal bonds
    
    
    96,875
    
    
    
    
    
    
    
    
    
    
    
    96,875Held-to-maturity:Municipal bonds
    
    
    23,893
    
    
    
    
    
    
    
    (76
    )
    
    
    23,817Government-sponsored enterprise securities
    
    
    457,460
    
    
    
    3
    
    
    
    (2,770
    )
    
    
    454,693$
    748,852
    
    
    $
    12
    
    
    $
    (2,862
    )
    
    $
    746,002Cash equivalents
    
    $
    170,624
    
    
    $
    9
    
    
    $
    (16
    )
    
    $
    170,617Short-term investments
    
    
    401,282
    
    
    
    3
    
    
    
    (1,482
    )
    
    
    399,803Long-term investments
    
    
    176,946
    
    
    
    
    
    
    
    (1,364
    )
    
    
    175,582$
    748,852
    
    
    $
    12
    
    
    $
    (2,862
    )
    
    $
    746,002
 December 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    125,441
    
    
    $
    
    
    
    $
    
    
    
    $
    125,441Government-sponsored enterprise securities
    
    
    102,912
    
    
    
    3
    
    
    
    (61
    )
    
    
    102,854Available-for-sale:Auction rate municipal bonds
    
    
    84,575
    
    
    
    
    
    
    
    
    
    
    
    84,575Held-to-maturity:Municipal bonds
    
    
    22,974
    
    
    
    
    
    
    
    (86
    )
    
    
    22,888Corporate bonds
    
    
    1,511
    
    
    
    
    
    
    
    (9
    )
    
    
    1,502Government-sponsored enterprise securities
    
    
    345,796
    
    
    
    
    
    
    
    (2,619
    )
    
    
    343,177$
    683,209
    
    
    $
    3
    
    
    $
    (2,775
    )
    
    $
    680,437Cash equivalents
    
    $
    228,353
    
    
    $
    3
    
    
    $
    (61
    )
    
    $
    228,295Short-term investments
    
    
    280,868
    
    
    
    
    
    
    
    (1,360
    )
    
    
    279,508Long-term investments
    
    
    173,988
    
    
    
    
    
    
    
    (1,354
    )
    
    
    172,634$
    683,209
    
    
    $
    3
    
    
    $
    (2,775
    )
    
    $
    680,437
 Municipal and corporate bonds.
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Government-sponsored enterprise securities (GSEs).
 The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments
 Loss Less Than 12 months
    
    
    Loss Greater Than 12 months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal bonds
    
    $
    16,047
    
    
    $
    (38
    )
    
    $
    8,154
    
    
    $
    (38
    )
    
    $
    24,201
    
    
    $
    (76
    )Government-sponsored
enterprise
securities
    
    
    331,983
    
    
    
    (1,666
    )
    
    
    143,856
    
    
    
    (1,120
    )
    
    
    475,839
    
    
    
    (2,786
    )$
    348,030
    
    
    $
    (1,704
    )
    
    $
    152,010
    
    
    $
    (1,158
    )
    
    $
    500,040
    
    
    $
    (2,862
    )
  Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005Purchased parts
    
    $
    8,911
    
    
    $
    8,008Work-in-process
    
    
    12,314
    
    
    
    11,475Finished goods
    
    
    14,826
    
    
    
    12,826$
    36,051
    
    
    $
    32,309
  Concentrations
   8




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Revenue Recognition
 General.
 Revenue Arrangements
with Multiple Deliverables
 Product.
  Services.
 Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts.
 Segment and Geographic Information
  9




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Three MonthsEnded March 31,2006
    
    
    2005Americas
    
    58%


    
    

    64%EMEA
    
    19%


    
    

    17%Japan
    
    15%


    
    

    13%Asia Pacific
    
    8%


    
    

    6%
   Computation of Per Share Amounts
  Three Months EndedMarch 31,2006
    
    
    2005(In thousands, except pershare data)Net income
    
    $
    10,954
    
    
    $
    9,937Basic:Weighted average shares outstanding
    
    
    142,477
    
    
    
    137,908Basic EPS
    
    $
    0.08
    
    
    $
    0.07Diluted:Weighted average shares outstanding
    
    
    142,477
    
    
    
    137,908Add: Weighted average dilutive potential shares
    
    
    6,731
    
    
    
    3,850Weighted average shares used in computing diluted EPS
    
    
    149,208
    
    
    
    141,758Diluted EPS
    
    $
    0.07
    
    
    $
    0.07
 Stock-Based Compensation
 Share-Based Payment
 10




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Accounting for Stock Issued to Employees
   Stock Option Plans.
 Employee Stock Purchase Plan.
 Restricted Stock.
  WeightedAverage
    
    RemainingOptions
        
    Exercise
    
    Contractual
    
    AggregateOutstanding
    
    
    Price
    
    Life (years)
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Balance, December 31, 2005
    
    
    31,788
    
    

    $13.75Granted
    
    
    2,220
    
    
    $15.21Exercised
    
    
    (2,656
    )
    
    $  8.15Forfeited/expired
    
    
    (277
    )
    
    $23.04Balance, March 31, 2006
    
    
    31,075
    
    
    $14.25
    
    
    6.18
    
    

    $202,093Vested and expected to vest at March 31, 2006
    
    
    29,873
    
    
    $14.32
    
    
    
    
    

    $195,387Exercisable
    
    
    20,956
    
    
    $15.45
    
    
    6.36
    
    

    $137,509
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Three MonthsEnded
    
    
    % ofMarch 31, 2006
    
    
    Revenue(in thousands)Cost of product revenue
    
    $
    263
    
    
    
    Cost of service revenue
    
    
    331
    
    
    
    Research and development
    
    
    2,983
    
    
    
    3
    %Sales and marketing
    
    
    4,187
    
    
    
    4
    %General and administrative
    
    
    1,885
    
    
    
    2
    %Stock-based compensation expense before income taxes
    
    
    9,649
    
    
    
    9
    %Income tax benefit
    
    
    (3,190
    )
    
    
    (3
    )%Total stock-based compensation expense after income taxes
    
    $
    6,459
    
    
    
    6
    %
     Determining Fair Value Under SFAS 123R
 Valuation and amortization method.
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Expected Term. .
 Expected Volatility-
 Expected Dividend
 Risk-Free Interest Rate-
 Estimated Forfeitures-
  Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    
    4.4
    %
    
    
    4.7
    %Expected term (in years)
    
    
    3.3
    
    
    
    1.3Dividend yield
    
    
    
    
    
    
    Volatility of common stock
    
    
    46
    %
    
    
    39
    %Estimated annual forfeitures
    
    
    11
    %
    
    
    Weighted-average fair value
    
    
    $5.74
    
    
    
    $5.03
 Pro Forma Information under SFAS 123 for Periods Prior to January 1, 2006
 Accounting for Stock-Based Compensation
  Three MonthsEnded March31, 2005Net income as reported
    
    $
    9,937Less: Total stock-based compensation expense determined
under fair value method for all awards, net of related tax
effect
    
    
    (10,009
    )Pro forma net loss
    
    $
    (72
    )Basic net income per share:As reported
    
    $
    0.07Pro forma
    
    $
    0.00Diluted net income per share:As reported
    
    $
    0.07Pro forma
    
    $
    0.00
 13




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Stock Option Plan
    
    Purchase PlanAverage risk free interest rate
    
    
    3.57
    %
    
    
    2.37
    %Average expected life of option
    
    3.3 years
    
    
    1.3 yearsDividend yield
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    66
    %
    
    
    65
    %Weighted-average fair value
    
    $
    4.87
    
    
    $
    4.33
 Recent Accounting Pronouncements
  2. COMPREHENSIVE INCOME OR LOSS
  3. COMMITMENTS AND CONTINGENCIES
 Guarantees and Product Warranties
 Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
   Balance, December 31, 2005
    
    $
    1,511Liabilities accrued for warranties issued during the period
    
    
    306Warranty claims settled during the period
    
    
    (250
    )Changes in liabilities for pre-existing warranties during the period, including changes in estimates
    
    
    (40
    )Balance, March 31, 2006
    
    $
    1,527
  14




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Deferred support revenue at December 31, 2005
    
    $
    60,481New support arrangements
    
    
    25,879Recognition of support revenue
    
    
    (17,385
    )Ending balance at March 31, 2006
    
    $
    68,975
  Purchase Commitments with Suppliers and Third-Party Manufacturers
  Lease Commitments
  Litigation
 In re
Foundry Networks, Inc. Initial Public Offering Securities Litigation, related to In re Initial Public Offering Securities Litigation,
  15




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##### Table of Contents



4. INCOME TAXES
    
 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 condensed consolidated 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. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors,
including, but not limited to, those discussed in the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations-Risk Factors That May Affect Future
Results and the Market Price of Our 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.
We undertake no obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the risk factors described in this
document as well as in other documents we file from time to time with the SEC. All public reports
filed by us with the SEC are available free of charge on our website at www.foundrynetworks.com or
from the SEC at www.sec.gov as soon as practicable after we electronically file such reports with
the SEC.
 17




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##### Table of Contents



Overview
  Critical Accounting Policies and Use of Estimates
  Stock-Based Compensation
  Income Taxes
   18




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##### Table of Contents



Results of Operations
 Net Revenue
   Three Months Ended March 31,2006
    
    
    2005% of
    
    
    
    
    
    
    % of$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    96,063
    
    
    
    84
    %
    
    $
    68,432
    
    
    
    81
    %
    
    $
    27,631
    
    
    
    40
    %Service
    
    
    17,938
    
    
    
    16
    %
    
    
    16,204
    
    
    
    19
    %
    
    
    1,734
    
    
    
    11
    %Total net revenue
    
    $
    114,001
    
    
    
    100
    %
    
    $
    84,636
    
    
    
    100
    %
    
    $
    29,365
    
    
    
    35
    %Chassis
    
    
    68,205
    
    
    
    71
    %
    
    $
    46,191
    
    
    
    67
    %
    
    
    22,014
    
    
    
    48
    %Stackable
    
    
    27,858
    
    
    
    29
    %
    
    
    22,241
    
    
    
    33
    %
    
    
    5,617
    
    
    
    25
    %Total net product revenue
    
    $
    96,063
    
    
    
    100
    %
    
    $
    68,432
    
    
    
    100
    %
    
    $
    27,631
    
    
    
    40
    %
  Three MonthsEnded March 31,2006
    
    2005Americas
    
    
    58
    %
    
    
    64
    %EMEA
    
    
    19
    %
    
    
    17
    %Japan
    
    
    15
    %
    
    
    13
    %Asia Pacific
    
    
    8
    %
    
    
    6
    %
   19




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##### Table of Contents



Gross Margins
  Three Months Ended March 31,2006
    
    
    2005Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin%
    
    
    $
    
    
    Margin %Gross margins:Product
    
    $
    53,877
    
    
    
    56
    %
    
    $
    39,810
    
    
    
    58%Service
    
    
    15,651
    
    
    
    87
    %
    
    
    12,891
    
    
    
    80%Total gross
margins
    
    $
    69,528
    
    
    
    61
    %
    
    $
    52,701
    
    
    
    62%
    Operating Expenses
  Three Months Ended March 31,2006
    
    
    2005% of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeResearch and Development
    
    $
    17,086
    
    
    
    15%
    
    
    $
    12,427
    
    
    
    15%
    
    
    
    37%Sales and Marketing
    
    
    30,803
    
    
    
    27%
    
    
    
    24,582
    
    
    
    29%
    
    
    
    25%General and Administrative
    
    
    10,684
    
    
    
    9%
    
    
    
    5,163
    
    
    
    6%
    
    
    
    107%
   20




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##### Table of Contents



Interest and other income, net
  Income Taxes
   Liquidity and Capital Resources
    21




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##### Table of Contents



Off-Balance Sheet Arrangements and Contractual Obligations
 Contractual Commitments
  Less Than
    
    
    1-3
    
    
    3-5
    
    
    More ThanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases of facilities
    
    $
    17,475
    
    
    $
    5,591
    
    
    $
    8,322
    
    
    $
    3,510
    
    
    $
    52Purchase commitments with contract manufacturers
    
    
    55,080
    
    
    
    55,080
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    72,555
    
    
    $
    60,671
    
    
    $
    8,322
    
    
    $
    3,510
    
    
    $
    52
   Off-Balance Sheet Arrangements
  Indemnifications
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures
 Limitations on Effectiveness of Controls.
 22




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##### Table of Contents



Evaluation of Disclosure Controls and Procedures.
 Changes
in Internal Control over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Intense competition in the market for networking solutions could prevent us from maintaining or
increasing revenue and sustaining profitability.
    We must continue to introduce new products with superior performance and features in a timely
manner in order to sustain and increase our revenue, and if we fail to predict and respond to
emerging technological trends and customers changing needs, our operating results may suffer.
 23




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##### Table of Contents



Although our customer base has increased, we still depend on large, recurring purchases from
certain significant customers, and a loss, cancellation or delay in purchases by these customers
could negatively affect our revenue.
   
    
    our reseller agreements generally do not require minimum purchases;
    
    our customers can stop purchasing and our resellers can stop marketing our products at any time; and
    
    our reseller agreements generally are not exclusive and are for one-year terms, with no
obligation of the resellers to renew the agreements.
  The United States government is a significant customer and has been one key to our financial
success. However, government demand is unpredictable and there is no guarantee of future contract
awards.
  24




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##### Table of Contents



We may be subject to litigation risks and intellectual property infringement claims that are
costly to defend and could limit our ability to use certain technologies in the future.
Additionally, we may be found to infringe on intellectual property rights of others.
    If we fail to protect our intellectual property, our business and ability to compete could suffer.
   Our ability to increase our revenue depends on expanding our direct sales operations and reseller
distribution channels and providing excellent customer support.
 25




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Our
reported results of operations are and may continue to be materially and adversely affected by
our adoption of SFAS 123R.
  Because our financial results are difficult to predict and may fluctuate significantly, we may not
meet quarterly financial expectations, which could cause our stock price to decline.
     26




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##### Table of Contents



Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue,
gross margins and expenses.
  Our gross margins and average selling prices of our products have decreased in the past and may
continue to decrease as a result of competitive pressures and other factors.
   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.
  27




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##### Table of Contents



Our operations in international markets involve inherent risks that we may not be able to control.
As a result, our business may be harmed if we are unable to successfully address these risks.
  
    
    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;
    
    infringement claims on foreign patents, copyrights, or trademark rights;
    
    difficulties in managing operations across disparate geographic areas;
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    adverse fluctuations in currency exchange rates;
    
    political instability and export restrictions;
    
    potential adverse tax consequences;
    
    unexpected changes in regulatory requirements;
    
    military conflict and terrorist activities; and
    
    natural disasters and widespread medical epidemics.
   28




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##### Table of Contents



We purchase several key components for our products from sole sources; if these components are not
available, our revenue may be harmed.
    Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in
our ability to fill 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 fail to meet our revenue expectations.
 29




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##### Table of Contents



If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
  If our internal controls over financial reporting do not comply with the requirements of the
Sarbanes-Oxley Act, our business and stock price could be adversely affected.
    The timing of the adoption of industry standards may negatively affect widespread market
acceptance of our products.
  30




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##### Table of Contents



If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and lost sales and be subject to product liability claims.
  
    
    negative customer reactions;
    
    product liability claims;
    
    negative publicity regarding us and our products;
    
    delays in or loss of market acceptance of our products;
    
    product returns;
    
    lost sales; and
    
    unexpected expenses to remedy defects or errors.
 We may incur liabilities that are not subject to maximum loss clauses.
  Our products may not continue to comply with the regulations governing their sale, which may harm
our business.
  We may engage in acquisitions that could result in the dilution of our stockholders, disrupt our
operations, cause us to incur substantial expenses and harm our business if we cannot successfully
integrate the acquired business, products, technologies or personnel.
 31




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##### Table of Contents




    
    difficulties in the assimilation of products, operations, personnel and technologies of the acquired companies;
    
    diversion of managements attention from other business concerns;
    
    disruptions to our operations, including potential difficulties in completing ongoing projects in a timely manner;
    
    risks of entering geographic and business markets in which we have no or limited prior experience; and
    
    potential loss of key employees of acquired organizations.
  Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  Anti-takeover provisions could make it more difficult for a third party to acquire us.
  Our operations may encounter disruptions as we relocate certain activities to another
facility.
  Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist
acts or other catastrophic events.
 32




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. 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
    
    Form of Stock Option Agreement under the registrants 1996 Stock Plan.*(1)10.3
    
    1999 Employee Stock Purchase Plan.*(2)10.4
    
    1999 Directors Stock Option Plan.*(3)10.5
    
    Form of Stock Option Agreement under the registrants 1999 Directors Stock Option Plan.*(3)10.6
    
    Form of Indemnification Agreement. (2)10.7
    
    OEM Purchase Agreement dated January 6, 1999 between Foundry Networks, Inc. and
Hewlett-Packard Company, Workgroup Networks Division. (4)10.8
    
    Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd. (4)10.9
    
    2000 Non-Executive Stock Option Plan.*(5)
 33




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##### Table of Contents



Number
    
    Description10.10
    
    Form of Stock Option Agreement under the registrants 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)10.12
    
    Confidential Settlement Agreement and Release, effective October 25, 2004, by and between
Nortel Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc., Bobby R. Johnson, Jr.,
H. Earl Ferguson, deceased, and Jeffrey Prince. (7)10.13
    
    Sublease agreement dated March 25, 2005, between Foundry Networks, Inc. and Hyperion Solutions
Corporation, for offices located at 4980 Great America Parkway, Santa Clara, CA 95054. (8)10.14
    
    Form of Restricted Stock Purchase Agreement under the registrants 1996 Stock Plan. *(1)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)
 
 *
    
    Indicates management contract or compensatory plan or arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock Option Agreement incorporated
herein by reference to the exhibit filed with 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).(7)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K filed on March 11,
2005 (Commission File No. 000-26689).(8)
    
    Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the
quarter ended March 31, 2005 (Commission File No. 000-26689). 34




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##### Table of Contents



SIGNATURES
  Foundry Networks, Inc.
(Registrant)By:
    
    /s/ Timothy D. HeffnerTimothy D. HeffnerVice President, Finance andAdministration, Chief Financial Officer(Principal Financial and Accounting Officer)
  35




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##### Table of Contents



Exhibit Index
 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
    
    Form of Stock Option Agreement under the registrants 1996 Stock Plan.*(1)10.3
    
    1999 Employee Stock Purchase Plan.*(2)10.4
    
    1999 Directors Stock Option Plan.*(3)10.5
    
    Form of Stock Option Agreement under the registrants 1999 Directors Stock Option Plan.*(3)10.6
    
    Form of Indemnification Agreement. (2)10.7
    
    OEM Purchase Agreement dated January 6, 1999 between Foundry Networks, Inc. and
Hewlett-Packard Company, Workgroup Networks Division. (4)10.8
    
    Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd. (4)10.9
    
    2000 Non-Executive Stock Option Plan.*(5)10.10
    
    Form of Stock Option Agreement under the registrants 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)10.12
    
    Confidential Settlement Agreement and Release, effective October 25, 2004, by and between
Nortel Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc., Bobby R. Johnson, Jr.,
H. Earl Ferguson, deceased, and Jeffrey Prince. (7)10.13
    
    Sublease agreement dated March 25, 2005, between Foundry Networks, Inc. and Hyperion Solutions
Corporation, for offices located at 4980 Great America Parkway, Santa Clara, CA 95054. (8)10.14
    
    Form of Restricted Stock Purchase Agreement under the registrants 1996 Stock Plan. *(1)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)
 
 *
    
    Indicates management contract or compensatory plan or arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock Option Agreement incorporated
herein by reference to the exhibit filed with 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).




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##### Table of Contents



(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).(7)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K filed on March 11,
2005 (Commission File No. 000-26689).(8)
    
    Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the
quarter ended March 31, 2005 (Commission File No. 000-26689).