##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 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
    
    77-0431154(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification 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 þ No o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
 Yes þ No o




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##### Table of Contents



FOUNDRY
NETWORKS, INC.

TABLE OF CONTENTS
 PAGEPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Risk Factors That May Affect Future Results and the Market Price of Our Stock
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3.
    
    Defaults Upon Senior Securities
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    35SIGNATURES
    
    
    37EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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##### Table of Contents



FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share amounts)
 June 30,
    
    December 31,2005
    
    2004(unaudited)
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    268,977
    
    
    $
    112,274Short-term investments
    
    
    244,316
    
    
    
    331,202Accounts receivable, net of allowances for doubtful accounts of
$3,544 and $3,117 and sales returns of $1,700 and $1,627 at June
30, 2005 and December 31, 2004, respectively
    
    
    59,180
    
    
    
    91,502Inventories
    
    
    37,091
    
    
    
    38,743Deferred tax assets
    
    
    25,746
    
    
    
    25,799Prepaid expenses and other assets
    
    
    6,156
    
    
    
    6,865Total current assets
    
    
    641,466
    
    
    
    606,385Property and equipment, net
    
    
    8,036
    
    
    
    8,852Investments
    
    
    170,873
    
    
    
    173,965Deferred tax assets
    
    
    16,479
    
    
    
    16,479Other assets
    
    
    5,347
    
    
    
    5,511Total assets
    
    $
    842,201
    
    
    $
    811,192LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,245
    
    
    $
    18,238Accrued payroll and related expenses
    
    
    18,261
    
    
    
    21,682Income taxes payable
    
    
    7,742
    
    
    
    Other accrued expenses
    
    
    8,807
    
    
    
    8,700Deferred support revenue
    
    
    33,484
    
    
    
    38,621Total current liabilities
    
    
    86,539
    
    
    
    87,241Deferred support revenue
    
    
    18,036
    
    
    
    17,613Total liabilities
    
    
    104,575
    
    
    
    104,854Commitments and contingencies (Note 3)Stockholders equity:Preferred stock, $0.0001 par value per share:Authorized  5,000 shares at June 30, 2005 and December 31, 2004;
None issued and outstanding as of June 30, 2005 and December 31,
2004
    
    
    
    
    
    
    Common stock, $0.0001 par value per share:Authorized  300,000 shares at June 30, 2005 and December 31, 2004:Issued and outstanding  138,782 and 137,226 shares at June 30,
2005 and December 31, 2004, respectively
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    479,082
    
    
    
    467,682Accumulated other comprehensive loss
    
    
    (53
    )
    
    
    (451
    )Retained earnings
    
    
    258,583
    
    
    
    239,093Total stockholders equity
    
    
    737,626
    
    
    
    706,338Total liabilities and stockholders equity
    
    $
    842,201
    
    
    $
    811,192
 
 (1)
    
    Derived from December 31, 2004 audited consolidated financial statements.  3




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net revenue:Product
    
    $
    80,748
    
    
    $
    83,489
    
    
    $
    149,180
    
    
    $
    172,789Service
    
    
    15,840
    
    
    
    14,338
    
    
    
    32,044
    
    
    
    29,054Total net revenue
    
    
    96,588
    
    
    
    97,827
    
    
    
    181,224
    
    
    
    201,843Cost of revenue:Product
    
    
    34,462
    
    
    
    30,442
    
    
    
    63,084
    
    
    
    62,436Service
    
    
    3,335
    
    
    
    3,566
    
    
    
    6,648
    
    
    
    6,692Total cost of revenue
    
    
    37,797
    
    
    
    34,008
    
    
    
    69,732
    
    
    
    69,128Gross profit
    
    
    58,791
    
    
    
    63,819
    
    
    
    111,492
    
    
    
    132,715Operating expenses:Research and development
    
    
    14,241
    
    
    
    10,003
    
    
    
    26,668
    
    
    
    20,015Sales and marketing
    
    
    28,338
    
    
    
    25,094
    
    
    
    52,920
    
    
    
    48,262General and administrative
    
    
    5,321
    
    
    
    6,268
    
    
    
    10,484
    
    
    
    11,693Total operating expenses
    
    
    47,900
    
    
    
    41,365
    
    
    
    90,072
    
    
    
    79,970Income from operations
    
    
    10,891
    
    
    
    22,454
    
    
    
    21,420
    
    
    
    52,745Interest and other income, net
    
    
    3,797
    
    
    
    1,720
    
    
    
    7,670
    
    
    
    3,527Income before provision for income taxes
    
    
    14,688
    
    
    
    24,174
    
    
    
    29,090
    
    
    
    56,272Provision for income taxes
    
    
    5,135
    
    
    
    9,186
    
    
    
    9,600
    
    
    
    21,383Net income
    
    $
    9,553
    
    
    $
    14,988
    
    
    $
    19,490
    
    
    $
    34,889Basic net income per share
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.26Weighted average shares used in
computing basic net income per share
    
    
    138,627
    
    
    
    135,183
    
    
    
    138,269
    
    
    
    133,964Diluted net income per share
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.24Weighted average shares used in
computing diluted net income per share
    
    
    141,109
    
    
    
    141,475
    
    
    
    141,511
    
    
    
    142,624
  4




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 Six Months Ended June 30,2005
    
    2004(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    19,490
    
    
    $
    34,889Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    4,482
    
    
    
    3,490Provision for doubtful accounts
    
    
    454
    
    
    
    Inventory provisions
    
    
    9,067
    
    
    
    7,844Tax benefit from stock option exercises
    
    
    1,241
    
    
    
    19,860Changes in operating assets and liabilities:Accounts receivable
    
    
    31,868
    
    
    
    1,882Inventories
    
    
    (7,415
    )
    
    
    (18,220
    )Prepaid expenses and deferred taxes and other assets
    
    
    326
    
    
    
    (512
    )Accounts payable
    
    
    7
    
    
    
    9,386Accrued payroll and related expenses
    
    
    (3,421
    )
    
    
    (523
    )Other accrued expenses
    
    
    7,849
    
    
    
    2,315Deferred support revenue
    
    
    (4,714
    )
    
    
    6,111Net cash provided by operating activities
    
    
    59,234
    
    
    
    66,522CASH FLOWS FROM INVESTING ACTIVITIES:Maturities of short-term investments
    
    
    258,935
    
    
    
    223,971Purchases of short-term and long-term investments
    
    
    (168,957
    )
    
    
    (322,151
    )Purchases of property and equipment, net
    
    
    (3,066
    )
    
    
    (5,949
    )Net cash provided by (used in) investing activities
    
    
    86,912
    
    
    
    (104,129
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of note receivable
    
    
    
    
    
    
    480Proceeds from issuances of common stock
    
    
    10,159
    
    
    
    27,169Net cash provided by financing activities
    
    
    10,159
    
    
    
    27,649INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    156,305
    
    
    
    (9,958
    )Effect of
foreign exchange rate changes on cash
    
    
    398
    
    
    
    (146
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    112,274
    
    
    
    161,718CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    268,977
    
    
    $
    151,614SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net
    
    $
    (202
    )
    
    $
    (4,143
    )
  5




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FOUNDRY NETWORKS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Information for the three and six months ended June 30, 2005 and 2004 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Principles of Consolidation and Foreign Currency Translation
  Reclassifications
  Use of Estimates
  Cash Equivalents and Investments
  6




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June 30, 2005Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueMoney market funds
    
    $
    82,199
    
    
    $
    
    
    
    $
    
    
    
    $
    82,199Municipal bonds
    
    
    113,051
    
    
    
    10
    
    
    
    (162
    )
    
    
    112,899Corporate bonds
    
    
    6,142
    
    
    
    
    
    
    
    (81
    )
    
    
    6,061Government-sponsored enterprise securities
    
    
    432,681
    
    
    
    18
    
    
    
    (1,955
    )
    
    
    430,744$
    634,073
    
    
    $
    28
    
    
    $
    (2,198
    )
    
    $
    631,903Cash equivalents
    
    $
    218,884
    
    
    $
    1
    
    
    $
    (20
    )
    
    $
    218,865Short-term investments
    
    
    244,316
    
    
    
    6
    
    
    
    (1,484
    )
    
    
    242,838Long-term investments
    
    
    170,873
    
    
    
    21
    
    
    
    (694
    )
    
    
    170,200$
    634,073
    
    
    $
    28
    
    
    $
    (2,198
    )
    
    $
    631,903
 December 31, 2004Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueMoney market funds
    
    $
    72,203
    
    
    $
    
    
    
    $
    
    
    
    $
    72,203Municipal bonds
    
    
    288,232
    
    
    
    5
    
    
    
    (157
    )
    
    
    288,080Corporate bonds
    
    
    11,941
    
    
    
    
    
    
    
    (58
    )
    
    
    11,883Government-sponsored enterprise securities
    
    
    204,994
    
    
    
    2
    
    
    
    (1,443
    )
    
    
    203,553$
    577,370
    
    
    $
    7
    
    
    $
    (1,658
    )
    
    $
    575,719Cash equivalents
    
    $
    72,203
    
    
    $
    
    
    
    $
    
    
    
    $
    72,203Short-term investments
    
    
    331,202
    
    
    
    3
    
    
    
    (588
    )
    
    
    330,617Long-term investments
    
    
    173,965
    
    
    
    4
    
    
    
    (1,070
    )
    
    
    172,899$
    577,370
    
    
    $
    7
    
    
    $
    (1,658
    )
    
    $
    575,719
 Municipal and corporate bonds.
 Government-sponsored enterprise securities (GSEs).
 7




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Inventories
  June 30,
    
    December 31,2005
    
    2004Purchased parts
    
    $
    10,059
    
    
    $
    11,713Work-in-process
    
    
    14,572
    
    
    
    19,795Finished goods
    
    
    12,460
    
    
    
    7,235$
    37,091
    
    
    $
    38,743
  Concentrations
   Revenue Recognition
 General.
 8




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Product.
  Services.
   Segment and Geographic Information
   9




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Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Americas
    
    
    66
    %
    
    
    68
    %
    
    
    65
    %
    
    
    65
    %EMEA
    
    
    18
    %
    
    
    15
    %
    
    
    18
    %
    
    
    18
    %Japan
    
    
    8
    %
    
    
    11
    %
    
    
    10
    %
    
    
    10
    %Asia Pacific
    
    
    8
    %
    
    
    6
    %
    
    
    7
    %
    
    
    7
    %
   Computation of Per Share Amounts
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)Net income
    
    $
    9,553
    
    
    $
    14,988
    
    
    $
    19,490
    
    
    $
    34,889Basic:Weighted average shares outstanding
    
    
    138,627
    
    
    
    135,183
    
    
    
    138,269
    
    
    
    133,964Basic EPS
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.26Diluted:Weighted average shares outstanding
    
    
    138,627
    
    
    
    135,183
    
    
    
    138,269
    
    
    
    133,964Add: Weighted average dilutive potential shares
    
    
    2,482
    
    
    
    6,292
    
    
    
    3,242
    
    
    
    8,660Weighted average shares used in computing diluted EPS
    
    
    141,109
    
    
    
    141,475
    
    
    
    141,511
    
    
    
    142,624Diluted EPS
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.24
 10




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Stock-Based Compensation
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)Net income as reported
    
    $
    9,553
    
    
    $
    14,988
    
    
    $
    19,490
    
    
    $
    34,889Deduct: Total stock-based
compensation expense
determined under fair value
method for all awards, net
of related tax effect
    
    
    (8,901
    )
    
    
    (9,506
    )
    
    
    (18,910
    )
    
    
    (18,362
    )Pro forma net income
    
    $
    652
    
    
    $
    5,482
    
    
    $
    580
    
    
    $
    16,527Basic net income per share:As reported
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.26Pro forma
    
    $
    0.00
    
    
    $
    0.04
    
    
    $
    0.00
    
    
    $
    0.12Diluted net income per share:As reported
    
    $
    0.07
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.24Pro forma
    
    $
    0.00
    
    
    $
    0.04
    
    
    $
    0.00
    
    
    $
    0.12
 11




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Three Months
    
    Six MonthsStock Option Plan:
    
    Ended June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Average risk free interest rate
    
    
    3.62
    %
    
    
    3.45
    %
    
    
    3.61
    %
    
    
    2.91
    %Average expected life of option
    
    2.6
    years
    
    3.7
    years
    
    2.8
    years
    
    3.9
    yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    60
    %
    
    
    70
    %
    
    
    62
    %
    
    
    73
    %
 Three Months
    
    Six MonthsEmployee Stock Purchase Plan:
    
    Ended June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Average risk free interest rate
    
    

    2.59
    %
    
    
    2.67
    %
    
    
    2.37
    %
    
    
    1.96
    %Average expected life of option
    
    1.4
    years
    
    1.9
    years
    
    1.3
    years
    
    1.6
    yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    64
    %
    
    
    70
    %
    
    
    65
    %
    
    
    67
    %
 Recent Accounting Pronouncements
     12




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2. COMPREHENSIVE INCOME OR LOSS
  3. COMMITMENTS AND CONTINGENCIES
 Guarantees and Product Warranties
    Balance, December 31, 2004
    
    $
    1,498Liabilities accrued for warranties issued during the period
    
    
    405Warranty claims settled during the period
    
    
    (493
    )Expirations and changes in estimates
    
    
    141Balance, June 30, 2005
    
    $
    1,551
  Balance, December 31, 2004
    
    $
    56,234Additions to deferred support revenue
    
    
    26,587Recognition of support revenue
    
    
    (31,301
    )Balance, June 30, 2005
    
    $
    51,520
  13




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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,
  14




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15




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4. INCOME TAXES
    16




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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.
 Overview
  Critical Accounting Policies and Use of Estimates
  Results of Operations
 Net Revenue
  17




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Three Months Ended June 30,2005
    
    2004% of
    
    
    
    
    
    % of$
    
    Revenue
    
    $
    
    Revenue
    
    $ Change
    
    % ChangeNet revenue:Product
    
    $
    80,748
    
    
    
    84
    %
    
    $
    83,489
    
    
    
    85
    %
    
    $
    (2,741
    )
    
    
    (3.3
    %)Service
    
    
    15,840
    
    
    
    16
    %
    
    
    14,338
    
    
    
    15
    %
    
    
    1,502
    
    
    
    10.5
    %Total net revenue
    
    $
    96,588
    
    
    
    100
    %
    
    $
    97,827
    
    
    
    100
    %
    
    $
    (1,239
    )
    
    
    (1.3
    %)Chassis
    
    
    57,953
    
    
    
    60
    %
    
    
    74,349
    
    
    
    76
    %
    
    
    (16,396
    )
    
    
    (22.1
    %)Stackable
    
    
    38,635
    
    
    
    40
    %
    
    
    23,478
    
    
    
    24
    %
    
    
    15,157
    
    
    
    64.6
    %Total net revenue
    
    $
    96,588
    
    
    
    100
    %
    
    $
    97,827
    
    
    
    100
    %
    
    $
    (1,239
    )
    
    
    (1.3
    %)
 Six Months Ended June 30,2005
    
    2004% of
    
    
    
    
    
    % of$
    
    Revenue
    
    $
    
    Revenue
    
    $ Change
    
    % ChangeNet revenue:Product
    
    $
    149,180
    
    
    
    82
    %
    
    $
    172,789
    
    
    
    86
    %
    
    $
    (23,609
    )
    
    
    (13.7
    %)Service
    
    
    32,044
    
    
    
    18
    %
    
    
    29,054
    
    
    
    14
    %
    
    
    2,990
    
    
    
    10.3
    %Total net revenue
    
    $
    181,224
    
    
    
    100
    %
    
    $
    201,843
    
    
    
    100
    %
    
    $
    (20,619
    )
    
    
    (10.2
    %)Chassis
    
    
    112,359
    
    
    
    62
    %
    
    
    157,562
    
    
    
    78
    %
    
    
    (45,203
    )
    
    
    (28.7
    %)Stackable
    
    
    68,865
    
    
    
    38
    %
    
    
    44,281
    
    
    
    22
    %
    
    
    24,584
    
    
    
    55.5
    %Total net revenue
    
    $
    181,224
    
    
    
    100
    %
    
    $
    201,843
    
    
    
    100
    %
    
    $
    (20,619
    )
    
    
    (10.2
    %)
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Americas
    
    
    66
    %
    
    
    68
    %
    
    
    65
    %
    
    
    65
    %EMEA
    
    
    18
    %
    
    
    15
    %
    
    
    18
    %
    
    
    18
    %Japan
    
    
    8
    %
    
    
    11
    %
    
    
    10
    %
    
    
    10
    %Asia Pacific
    
    
    8
    %
    
    
    6
    %
    
    
    7
    %
    
    
    7
    %
   18




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##### Table of Contents



Gross Margins
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Gross
    
    
    
    
    
    Gross
    
    
    
    
    
    Gross
    
    
    
    
    
    Gross$
    
    Margin %
    
    $
    
    Margin %
    
    $
    
    Margin %
    
    $
    
    Margin %Gross margins:Product
    
    $
    46,286
    
    
    
    57
    %
    
    $
    53,047
    
    
    
    64
    %
    
    $
    86,096
    
    
    
    58
    %
    
    $
    110,353
    
    
    
    64
    %Service
    
    
    12,505
    
    
    
    79
    %
    
    
    10,772
    
    
    
    75
    %
    
    
    25,396
    
    
    
    79
    %
    
    
    22,362
    
    
    
    77
    %Total gross margins
    
    $
    58,791
    
    
    
    61
    %
    
    $
    63,819
    
    
    
    65
    %
    
    $
    111,492
    
    
    
    62
    %
    
    $
    132,715
    
    
    
    66
    %
    19




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##### Table of Contents



Operating Expenses
  Three Months Ended June 30,2005
    
    2004$
    
    % of
    
    $
    
    % of
    
    %Revenue
    
    
    
    
    
    Revenue
    
    ChangeResearch and Development
    
    $
    14,241
    
    
    
    15
    %
    
    $
    10,003
    
    
    
    10
    %
    
    
    42
    %Sales and Marketing
    
    
    28,338
    
    
    
    29
    %
    
    
    25,094
    
    
    
    26
    %
    
    
    13
    %General and Administrative
    
    
    5,321
    
    
    
    6
    %
    
    
    6,268
    
    
    
    6
    %
    
    
    (15
    %)
 Six Months Ended June 30,2005
    
    2004$
    
    % of
    
    $
    
    % of
    
    %Revenue
    
    
    
    
    
    Revenue
    
    ChangeResearch and Development
    
    $
    26,668
    
    
    
    15
    %
    
    $
    20,015
    
    
    
    10
    %
    
    
    33
    %Sales and Marketing
    
    
    52,920
    
    
    
    29
    %
    
    
    48,262
    
    
    
    24
    %
    
    
    10
    %General and Administrative
    
    
    10,484
    
    
    
    6
    %
    
    
    11,693
    
    
    
    6
    %
    
    
    (10
    %)
    Interest and other income, net
  20




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##### Table of Contents



Income Taxes
   Liquidity and Capital Resources
     Off-Balance Sheet Arrangements and Contractual Obligations
  21




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##### Table of Contents



Contractual Commitments
  Less Than
    
    1-3
    
    MoreTotal
    
    1 Year
    
    Years
    
    Than 3 YearsOperating leases- facilities
    
    $
    18,382
    
    
    $
    5,515
    
    
    $
    10,310
    
    
    $
    2,557Inventory purchase commitments
    
    
    33,732
    
    
    
    33,732
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    52,114
    
    
    $
    39,247
    
    
    $
    10,310
    
    
    $
    2,557
  Indemnifications
  Recent Accounting Pronouncements
    22




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##### Table of Contents



Risk Factors That May Affect Future Results and the Market Price of Our Stock
 Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue,
gross margins and expenses.
  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.
  23




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##### Table of Contents



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.
  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.
      24




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##### Table of Contents



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.
   25




---



##### Table of Contents



If we fail to protect our intellectual property, our business and ability to compete could
suffer.
   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.
    26




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##### Table of Contents



Our ability to increase our revenue depends on expanding our direct sales operations and
reseller distribution channels and continuing to provide excellent customer support.
   Our gross margins and average selling prices of our products have decreased 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;
    
    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, such as SARS.
   28




---



##### 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.
   29




---



##### Table of Contents



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.
  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.
  Recent legislation requires us to undertake an annual evaluation of our internal controls over
financial reporting that may identify internal control weaknesses requiring remediation, which
could harm our reputation.
  Beginning January 1, 2006, we will be required to record compensation expense for stock options.
As a result, our profitability will be reduced significantly.
  The timing of the adoption of industry standards may negatively affect widespread market
acceptance of our products.
  30




---



##### 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.
  31




---



##### Table of Contents



We may engage in acquisitions that could result in the dilution of our stockholders, disrupt our
operations, cause us to incur substantial expenses and harm our business if we cannot
successfully integrate the acquired business, products, technologies or personnel.
  
    
    difficulties in the assimilation of products, operations, personnel and technologies
of the acquired companies;
    
    diversion of managements attention from other business concerns;
    
    disruptions to our operations, including potential difficulties in completing ongoing
projects in a timely manner;
    
    risks of entering geographic and business markets in which we have no or limited prior experience; and
    
    potential loss of key employees of acquired organizations.
  Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  Anti-takeover provisions could make it more difficult for a third party to acquire us.
  32




---



##### Table of Contents



Our operations could be significantly hindered by the occurrence of a natural disaster,
terrorist acts or other catastrophic events.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures
 Limitations on Effectiveness of Controls.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
 33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 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.
  Name of Director Nominee
    
    In Favor
    
    Withheld
    
    AbstainBobby
R. Johnson, Jr.

Andrew K. Ludwick

Alfred J. Amoroso

C. Nicholas Keating, Jr.

J. Steven Young

Alan L. Earhart
    
    121,517,240
117,563,604
122,278,330
117,533,680
117,541,053
122,274,960
    
    





    
    2,760,135
6,713,771
1,999,045
6,743,695
6,736,322
2,002,415
  
 Item 5. Other Information.
  34




---



##### Table of Contents



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)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)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. 35




---



##### Table of Contents



(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). 36




---



##### Table of Contents



SIGNATURES
  Foundry Networks, Inc.
(Registrant)By:
    /s/ TIMOTHY D. HEFFNERTimothy D. HeffnerVice President, Finance and
Administration, Chief Financial Officer
(Principal Financial and Accounting Officer)  37




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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.* (1)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)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.




---



##### Table of Contents



(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).(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).