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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 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934For 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.)
 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 As of May 6, 2005, there
were 138,592,646 shares of the registrants common stock, par value $0.0001 per
share, outstanding.




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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, 2005 and December 31, 2004
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    33Item 4.
    
    Controls and Procedures
    
    33PART II
    
    OTHER INFORMATION
    
    34Item 1.
    
    Legal Proceedings
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    35Item 5.
    
    Other Information
    
    35Item 6.
    
    Exhibits
    
    35SIGNATURES
    
    
    

    38EXHIBIT 10.13EXHIBIT 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 31,2005
    
    
    2004(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    129,551
    
    
    $
    112,274Short-term investments
    
    
    354,840
    
    
    
    331,202Accounts receivable, net of allowances for doubtful accounts of
$3,559 and $3,117 and sales returns of $1,700 and $1,627 at March
31, 2005 and December 31, 2004, respectively
    
    
    66,262
    
    
    
    91,502Inventories
    
    
    40,986
    
    
    
    38,743Deferred tax assets
    
    
    25,742
    
    
    
    25,799Prepaid expenses and other assets
    
    
    7,295
    
    
    
    6,865Total current assets
    
    
    624,676
    
    
    
    606,385Property and equipment, net
    
    
    8,229
    
    
    
    8,852Investments
    
    
    172,135
    
    
    
    173,965Deferred tax assets
    
    
    16,479
    
    
    
    16,479Other assets
    
    
    5,375
    
    
    
    5,511Total assets
    
    $
    826,894
    
    
    $
    811,192LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    17,166
    
    
    $
    18,238Accrued payroll and related expenses
    
    
    13,651
    
    
    
    21,682Income taxes payable
    
    
    7,903
    
    
    
    Other accrued expenses
    
    
    8,201
    
    
    
    8,700Deferred support revenue
    
    
    36,620
    
    
    
    38,621Total current liabilities
    
    
    83,541
    
    
    
    87,241Deferred support revenue
    
    
    17,438
    
    
    
    17,613Total liabilities
    
    
    100,979
    
    
    
    104,854Commitments and contingencies (Note 3)Stockholders equity:Preferred stock, $0.0001 par value per share:Authorized  5,000 shares at March 31, 2005 and December 31, 2004;
None issued and outstanding as of March 31, 2005 and December 31,
2004
    
    
    
    
    
    
    Common stock, $0.0001 par value per share:Authorized  300,000 shares at March 31, 2005 and December 31, 2004:Issued and outstanding  138,436 and 137,226 shares at March 31,
2005 and December 31, 2004, respectively
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    477,192
    
    
    
    467,682Accumulated other comprehensive loss
    
    
    (321
    )
    
    
    (451
    )Retained earnings
    
    
    249,030
    
    
    
    239,093Total stockholders equity
    
    
    725,915
    
    
    
    706,338Total liabilities and stockholders equity
    
    $
    826,894
    
    
    $
    811,192
   (1)
    Derived from December 31, 2004 audited consolidated financial statements. 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 OPERATIONS (unaudited)
 Three Months EndedMarch 31,2005
    
    
    2004(in thousands, except per share amounts)Net revenues:Product
    
    $
    68,432
    
    
    $
    89,300Service
    
    
    16,204
    
    
    
    14,716Total net revenues
    
    
    84,636
    
    
    
    104,016Cost of revenues:Product
    
    
    28,622
    
    
    
    31,994Service
    
    
    3,313
    
    
    
    3,126Total cost of revenues
    
    
    31,935
    
    
    
    35,120Gross profit
    
    
    52,701
    
    
    
    68,896Operating expenses:Research and development
    
    
    12,427
    
    
    
    10,012Sales and marketing
    
    
    24,582
    
    
    
    23,168General and administrative
    
    
    5,163
    
    
    
    5,425Total operating expenses
    
    
    42,172
    
    
    
    38,605Income from operations
    
    
    10,529
    
    
    
    30,291Interest and other income, net
    
    
    3,873
    
    
    
    1,807Income before provision for income taxes
    
    
    14,402
    
    
    
    32,098Provision for income taxes
    
    
    4,465
    
    
    
    12,197Net income
    
    $
    9,937
    
    
    $
    19,901Basic net income per share
    
    $
    0.07
    
    
    $
    0.15Weighted average shares used in
computing basic net income per share
    
    
    137,908
    
    
    
    133,311Diluted net income per share
    
    $
    0.07
    
    
    $
    0.14Weighted average shares used in
computing diluted net income per share
    
    
    141,758
    
    
    
    143,846
 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)
 Three Months Ended March 31,2005
    
    
    2004(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    9,937
    
    
    $
    19,901Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,948
    
    
    
    1,501Inventory provisions
    
    
    5,404
    
    
    
    4,626Deferred tax assets
    
    
    57
    
    
    
    (1,671
    )Tax benefit from stock option exercises
    
    
    1,081
    
    
    
    17,296Changes in operating assets and liabilities:Accounts receivable
    
    
    25,240
    
    
    
    3,719Inventories
    
    
    (7,647
    )
    
    
    (18,142
    )Prepaid expenses and other assets
    
    
    (294
    )
    
    
    (963
    )Accounts payable
    
    
    (1,072
    )
    
    
    8,297Accrued payroll and related expenses
    
    
    (8,031
    )
    
    
    (4,430
    )Income taxes payable
    
    
    7,903
    
    
    
    (62
    )Other accrued expenses
    
    
    (499
    )
    
    
    461Deferred support revenue
    
    
    (2,176
    )
    
    
    6,298Net cash provided by operating activities
    
    
    31,851
    
    
    
    36,831CASH FLOWS FROM INVESTING ACTIVITIES:Maturities of short-term investments
    
    
    59,019
    
    
    
    157,709Purchases of short-term and long-term investments
    
    
    (80,827
    )
    
    
    (179,169
    )Purchases of property and equipment, net
    
    
    (1,325
    )
    
    
    (4,360
    )Net cash used in investing activities
    
    
    (23,133
    )
    
    
    (25,820
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuances of common stock
    
    
    8,429
    
    
    
    22,432Net cash provided by financing activities
    
    
    8,429
    
    
    
    22,432INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    17,147
    
    
    
    33,443Effect of exchange rate changes on cash
    
    
    130
    
    
    
    30CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    112,274
    
    
    
    161,718CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    129,551
    
    
    $
    195,191SUPPLEMENTAL CASH FLOW INFORMATION:Cash refund from income taxes, net
    
    $
    4,919
    
    
    $
    3,444
 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 months ended March 31, 2005 and 2004 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited condensed consolidated financial statements included herein have been prepared
by Foundry Networks, Inc. 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 we). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S generally accepted
accounting principles 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 for the year ended December 31, 2004. The unaudited condensed consolidated financial statements included herein reflect all
adjustments, including normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of consolidated financial position, results of operations and
cash flows for the periods presented. The consolidated results of operations for the three months
ended March 31, 2005 are not necessarily indicative of the results that may be expected for future
quarters or for the year ending December 31, 2005. Principles of Consolidation and Foreign Currency Translation Our condensed consolidated financial statements reflect the operations of Foundry and our
wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The
functional currency of our foreign subsidiaries is deemed to be the local countrys currency.
Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate
in effect at the applicable balance sheet date, and revenues and expenses are translated into U.S.
dollars using average exchange rates prevailing during that period. Translation adjustments have
not been material to date and are included as a component of accumulated other comprehensive income
or loss within stockholders equity. Reclassifications Certain prior period amounts on the condensed consolidated statements of cash flows have been
reclassified to conform to the March 31, 2005 presentation. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates, judgments, and assumptions that affect the
amounts reported in the financial statements and accompanying footnotes. Actual results could
differ from those estimates. Estimates, judgments and assumptions are used in the recognition of
revenue, accounting for allowances for doubtful accounts and sales returns, inventory provisions,
product warranty liability, income taxes, deferred tax assets, contingencies and similar items.
Estimates, judgments and assumptions are reviewed periodically by management and the effects of
revisions are reflected in the condensed consolidated financial statements in the period in which
they are made. Cash Equivalents and Investments 6




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We consider all investments with original maturities of 90 days or less to be cash
equivalents. Cash and cash equivalents consist of 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. Investments with original maturities greater than 90 days that mature less than one year from
the consolidated balance sheet date are classified as short-term investments. Investments with
maturities greater than one year from the consolidated balance sheet date are classified as
long-term investments. All of our investments are stated at amortized cost and classified as
held-to-maturity. We monitor our investments for impairment on a quarterly basis and determine whether a decline
in fair value is other-than-temporary by considering factors such as current economic and market
conditions, the credit rating of the securitys issuer, the length of time an investments fair
value has been below our carrying value, and our ability and intent to hold investments to
maturity. If an investments decline in fair value is caused by factors other than changes in
interest rates and is deemed to be other-than-temporary, we would reduce its carrying value to its
estimated fair value, as determined based on quoted market prices or liquidation values. Declines
in value judged to be other-than-temporary, if any, are recorded in operations as incurred. Under
the Investment Company Act of 1940 (the 1940 Act), a company meeting
the definition of an investment company is subject to various legal
requirements on its operations. A company may become subject to the
1940 Act if, among other reasons, it owns investment securities with
a value exceeding 40 percent of the value of its total assets
(excluding government securities and cash items) on an unconsolidated
basis, unless a particular exemption or safe harbor applies. From
time to time, we have invested in municipal bonds. At times, the total
value of the investment securities we hold may, and recently has,
exceeded 40 percent of total assets. However, we are, and intend to
remain, an operating company not in the business of investing,
reinvesting, owning, holding or trading in securities. Our efforts
are focused almost exclusively on networking equipment products and
we intend to continue to conduct business as an operating company,
and to take such actions as are necessary to ensure we are not, and
are not regulated as, an investment company. Cash equivalents and investments consist of the following (in thousands): March 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    92,751
    
    
    $
    
    
    
    $
    
    
    
    $
    92,751Municipal bonds
    
    
    290,248
    
    
    
    5
    
    
    
    (233
    )
    
    
    290,020Corporate bonds
    
    
    8,229
    
    
    
    
    
    
    
    (119
    )
    
    
    8,110Government-sponsored enterprise securities
    
    
    238,495
    
    
    
    
    
    
    
    (2,638
    )
    
    
    235,857$
    629,723
    
    
    $
    5
    
    
    $
    (2,990
    )
    
    $
    626,738Cash equivalents
    
    $
    102,748
    
    
    $
    3
    
    
    $
    
    
    
    $
    102,751Short-term investments
    
    
    354,840
    
    
    
    2
    
    
    
    (1,217
    )
    
    
    353,625Long-term investments
    
    
    172,135
    
    
    
    
    
    
    
    (1,773
    )
    
    
    170,362$
    629,723
    
    
    $
    5
    
    
    $
    (2,990
    )
    
    $
    626,738
 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.Unrealized losses as of March 31, 2005 on our investments in
municipal and corporate bonds were caused by interest rate increases. The contractual terms of the
debentures do not permit the issuer to settle the securities at a price less than the amortized
cost of the investment. The issuers of our municipal bonds have a credit rating of AAA, and the
issuers of our corporate bonds have a credit rating of AA (Moodys and S&P). 7




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Government-sponsored enterprise securities (GSEs).Unrealized losses as of March 31, 2005 on
our investments in fixed income housing GSEs (i.e., Federal National Mortgage Association and
Federal Home Loan Mortgage Corp.) were caused by interest rate increases. The contractual terms of
the investments do not permit the issuer to settle the securities at a price less than the
amortized cost of the investment. The issuers of our GSEs have a credit rating of AAA. Because the decline in the market value of our investments is attributable to changes in
interest rates and not credit quality, and because we have the ability and intent to hold these
investments until a recovery of our amortized cost, which will be at maturity, we do not consider
these investments to be other-than-temporarily impaired at March 31, 2005. Inventories Inventories are stated on a first-in, first-out basis at the lower of cost or estimated net
realizable value, and include purchased parts and subassemblies, labor and manufacturing overhead.
Inventories consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Purchased parts
    
    $
    10,624
    
    
    $
    11,713Work-in-process
    
    
    20,122
    
    
    
    19,795Finished goods
    
    
    10,240
    
    
    
    7,235$
    40,986
    
    
    $
    38,743
 The networking industry is characterized by rapid technological change, frequent new product
introductions, changes in customer requirements, and evolving industry standards. Our inventory
purchases and commitments are made based on anticipated demand for our products and our expected
service requirements, as estimated by management. We perform an assessment of our inventory each
quarter, which includes a review of, among other factors, demand requirements, manufacturing
lead-times, product life cycles and development plans, product pricing and quality issues. Based on
this analysis, we estimate the amount of excess and obsolete inventory on hand and make adjustments
to record inventory at the lower of cost or estimated net realizable value. Once inventory has been
written down to the lower of cost or estimated net realizable value, it is reflected on our balance
sheet at its new carrying value until it is sold or otherwise disposed. Net inventory provisions of
$5.4 million and $4.6 million were recorded for the three months ended March 31, 2005 and 2004,
respectively. Concentrations Financial instruments that potentially subject us to a concentration of credit risk consist
principally of cash equivalents, short and long-term investments, and accounts receivable. We seek
to reduce credit risk on financial instruments by investing in high-quality debt issuances and, by
policy, we limit the amount of credit exposure with any one issuer or fund. Additionally, we grant
credit only to customers deemed credit worthy in the judgment of management. As of March 31, 2005
and December 31, 2004, ten customers accounted for approximately 35% and 41%, respectively, of our
net outstanding trade receivables. Proprietary ASICs used in the manufacture of our products are purchased from sole sources. Our
custom-designed ASICs may not be readily available from other suppliers as the development period
required to fabricate our ASICs can be lengthy. The inability of an ASIC supplier to fulfill our
production requirements, or the time required for us to identify new suppliers if a relationship is
terminated, could negatively affect our future results of operations. Revenue Recognition 8




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General.We generally sell our products through our direct sales force to domestic customers
and through reseller channels to international customers. We generate the majority of our revenue
from sales of chassis and stackable-based networking equipment, with the remainder of our revenue
coming from customer support fees, training and installation services. We recognize revenue when
persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price
is fixed or determinable and collectibility is reasonably assured. Evidence of an arrangement
generally consists of customer purchase orders and, in certain instances, sales contracts or
agreements. Shipping terms and related documents, or written evidence of customer acceptance, when
applicable, are used to verify delivery or performance. We assess whether the sales price is fixed
or determinable based on payment terms and whether the sales price is subject to refund or
adjustment. We assess collectibility based on the creditworthiness of the customer as determined by
our credit checks and the customers payment history with us. When sales arrangements contain multiple elements (e.g., hardware and installation), we apply
the provisions of Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21) to determine the separate units of accounting that exist within the
arrangement. If more than one unit of accounting exists, the arrangement consideration is allocated
to each unit of accounting using either the relative fair value method or the residual fair value
method as prescribed by EITF 00-21. Revenue is recognized for each unit of accounting when the
revenue recognition criteria described in the preceding paragraph have been met for that unit of
accounting. Product.Product revenue is generally recognized upon transfer of title, which is generally
upon shipment. If an acceptance period or other contingency exists, revenue is recognized upon the
earlier of customer acceptance or expiration of the acceptance period, or upon satisfaction of the
contingency. Shipping charges billed to customers are included in product revenue and the related
shipping costs are included in cost of product revenues. At the time product revenue is recognized, we estimate the amount of warranty costs to be
incurred and record the amount as a cost of product revenue. Our standard warranty period generally
extends 12 months from the date of sale, and our estimate of the amount necessary to settle
warranty claims is based primarily on our past experience. We also provide for estimated sales
returns at the time product revenue is recognized and record that amount as a reduction to product
revenue. Our sales return provision is based primarily on historical sales returns and our return
policies. Our resellers generally do not have a right of return and our contracts with original
equipment manufacturers only provide for rights of return in the event our products do not meet our
published specifications or there is an epidemic failure, as defined in the contracts. Services.Service revenues consist primarily of fees for customer support services and, to a
lesser extent, training and installation services. Our suite of customer support programs provides
customers access to technical assistance, unspecified software updates on a when-and-if available
basis, hardware repair and replacement parts. Support services are offered under renewable, fee-based contracts. Revenue from customer
support contracts is deferred and recognized ratably over the contractual support period, in
accordance with Financial Accounting Standards Board (FASB) Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts. Support contracts generally range from one to five years. Revenue from training and installation services is recognized when services have been
performed, and represented less than 1% of total revenues for all periods presented. Segment and Geographic Information Operating segments are defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and in assessing performance. We are
organized as, and operate in, one reportable segment: the design, development, manufacturing,
marketing and sale of a comprehensive, end-to-end suite of high-performance data networking
solutions, including Ethernet Layer 2 and Layer 3 switches, Metro routers and Internet traffic
management products. Our chief operating decision-making group reviews consolidated financial
information, accompanied by information about revenues by geographic region and configuration type.
We do not assess the performance of our geographic regions on other measures of income or expense,
such as gross margin or net 9




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income. In addition, our assets are primarily located in our corporate office in the United
States and not allocated to any specific region. Therefore, geographic information is presented
only for net product revenue. We manage our business based on four geographic regions: the Americas (primarily the United
States); Europe, the Middle East, and Africa (EMEA); Japan; and Asia Pacific. Our foreign offices
conduct sales, marketing and support activities. Because some of our customers, such as the U.S.
Federal government and multinational companies, span various geographic locations, we determine
revenues by geographic region based on the billing location of the customer. Net product revenue by region as a percentage of net product revenue was as follows: Three Months Ended March 31,2005
    
    
    2004Americas
    
    
    64
    %
    
    
    63
    %EMEA
    
    
    17
    %
    
    
    21
    %Japan
    
    
    13
    %
    
    
    9
    %Asia Pacific
    
    
    6
    %
    
    
    7
    %
 Sales to the U.S. federal government accounted for approximately 17% and 32% of our total
revenues in the three months ended March 31, 2005 and 2004, respectively. Net product revenue from customers representing 10% or more of net product revenue for the
respective periods was as follows: Three Months Ended March 31,2005
    
    
    2004Customer A
    
    
    11
    %
    
    
    < 10
    %Customer B
    
    
    < 10
    %
    
    
    13
    %
 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. Diluted EPS has been calculated using the
weighted-average number of shares of common stock outstanding during the period and potentially
dilutive weighted-average common stock equivalents. Weighted-average common stock equivalents
include the potentially dilutive effect of in-the-money stock options, determined 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 received assuming the exercise of all in-the-money
stock options are assumed to be used to repurchase shares in the open market. 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 stock for the

respective period and, therefore, their inclusion would have been anti-dilutive. There were 13.6
million and 1.1 million anti-dilutive common stock equivalents for the three months ended March 31,
2005 and 2004, respectively. 10




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##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2004(In thousands, except per share data)Net income
    
    $
    9,937
    
    
    $
    19,901Basic:Weighted average shares outstanding
    
    
    137,908
    
    
    
    133,311Basic EPS
    
    $
    0.07
    
    
    $
    0.15Diluted:Weighted average shares outstanding
    
    
    137,908
    
    
    
    133,311Add: Weighted average dilutive
potential shares
    
    
    3,850
    
    
    
    10,535Weighted average shares used in
computing diluted EPS
    
    
    141,758
    
    
    
    143,846Diluted EPS
    
    $
    0.07
    
    
    $
    0.14
 Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), we 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, we recognize compensation expense if options are granted
with an exercise price below fair market value at the date of grant or if in-the-money options are
modified subsequent to the date of grant. Any resulting compensation expense is recognized either
ratably over the vesting period or using variable accounting over the period from the date of
modification to exercise or cancellation of the award. We currently grant stock options under several stock option plans that allow for the granting
of non-qualified and incentive stock options to our employees and directors. Stock options
generally vest ratably over two to five years from the date of grant and have a term of five to ten
years. We also have an employee stock purchase plan that allows eligible employees to purchase
shares of our 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
that may not exceed 20% of an employees compensation. The following table illustrates the effect on reported net income and earnings per share had
we accounted for our employee stock options and employee stock purchase plan under the fair value
method prescribed by SFAS 123. 11




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##### Table of Contents



Three Months EndedMarch 31,2005
    
    
    2004(in thousands, except per share amounts)Net income as reported
    
    $
    9,937
    
    
    $
    19,901Deduct: Total stock-based
compensation expense
determined using fair value
method for all awards, net
of related tax effect
    
    
    (10,009
    )
    
    
    (8,469
    )Pro forma net income (loss)
    
    $
    (72
    )
    
    $
    11,432Basic net income per share:As reported
    
    $
    0.07
    
    
    $
    0.15Pro forma
    
    $
    0.00
    
    
    $
    0.09Diluted net income per share:As reported
    
    $
    0.07
    
    
    $
    0.14Pro forma
    
    $
    0.00
    
    
    $
    0.08
 We estimate the fair value of our stock options using the Black-Scholes option pricing model,
which is the most commonly used model for purposes of disclosure pursuant to SFAS 123. The
Black-Scholes option-pricing model includes assumptions regarding expected stock price volatility,
option lives, dividend yields, and risk-free interest rates. These assumptions reflect our best
estimates, but involve uncertainties based on market conditions generally outside of our control. The following weighted-average assumptions were used to estimate the fair value of option
grants and employee stock purchase plan purchase rights. Expected volatility assumptions were
based on the historical volatility of our common stock over the most recent period commensurate
with the estimated expected life of our stock options. We base the expected life assumption on
historical experience as well as the terms and vesting periods of the options granted. Three MonthsEnded March 31,2005
    
    
    2004Stock Option Plan:Average risk free interest rate
    
    
    3.57
    %
    
    
    2.62
    %Average expected life of option
    
    3.3 years
    
    4.0 yearsDividend yield
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    66
    %
    
    
    75
    %
 Three MonthsEnded March 31,2005
    
    
    2004Employee Stock Purchase Plan:Average risk free interest rate
    
    
    2.37
    %
    
    
    1.24
    %Average expected life of option
    
    1.3 years
    
    1.4 yearsDividend yield
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    65
    %
    
    
    65
    %
 12




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##### Table of Contents



Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R also amends SFAS No. 95, Statement of Cash Flows, to require that tax
benefits from stock option exercises be classified as a financing activity, instead of an operating
activity, on the statement of cash flows. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on
their fair values, beginning on January 1, 2006 for calendar year companies. SFAS 123R permits companies to adopt its requirements using either a modified prospective
method, or a modified retrospective method. Under the modified prospective method, compensation
cost for the unvested portion of awards that are outstanding as of the adoption date will be
recognized over the remaining service period. The compensation cost for that unvested portion of
awards will be based on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards that are modified,
repurchased, or cancelled after the adoption date will be accounted for under the provisions of
SFAS 123R. Under the modified retrospective method, the requirements are the same as
under the modified prospective method, but also permits entities to restate financial statements
of previous periods based on pro forma disclosures made in accordance with SFAS 123. We will adopt
SFAS 123R effective January 1, 2006, based on the new effective date announced by the SEC. We have
not yet determined the method of adoption or the effect of adopting SFAS 123R, nor have we
determined whether the adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123. However, we expect its adoption to have a material effect on our
consolidated results of operations. 2. COMPREHENSIVE INCOME OR LOSS Comprehensive income or loss is defined as the change in equity of an enterprise excluding
changes resulting from stockholder transactions. Non-net income components of comprehensive income
or loss for the three months ended March 31, 2005 and 2004 were insignificant and consisted
entirely 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 record a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45 is applicable to our product warranty
liability and indemnification obligations contained in commercial agreements, including customary
intellectual property indemnifications for our products contained in agreements with our resellers
and end-users. We generally provide customers with a standard one-year hardware and 90-day software warranty.
Our warranty accrual represents our best estimate of the amount necessary to settle future and
existing claims as of the balance sheet date. We periodically assess the adequacy of our warranty
accrual and adjust the amount as considered necessary. 13




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##### Table of Contents



Changes in product warranty liability for the three months ended March 31, 2005 were as
follows: Balance, December 31, 2004
    
    $
    1,498Liabilities accrued for warranties issued during the period
    
    
    188Warranty claims settled during the period
    
    
    (154
    )Expirations and changes in estimates
    
    
    (132
    )Balance, March 31, 2005
    
    $
    1,400
 We offer our customers renewable support arrangements, including extended warranties, that
generally range from one to five years. We do not separate extended warranty revenues from routine
support service revenues, as it is not practical to do so. The change in our deferred support
revenue balance was as follows for the three months ended March 31, 2005: Balance, December 31, 2004
    
    $
    56,234Additions to deferred support revenue
    
    
    13,568Recognition of support revenue
    
    
    (15,744
    )Balance, March 31, 2005
    
    $
    54,058
 In the ordinary course of business, we enter into contractual arrangements under which we may
agree to indemnify the counter-party from 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. Such indemnification clauses may
not be subject to maximum loss clauses. No amounts are reflected in our condensed consolidated
financial statements as of March 31, 2005 or December 31, 2004 related to these indemnifications
as, historically, payments made related to these indemnifications have not been material to our
consolidated financial position or results of operations. Purchase Commitments with Suppliers and Third-Party Manufacturers We use contract manufacturers to assemble certain parts for our chassis products. We also
utilize third-party OEMs to manufacture certain Foundry-branded products. In order to reduce
manufacturing lead-times and ensure an adequate supply of inventories, our agreements with some of
these manufacturers allow them to procure long lead-time component inventory on our behalf based on
a rolling production forecast provided by us. We are contractually obligated to purchase long
lead-time component inventory procured by certain manufacturers in accordance with our forecasts
although we can generally give notice of order cancellation at least 90 days prior to the delivery
date. In addition, we issue purchase orders to our component suppliers and third-party
manufacturers that may not be cancelable at any time. As of March 31, 2005, we had approximately
$36.6 million of open purchase orders with our component suppliers and third-party manufacturers
that may not be cancelable. Lease Commitments We lease our facilities and office buildings under operating leases that expire at various
dates through April 2011. Our headquarters for corporate administration, research and development,
sales and marketing, and manufacturing occupy approximately 110,000 square feet of space in San
Jose, California. In March 2005, we entered into a lease agreement for 141,000 square feet of
additional office space in Santa Clara, California. The lease expires in 2010. We will continue
to utilize the San Jose location for our manufacturing operations and our corporate administration,
research and development, and sales and marketing functions will move to Santa Clara. Rent expense
for the Santa Clara office space will initially be approximately $1.6 million per year, beginning
April 1, 2005, with annual increases of approximately 5% in subsequent years. See also Item 2. Managements
Discussion and Analysis of Financial Condition and Results Of Operations Contractual Commitments
for a tabular disclosure of our lease commitments. 14




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##### Table of Contents



Litigation We are a defendant in a class action lawsuit filed on November 27, 2001 in the United States
District Court for the Southern District of New York (the Court) on behalf of purchasers of our 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 our common stock from September 27, 1999
through December 6, 2000. The operative amended complaint names as defendants us and three of our
officers (Foundry Defendants), including our Chief Executive Officer and Chief Financial Officer;
and investment banking firms that served as underwriters for our 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 initial public offering (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 be 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 alleges that false or misleading analyst reports were issued. 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 us. 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 us 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
our remaining individual defendants on the basis that those defendants allegedly sold our 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 individual defendants in the other
cases. We have accepted 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 we may have against the underwriters. The settlement requires approval by the Court.
In February 2005, the Court granted tentative approval to the
terms of the proposed settlement. We re-evaluated the proposed settlement in
light of the Courts ruling and have accepted the proposed settlement. The settlement must still receive final approval from the court
following notice to class members and an opportunity for them and others affected by the settlement
to object. There can be no assurance that the settlement will receive final approval. Litigation
between the plaintiffs and underwriters is proceeding. Both plaintiffs and underwriters agreed to
select a number of test cases from among the approximately 300 cases against the issuers. We have
been notified that we were selected as one of the test cases. We expect we will receive requests
for discovery in the test case. In May 2003, Lucent Technologies Inc. (Lucent) filed a lawsuit against us in the United States
District Court for the District of Delaware alleging that certain of our products infringe several
of Lucents patents and seeking injunctive relief, as well as unspecified damages. Lucent also
brought suit on the same patents (and one additional patent) against one of our competitors,
Extreme Networks, Inc. On February 6, 2004, the District Court severed the two cases. Fact
discovery is now closed. A Markman claim construction hearing was held on January 14, 2005. On
April 15, 2005 the Court issued its order construing the claims. On February 28, 2005, the parties
filed summary judgment motions. Trial in the matter is expected to begin in November 2005. We have
analyzed the validity of Lucents claims and believe that Lucents suit is without merit. We are
committed to vigorously defending ourselves against Lucents claims. 15




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##### Table of Contents



On February 13, 2004, we filed a lawsuit against Lucent in the United States District Court,
Eastern District of Texas, Marshall Division. The lawsuit alleges that certain of Lucents products
infringe one of our patents. We are seeking injunctive relief and damages. On March 22, 2004,
Lucent filed an Answer and Counter Claim seeking a declaration of invalidity as to our asserted
patent. On April 9, 2004, Lucent filed an Amended Answer and Counter Claim asserting infringement
of another of Lucents patents. We have analyzed the validity of Lucents counter claim and believe
it is without merit. Discovery has begun and is scheduled to close on June 17, 2005. A Markman
hearing was held on March 24, 2005, and the parties are awaiting the results of that hearing. Trial
is scheduled to begin August 1, 2005. From time to time, we are 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. From time to time, third parties assert patent infringement claims
against us in the form of letters, lawsuits and other forms of communication. In addition, from
time to time, we receive notification from customers claiming that they are entitled to
indemnification or other obligations from us related to infringement claims made against them by
third parties. Regardless of the merits of our position, litigation is always an expensive and
uncertain proposition. In accordance with SFAS No. 5, Accounting for Contingencies (SFAS 5), we
record a liability when it is both probable that a liability has been incurred and the amount of
loss can be reasonably estimated. We review the need for any such liability on a quarterly basis
and record any necessary adjustments to reflect the effect of ongoing negotiations, settlements,
rulings, advice of legal counsel, and other information and events pertaining to a particular case
in the period they become known. At March 31, 2005, we have not recorded any such liabilities in
accordance with SFAS 5. We believe we have valid defenses with respect to the legal matters pending
against us. In the event of a determination adverse to us, we could incur substantial monetary
liability and be required to change our business practices. Any unfavorable determination could
have a material adverse effect on our financial position, results of operations, or cash flows. 4. INCOME TAXES Our interim effective income tax rate is based on our best estimate of our annual effective
income tax rate. The effective tax rate for the three months ended March 31, 2005 and 2004 was 31%
and 38%, respectively. These rates reflect applicable federal and state tax rates, offset by
research and development tax credits, export sales incentives, and tax-exempt interest income. The
lower effective tax rate of 31% in the first quarter of 2005 was due to the effect of lower
estimated pre-tax income in 2005 and significantly higher estimated tax-exempt interest income for
2005. Our 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, we receive an income tax benefit for the difference between the fair market value of the
stock issued at the time of exercise or disposition and the option price, tax effected. These
benefits are recorded in stockholders equity and were $1.1 million and $17.3 million for the three
months ended March 31, 2005 and 2004, respectively. Management believes Foundry will likely generate sufficient taxable income in the future to
realize the tax benefits arising from its existing net deferred tax assets of $42.2 million at
March 31, 2005. 16




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##### Table of Contents



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 thisForm 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.comor from the SEC atwww.sec.govas 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 data networking solutions, including Ethernet Layer 2 and
Layer 3 switches, Metro routers, and Internet traffic management products. Our customers include
U.S. government agencies, universities, e-commerce sites, and enterprises such as healthcare,
financial, manufacturing and entertainment companies, as well as Internet and Metro service
providers. Critical Accounting Policies and Use of Estimates Managements discussion and analysis of financial condition and results of operations are
based on our condensed consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the 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 its estimates and judgments on historical experience, market
trends, and other factors that are believed to be reasonable under the circumstances. The results
of these estimates form the basis for judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes critical accounting policies as
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004 reflect the more
significant judgments and estimates used in preparation of our financial statements. Management has
discussed the development, selection, and disclosure of these estimates with the Audit Committee of
Foundrys Board of Directors. Management believes there have been no material changes to our
critical accounting policies and estimates during the three months ended March 31, 2005 compared to
those discussed in our Annual Report on Form 10-K for the year ended December 31, 2004. Results of Operations Net Revenues We offer products in two configuration platforms, a fixed configuration stackable and a
flexible configuration chassis. A stackable has a fixed configuration that cannot be altered.
A chassis uses a modular platform that can be populated and reconfigured with various management and
line card modules as frequently as desired by the customer. For example, customers can use our
chassis products at the edge of their network and then reconfigure the chassis to be used in the
backbone or core of their network. Our selling prices and gross margins on chassis-based 17




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##### Table of Contents



products are generally higher than our stackable products because of the flexible
configuration offered by chassis-based products. Net revenue information is as follows (dollars in thousands): Three Months Ended March 31,2005
    
    
    2004% of
    
    
    
    
    
    
    % of$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    % ChangeNet revenues:Product
    
    $
    68,432
    
    
    
    81
    %
    
    $
    89,300
    
    
    
    86
    %
    
    
    (23.4
    %)Service
    
    
    16,204
    
    
    
    19
    %
    
    
    14,716
    
    
    
    14
    %
    
    
    10.1
    %Total net revenues
    
    $
    84,636
    
    
    
    100
    %
    
    $
    104,016
    
    
    
    100
    %
    
    
    (18.6
    %)Chassis
    
    $
    54,167
    
    
    
    64
    %
    
    $
    83,213
    
    
    
    80
    %
    
    
    (34.9
    %)Stackable
    
    
    30,469
    
    
    
    36
    %
    
    
    20,803
    
    
    
    20
    %
    
    
    46.5
    %Total net revenues
    
    $
    84,636
    
    
    
    100
    %
    
    $
    104,016
    
    
    
    100
    %
    
    
    (18.6
    %)
 We manage our business based on four geographic regions: the Americas (primarily the United
States); Europe, the Middle East, and Africa (EMEA); Japan; and Asia Pacific. Because some of our
customers, such as the U.S. Federal government and multinational companies, span various geographic
locations, we determine revenues by geographic region based on the billing location of the
customer. Net product revenue by region as a percentage of net product revenue was as follows: Three Months Ended March 31,2005
    
    
    2004Americas
    
    
    64
    %
    
    
    63
    %EMEA
    
    
    17
    %
    
    
    21
    %Japan
    
    
    13
    %
    
    
    9
    %Asia Pacific
    
    
    6
    %
    
    
    7
    %
 Net product revenues decreased 23% in the first quarter of 2005, as compared to the first
quarter of 2004, primarily due to a significant decline in sales to the U.S. Federal government,
decreased demand in Europe, and a shift in sales mix to lower-priced stackable products. Sales to
the U.S. Federal government accounted for approximately 17% of total revenues in the first quarter
of 2005, down from 32% in the first quarter of 2004, as a result of reduced Federal funding for IT
projects. Product sales in the EMEA region decreased 37% in the first quarter of 2005, as compared
to the first quarter of 2004, primarily due to weaker than expected sales in France and the United
Kingdom. This substantial decline was primarily due to the completion of several large customer
network deployments in the first quarter of 2004. The decrease in sales in the EMEA region was
partially offset by stronger sales to Japan. Product sales to Japan increased 16% in the first
quarter of 2005.
Our product sales volume, as measured in units sold, in the first quarter of 2005 declined
approximately 10% from the first quarter last year and our average selling prices continued to
decline in the first quarter of 2005 due to sluggish capital spending and a heightened competitive
pricing environment dominated by Cisco Systems, Inc. Although recent macro-economic indicators
appear to demonstrate signs of an economic recovery, many of our customers continue to closely
monitor and limit expenditures on information technologies. 18




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##### Table of Contents



Service revenues consist primarily of revenue from customer support contracts. Service
revenues increased 10% due to a larger installed base of our networking equipment. Our customer
base grew from 6,500 customers at the end of 2003 to 7,800 customers at the end of 2004. Net product revenue from customers representing 10% or more of net product revenue was as
follows: Three Months Ended March 31,2005
    
    
    2004Customer A
    
    
    11
    %
    
    
    < 10
    %Customer B
    
    
    < 10
    %
    
    
    13
    %
 Gross Margins The following table presents gross margins and the related gross margin percentages (dollars
in thousands): Three Months Ended March 31,2005
    
    
    2004Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin %
    
    
    $
    
    
    Margin %Gross margins:Product
    
    $
    39,810
    
    
    
    58
    %
    
    $
    57,306
    
    
    
    64
    %Service
    
    
    12,891
    
    
    
    80
    %
    
    
    11,590
    
    
    
    79
    %Total gross margins
    
    $
    52,701
    
    
    
    62
    %
    
    $
    68,896
    
    
    
    66
    %
 Our cost of product revenue consists primarily of material, labor, manufacturing overhead,
freight, warranty costs, and provisions for excess and obsolete inventory. The decrease in product
gross margins as a percentage of net product revenue in the first quarter of 2005 was due to lower
average selling prices caused by a more competitive pricing environment, a shift in product mix to
lower margin stackable products, and, to a lesser extent, higher inventory provisions. During the
first quarter of 2005, our product mix shifted from higher-margin chassis products to lower-margin
stackable products due to the introduction of several new families of Layer 2/3, Layer 4-7, and
access router stackable products in the latter half of 2004. Sales of our stackable products
represented 36% of total revenues for the first quarter of 2005, versus 20% for the first quarter
of 2004. Net inventory provisions increased $1.0 million in the first quarter of 2005, compared to
the first quarter of 2004. Our cost of service revenues consists primarily of costs of providing services under customer
support contracts. These costs include materials, labor, and overhead. Service gross margins
typically experience variability due to the timing of technical support service initiations and
renewals and additional investments in our customer support infrastructure. Our gross margins may be adversely affected by increased price competition, component
shortages, increases in material or labor costs, excess and obsolete inventory charges, changes in
channels of distribution, or 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. Operating Expenses The following table presents operating expenses (dollars in thousands): 19




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##### Table of Contents



Three Months Ended March 31,2005
    
    
    2004% of
    
    
    
    
    
    
    % of$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    % ChangeResearch and Development
    
    $
    12,427
    
    
    
    15
    %
    
    $
    10,012
    
    
    
    10
    %
    
    
    24.1
    %Sales and Marketing
    
    
    24,582
    
    
    
    29
    %
    
    
    23,168
    
    
    
    22
    %
    
    
    6.1
    %General and Administrative
    
    
    5,163
    
    
    
    6
    %
    
    
    5,425
    
    
    
    5
    %
    
    
    (4.8
    %)
 Research and developmentexpenses consist primarily of salaries and related personnel
expenses, prototype materials, costs incurred for the development of our ASICs, software
development and testing costs, and depreciation of equipment used in research and development
activities. The increase of $2.4 million in the first quarter of 2005 was primarily due to
increased payroll costs associated with a 19% increase in headcount from 163 engineers in the first
quarter of 2004 to 194 engineers in 2005 and, to a lesser extent, increases in prototype expenses
and depreciation on test equipment. We believe that investments in research and development,
including the recruiting and hiring of engineers, are critical to our ability to remain competitive
in the marketplace. Sales and marketingexpenses 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. The increase of $1.4 million in the
first quarter of 2005 was primarily due to increased payroll costs associated with a 7% increase in
our sales personnel from 245 sales representatives and systems engineers in the first quarter of
2004 to 261 in the first quarter of 2005. General and administrativeexpenses consist primarily of salaries and related expenses for
executive, finance and administrative personnel, facilities, bad debt, legal, and other general
corporate expenses. The slight decrease in absolute dollars in the first quarter of 2005 was due
to lower legal fees, as compared to the first quarter of 2004. Interest and other income, net We earn interest income on funds maintained in interest-bearing money market and investment
accounts. We recorded interest and other income of $3.9 million and $1.8 million for the three
months ended March 31, 2005 and 2004, respectively. The increase was primarily due to increased
average investment balances and higher interest rates. Our total cash and investments increased
$95.9 million, or 17%, from March 31, 2004 to March 31, 2005. Income Taxes Our effective income tax rates for the three months ended March 31, 2005 and 2004 were 31% and
38%, respectively. The lower effective tax rate of 31% in the first quarter of 2005 was due to the
effect of lower estimated pre-tax income in 2005 and significantly higher tax-exempt interest
income in 2005. Our income taxes payable for federal and state purposes have been reduced, and stockholders
equity increased, by the tax benefits associated with taxable dispositions of employee stock
options. When an employee exercises a stock option issued under a nonqualified plan, or has a
disqualifying disposition related to a qualified plan, we receive an income tax benefit for the
difference between the fair market value of the stock issued at the time of the exercise or
disposition and the employees option price, tax effected. These benefits are recorded in
stockholders equity and were $1.1 million and $17.3 million for the three months ended March 31,
2005 and 2004, respectively. Liquidity and Capital Resources At March 31, 2005, we had cash and investments of $656.5 million, an increase of $39.1 million
from $617.4 million at December 31, 2004. In the first quarter of 2005, we generated $31.9 million
of cash from operations, which principally reflects net income of $9.9 million and a $25.2 million
decrease in accounts receivable associated with lower sales in the first quarter of 2005 and the
collection of annual support renewals that were billed in 20




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December 2004. The remaining increase in cash and investments can be attributed primarily to
$8.4 million of proceeds from issuances of common stock. Net inventories increased $2.2 million during the first quarter of 2005. In the fourth quarter
of 2004 and early 2005, we increased our inventory levels in anticipation of higher sales volume in
2005. However, product revenues in the first quarter of 2005 were significantly lower than
anticipated. As a result, annualized inventory turnover decreased from approximately 3.5 for the
three months ended December 31, 2004 to 2.8 for the three months ended March 31, 2005. Accounts receivable, net of allowances, decreased $25.2 million from the end of 2004 to $66.3
million as of March 31, 2005. Our accounts receivable and days sales outstanding (DSO) are
primarily affected by shipment linearity, collections performance, and timing of support contract
renewals. DSO, calculated based on annualized revenues for the most recent quarter ended and net
accounts receivable as of the balance sheet date, decreased to 71 days as of March 31, 2005 from 79
days as of December 31, 2004. The decrease in DSO was primarily due to a significant concentration
of annual support contracts that were renewed during the fourth quarter of 2004, with little or no
revenue contribution in 2004. Although it is difficult for us to predict future liquidity requirements with certainty, we
believe our existing cash balances and anticipated funds from operations will satisfy our cash
requirements for at least the next 12 months. Key factors affecting our cash flows include our
ability to effectively manage our working capital, in particular, inventories and accounts
receivable, and future demand for our products and related pricing. We may incur higher capital
expenditures in the near future to expand our operations. Although we do not have any current plans
or commitments to do so, we may from time to time consider the acquisition of products or
businesses complementary to our business. Any acquisition or investment may require additional
capital. Off-Balance Sheet Arrangements and Contractual Obligations Other than operating leases of facilities, we do not maintain any off-balance sheet
transactions, arrangements, or obligations that are reasonably likely to have a material effect on
our consolidated financial condition, results of operations, liquidity, or capital resources. Contractual Commitments The following table summarizes our contractual obligations as of March 31, 2005 and the effect
such obligations are expected to have on our liquidity and cash flows in future periods (in
thousands): Less Than
    
    
    1-3
    
    
    MoreTotal
    
    
    1 Year
    
    
    Years
    
    
    Than 3 YearsOperating leases- facilities
    
    $
    17,453
    
    
    $
    4,264
    
    
    $
    9,941
    
    
    $
    3,248Inventory purchase commitments
    
    
    36,639
    
    
    
    36,639
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    54,092
    
    
    $
    40,903
    
    
    $
    9,941
    
    
    $
    3,248
 For purposes of the above table, contractual obligations for the purchase of goods or services
are defined as agreements that are enforceable, legally binding on us, and that subject us to
penalties if we cancel the agreements. Our purchase commitments are based on our short-term
manufacturing needs and are fulfilled by our vendors within short time horizons. Operating lease
obligations represent the minimum lease rental payments under non-cancelable leases for our office
space in various locations around the world that expire at various dates through 2011. In March
2005, we entered into a lease agreement for 141,000 square feet of additional office space in Santa
Clara, California. The lease expires in 2010. We will continue to utilize the San Jose location
for our manufacturing operations and our corporate administration, research and development, and
sales and marketing functions will move to Santa Clara. Rent expense for the Santa Clara office
space will initially be approximately $1.6 million per year, beginning April 1, 2005, with annual
increases of approximately 5% in subsequent years. 21




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Indemnifications In the ordinary course of business, we enter into contractual arrangements under which we may
agree to indemnify the counter-party from 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. Such indemnification clauses may
not be subject to maximum loss clauses. No amounts are reflected in our condensed consolidated
financial statements as of March 31, 2005 or December 31, 2004 related to these indemnifications
as, historically, payments made related to these indemnifications have not been material to our
financial position or results of operations. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R also amends SFAS No. 95, Statement of Cash Flows, to require that tax
benefits from stock option exercises be classified as a financing activity, instead of an operating
activity, on the statement of cash flows. SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on
their fair values, beginning on January 1, 2006 for calendar year companies. SFAS 123R permits companies to adopt its requirements using either a modified prospective
method, or a modified retrospective method. Under the modified prospective method, compensation
cost for the unvested portion of awards that are outstanding as of the adoption date will be
recognized over the remaining service period. The compensation cost for that unvested portion of
awards will be based on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards that are modified,
repurchased, or cancelled after the adoption date will be accounted for under the provisions of
SFAS 123R. Under the modified retrospective method, the requirements are the same as
under the modified prospective method, but also permits entities to restate financial statements
of previous periods based on proforma disclosures made in accordance with SFAS 123. We will adopt
SFAS 123R effective January 1, 2006, based on the new effective date announced by the SEC. We have
not yet determined the method of adoption or the effect of adopting SFAS 123R, nor have we
determined whether the adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123. However, we expect its adoption to have a material effect on our
consolidated results of operations. 
 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 revenues,
gross margins and expenses. Our quarterly revenues and operating results 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, current political turmoil
in many parts of the world, including terrorist and military actions, may weaken the global
economy. If 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. There can be no assurance that we will be able to maintain or improve our
financial results or that economic and market conditions will continue to improve and will not
deteriorate.  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. 22




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Sales to our ten largest customers accounted for 39% and 42% of net product revenue for the
three months ended March 31, 2005 and 2004, respectively. The loss of continued orders from any of
our more significant customers, such as the U.S. government or individual agencies within the U.S.
government, Mitsui, 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. Although 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; and
    our reseller agreements generally are not exclusive and are for one-year terms, with no
obligation of the resellers to renew the agreements. 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. In addition, a change in the mix of our
customers, or a change in the mix of direct and indirect sales, could adversely affect our revenues
and gross margins.  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. As part of the changing economic environment, the United States government has become an
important customer for the networking industry, and for us in particular. The process of becoming a
qualified government vendor, especially for high-security projects, takes considerable time and
effort, and the timing of contract awards and deployment of our products are hard to predict.
Typically, six to twelve months may elapse between the initial evaluation of our systems by
governmental agencies and the execution of a contract. The revenue stream from these contracts is
hard to predict and may be materially uneven between quarters. 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 delays or
decreased capital expenditures in certain areas. If we fail to win significant government contract
awards, if the government or individual agencies within the government terminate or reduce the
scope and value of our existing contracts, or if the government fails to reduce the budget deficit,
our financial results may be harmed. Additionally, government orders may be subject to priority
requirements that may affect scheduled shipments to our other customers.  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. Our quarterly revenues and operating results are difficult to predict and may fluctuate
significantly from quarter to quarter. Delays in generating or recognizing revenues
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. We recently decided to
discontinue providing guidance. In the future, we may begin to provide guidance again, but could
again discontinue the practice if we believe the business outlook is
too uncertain to predict. Any such
decision could cause our stock price to decline. 23




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We may experience a delay in generating or recognizing revenue for a number of reasons.
Unfulfilled orders at the beginning of each quarter are typically substantially less than our
expected revenue for that quarter. Therefore, we depend on obtaining orders in a quarter for
shipment in that quarter to achieve our revenue objectives. In addition, our reseller agreements
typically allow the reseller to delay scheduled delivery dates without penalty. Moreover, demand
for our products may fluctuate as a result of seasonality. For example, sales to the U.S.
government are typically stronger in the third calendar quarter and demand from European customers
is generally weaker in the summer months. Orders are generally cancelable at any time prior to shipment. Reasons for cancellation could
include our inability to deliver products within the customers specified timeframe due to
component shortages or high priority government orders that take precedence to commercial
enterprise orders, as well as other reasons. Our revenues for a particular period may also be difficult to predict and may be adversely
affected if we experience a non-linear (back-end loaded) sales pattern during the period. We
typically experience significantly higher levels of sales towards the end of a period as a result
of customers submitting their orders late in the period or as a result of manufacturing issues or
component shortages which may delay shipments. Such non-linearity in shipments can increase costs,
as irregular shipment patterns result in periods of underutilized capacity and additional costs
associated with higher inventory levels, inventory planning and management. Furthermore, orders
received towards the end of the period may not ship within the period due to our manufacturing lead
times. In addition, we may incur increased costs and expenses related to sales and marketing,
including expansion of our direct sales operations and distribution channels, product marketing,
customer support, expansion of our corporate infrastructure, legal matters, and facilities
expansion. We base our operating expenses on anticipated revenue levels, 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. 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 prior results for any period as an indication of future performance. In
the future, our revenue may remain the same, decrease or increase, and we may not be able to
sustain or increase profitability on a quarterly or annual basis. As a consequence, operating
results for a particular quarter are extremely difficult to predict.  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 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 provide assurance 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, F5 Networks,
Inc., Nortel Networks, Enterasys Networks, 3Com, Huawei Technologies, Force 10 Networks, 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. 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 24




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earlier, products that are superior to ours in terms of features, quality, pricing or a
combination of these and 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, enhance our
current products and maintain customer satisfaction. In addition, we must make certain our sales
and marketing capabilities allow us to compete effectively against our competitors. If we fail to
do so, our products may not compete favorably with those of our competitors and our revenues 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, and if we fail to predict and respond to
emerging technological trends and customers changing needs, our operating results may suffer. The networking industry is characterized by rapid technological change, frequent new product
introductions, changes in customer requirements, and evolving industry standards. Therefore, in
order to remain competitive, we must 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. Even if these objectives are accomplished, new products may not be successful in the
marketplace, or may take more time than anticipated to start generating meaningful revenue. 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 the market
will accept. After a product is developed, we must be able to forecast sales volumes and quickly
manufacture a sufficient volume of products and mix of 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 or 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 and in achieving volume manufacturing for such new products.
This has led to, and may in the future lead to, delayed sales, increased expenses and lower
quarterly revenues 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.  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 on our internally developed
technology and know-how. Our proprietary technology includes our ASICs, our IronCore, JetCore, and
Terathon hardware architecture, our IronWare software, our IronView network management 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 in which the laws may not protect our proprietary rights as fully as in the
United States. 25




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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. The networking industry is subject to 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 rate of
issuance of new patents in the networking industry, it is practically impossible for a company to
determine in advance whether a product or any of its components may infringe upon intellectual
property rights that may be claimed by others. From time to time third parties have asserted
exclusive patent, copyright and trademark rights to technologies and related standards that are
important to us. Third parties may in the future assert claims or initiate litigation against us or
our manufacturers, suppliers or customers alleging infringement of their intellectual property
rights with respect to our existing or future products. We are committed to vigorously defending
ourselves against such claims. Regardless of the merits of our position, we have in the past and
may in the future 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. Some companies have attempted to realize revenues from their patent portfolios by using
licensing programs. Some of these companies have contacted us regarding a license. We carefully
review all license requests, but are unwilling to license technology not required for our product
portfolio. However, any asserted license demand can require considerable effort and expense to
review and respond. Moreover, a refusal by us to a license request could result in threats of
litigation or actual litigation, which, if initiated, could harm our business. 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 Note 3, Commitments and
ContingenciesLitigation, to Condensed Consolidated
Financial Statements, and we are vigorously contesting these
allegations. Responding to the allegations has been, and probably will continue to be, expensive
and time-consuming for us. An unfavorable resolution of the lawsuits could adversely affect our
business, results of operations, or financial condition.  Our ability to increase our revenues depends on expanding our direct sales operations 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 and system integrators 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. Resellers
and system integrators typically sell directly to end-users and often provide system installation,
technical support, professional services, and other support services in addition to network
equipment sales. System integrators also typically integrate our products into an overall solution,
and a number of resellers and service providers are also system integrators. 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.
Additionally, if we do not manage distribution of our products and services effectively, or if our
resellers financial conditions or operations weaken, our revenues and gross margins could be
adversely affected. In an effort to gain market share and support our customers, we may need to expand our direct
sales operations and customer service staff to support new and existing customers. The timing and
extent of any such expansion are uncertain. We currently outsource our technical support to a
third-party provider in Australia to support our customers on that continent. In the future, we may
utilize third-party contractors in other regions of the world as part 26




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of our expansion effort. Expansion of our direct sales operations, reseller channels, and
customer service operations may not be successfully implemented and the cost of any expansion may
exceed the revenues generated.  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 have 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 occasionally lower sales prices in order
to gain market share or create more demand. Furthermore, as a result of the recent disruption in
the technology sector, coupled with more broad macro-economic factors, both we and our competitors
may pursue more aggressive pricing strategies in an effort to maintain sales levels. Such intense
pricing competition could cause our gross margins to decline and may adversely affect our business,
operating results or financial condition. Our gross margins may be adversely affected if we are unable to reduce manufacturing costs and
effectively manage our inventory levels. Although management continues to closely monitor inventory
levels, declines in demand for our products could result in additional provisions for excess and
obsolete 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 an end user than on sales through resellers or to our OEMs. As a
result, any significant shift in revenues through resellers or to our OEMs could harm our gross
margins. If product or related warranty costs associated with our products are greater than we have
experienced, our gross margins may also be adversely affected.  We need additional qualified personnel to maintain and expand our business. If we are unable to
promptly attract and retain qualified personnel, our business may be harmed. We believe our future success will depend in large part on our ability to identify, attract
and retain highly-skilled managerial, engineering, sales and marketing, finance and manufacturing
personnel. 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 engineering and sales personnel. 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, we have historically used stock options to
motivate and retain our employees. The recent decision by the accounting standard setting body
regarding the accounting treatment of stock options as compensation expense 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 on 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 may depend 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 for any of our personnel.  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. 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 in 27




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Europe, Mitsui in Japan, Shanghai Gentek and GTI in China, and Samsung in Korea. The failure
of our international resellers to sell our products would limit our ability to sustain 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. There are a number of additional 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;
    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. The factors described above could also disrupt our product and component manufacturers and key
suppliers located outside of the United States. 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, our 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. See also Item 3 Quantitative and
Qualitative Disclosures About Market Risk for a review of certain risks associated with foreign
exchange rates.  We purchase several key components for our products from sole sources; if these components are not
available, our revenues may be harmed. We purchase several key components used in our products from sole sources, and depend on
supply from these sources to meet our needs. The inability of any supplier to provide us with an
adequate supply 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. Lead-times for various components have lengthened recently as a result of limits on IT
spending and the economic uncertainty, which has made certain components scarce. As component
demand increases and lead-times become longer, our suppliers may increase component costs. If
component costs increase, our gross margins may also decline. Our principal limited or sole-sourced components include high-speed dynamic and static random
access memories, commonly known as DRAMs and SRAMs, ASICs, printed circuit boards, optical
components, packet 28




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processors, switching fabrics, microprocessors and power supplies. We acquire these components
through purchase orders and have no long-term commitments regarding supply or pricing 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 insufficient 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. Our subassemblies for certain products are manufactured by contract manufacturers. We then
perform final assembly and testing of these products. In addition, some Foundry-branded products
are manufactured by third party OEMs. Our agreements with some of these companies allow them to
procure long lead-time component inventory on our behalf based on a rolling production forecast
provided by us. We are contractually obligated to purchase long lead-time component inventory
procured by certain suppliers and third-party manufacturers in accordance with our forecasts
although we can generally give notice of order cancellation at least 90 days prior to the delivery
date. If actual demand for our products is below our projections, we may have excess inventory as a
result of our purchase commitments. We do not have long-term contracts with these suppliers and
third-party manufacturers. We have experienced delays in product shipments from our contract manufacturers, which in turn
delayed product shipments to our customers. In addition, certain of our products require a long
manufacturing lead-time, which may result in delayed shipments. 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 or OEMs to provide us with adequate
supplies of high-quality products, the loss of any of our third-party manufacturers, or the
inability to obtain components and raw materials, could cause a delay in our ability to fulfill
orders. Additionally, from time to time, we transition, via our contract manufacturers, to
different manufacturing locations, including lower-cost foreign countries. Such transitions are
inherently risky and could cause a delay in our ability to fulfill orders or a deterioration in
product quality.  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. 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, 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
certain customers for a particular quarter are not realized in that quarter, we may not 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. 29




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Our ability to successfully implement our business plan and comply with regulations requires
an effective planning and management process. We expect that we will need to continue to improve
existing, and implement new, operational and financial systems, procedures and controls to manage
our business effectively in the future. 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.  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. We have recently completed our evaluation of our internal controls over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act of 2002. Although our assessment, testing and
evaluation resulted in our conclusion that as of December 31, 2004, our internal controls over
financial reporting were effective, we cannot predict the outcome of our testing in future periods.
If our internal controls are found to be ineffective in future periods, our reputation could be
harmed. We may incur additional expenses and commitment of managements time in connection with
further evaluations, either of which could materially increase our operating expenses and
accordingly reduce our net income.  Beginning January 1, 2006, we will be required to record compensation expense for stock
options. As a result, our profitability will be reduced significantly. In December 2004, FASB issued an accounting standard that will require the fair value of all
equity-based awards granted to employees be recognized in the statement of operations as
compensation expense, beginning on January 1, 2006 for calendar year companies. The various
methods for determining the fair value of stock options are based on, among other things, the
volatility of the underlying stock. As noted above, our stock price has historically been volatile.
Therefore, the adoption of this accounting standard will negatively affect our profitability and
may adversely affect 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.  The timing of the adoption of industry standards may negatively affect 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 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 on widespread
market acceptance of their underlying technologies. At least one networking equipment standards
body has reportedly stopped all work on a standard in response to assertions by Nortel that it
controls the patent rights to certain industry standards. Attempts by third parties to impose
licensing fees on industry standards could undermine the adoption of such standards and decrease
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. 30




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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 defects or errors.  We may incur liabilities that are not subject to maximum loss clauses. In the ordinary course of business, we enter into purchase orders, sales contracts, and other
similar contractual arrangements relating to the marketing, sale, manufacture, distribution, or use
of our products and services. We may incur liabilities relating to our failure to address certain
liabilities or inability to perform certain covenants or obligations under such agreements, or
which result from claims and losses arising from certain external events as outlined within the
particular contract. Such agreements may not contain, or be subject to, maximum loss clauses, and
liabilities arising from them may result in significant adverse changes to our financial position
or results of operations.  Our products may not continue to comply with the regulations governing 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 in which we currently sell, there can be 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 revenues or maintaining profitability. Additionally, future changes in tariffs, or
their application, by regulatory agencies could affect the sales of some of our products.  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. Although we focus on internal product development and growth, we may learn of acquisition
prospects that would complement our existing business or enhance our technological capabilities.
Any acquisition by us could result in large and immediate write-offs, the incurrence of debt and
contingent liabilities, or amortization expenses related to amortizable intangible assets, any of
which could negatively affect our results of operations. Furthermore, acquisitions involve numerous
risks and uncertainties, including: 31




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
    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. 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, and our failure to do so could harm our business.  Our stock price has been volatile historically, which may make it more difficult to sell 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, speculation in the press or investment community, 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.  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 events. Our
principal operations are susceptible to outages due to fire, floods,
earthquakes, power loss, power
shortages, telecommunications failures, break-ins and similar events. In addition, certain of our
local and foreign offices, OEMs, and contract manufacturers are located in areas susceptible to
earthquakes and acts of terrorism, which could cause a material disruption in our operations. For
example, we procure critical components from countries such as 32




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Japan and Taiwan, which periodically experience earthquakes and typhoons. 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 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. Management believes there have been no material changes to our quantitative and qualitative
disclosures about market risk during the three-month period ended March 31, 2005, compared to those
discussed in our Annual Report on Form 10-K for the year ended December 31, 2004. 
 Item 4. Controls and Procedures Limitations on Effectiveness of Controls.Management is responsible for establishing and
maintaining an adequate system of internal controls over financial reporting. The system contains
monitoring mechanisms, and actions deemed appropriate by management are taken to address
deficiencies. The Audit Committee, which is composed entirely of directors who are not officers or
employees of the Company, provides oversight to the financial reporting process. Even an effective
internal control system, no matter how well designed, has inherent limitations  including the
possibility of human error and the circumvention or overriding of controls  and therefore can only
provide reasonable assurance that financial statements are free of material errors. Further,
because of changes in conditions, the effectiveness of the system of internal controls may vary
over time and no projections can be made to future periods. Evaluation of Disclosure Controls and Procedures.Based on their evaluation as of March 31,
2005, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended) were sufficiently effective to ensure that the information required to be
disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and
reported within the time periods specified in the SECs rules and Form 10-Q. Changes in Internal Control over Financial Reporting.There were no significant changes to
our internal controls during the quarter ended March 31, 2005 that have materially affected our
internal controls over financial reporting. 33




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings. See
Note 3, Commitments and
ContingenciesLitigation, to Condensed Consolidated
Financial Statements. 34




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Item 2. Unregistered Sales of Equity 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. 
 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.)
 35




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Number
    
    Description10.1
    
    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 95054.31.1
    
    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). 36




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(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. 37




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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: May 10, 2005 38




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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 95054.31.1
    
    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 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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(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.