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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended March 31, 2002





OR





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




For the transition period from
 to





Commission file number 000-26689





---




FOUNDRY NETWORKS, INC.


(Exact name of registrant as specified in its charter)





Delaware (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)





N/A





---




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  ̈





As of May 7, 2002, there were 119,962,195 shares of the registrants common stock outstanding, par value $0.0001.





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##### Table of Contents

INDEX





PagePART I

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001

3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

14Risk Factors That May Affect Future Results and Market Price of Stock

19Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

31Item 2.

Changes in Securities and Use of Proceeds

32Item 3.

Defaults Upon Senior Securities

32Item 4.

Submission of Matters to a Vote of Security Holders

32Item 5.

Other Information

32Item 6.

Exhibits and Reports on Form 8-K

32SIGNATURES

34







2




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##### Table of Contents

PART I.    FINANCIAL INFORMATION





Item 1.Financial Statements.





FOUNDRY NETWORKS,
INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)





March 31,


December 31,2002


2001ASSETS

(unaudited)


(1)Current assets:Cash and cash equivalents

$
112,098


$
98,210Short-term investments


171,212



176,524Accounts receivable, net of allowances for doubtful accounts of $6,103 and $6,648 and sales returns of $1,501 and $1,501 at March
31, 2002 and December 31, 2001, respectively


45,198



51,830Inventories


44,764



43,277Deferred tax assets


26,656



29,656Prepaid expenses and other current assets


4,287



4,863Total current assets


404,215



404,360Property and equipment


13,767



13,184Less: Accumulated depreciation


(8,037
)


(6,868
)Net property and equipment


5,730



6,316Other long-term assets


1,112



1,462Total assets

$
411,057


$
412,138LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
11,156


$
15,300Accrued payroll and related expenses


9,510



10,932Warranty accrual


2,499



2,499Other accrued expenses


3,963



4,601Income taxes payable


1,310



1,193Deferred revenue


16,471



15,781Total current liabilities


44,909



50,306Commitments and contingencies (Note 4)Stockholders equity:Common stock, $0.0001 par value:Authorized300,000,000 shares at March 31, 2002:Issued and outstanding119,942,224 and 119,298,814 shares at March 31,
2002 and December 31, 2001, respectively


12



12Treasury stock


(14,996
)


(14,996
)Additional paid-in capital


288,025



284,740Note receivable from stockholder


(480
)


(480
)Deferred stock compensation


(919
)


(1,302
)Cumulative translation adjustment


(50
)


351Retained earnings


94,556



93,507Total stockholders equity


366,148



361,832Total liabilities and stockholders equity

$
411,057


$
412,138


---

|(1) |  | Derived from audited consolidated financial statements.
|--- |  | -------------------------------------------------------




See accompanying notes to condensed consolidated financial statements.







3




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##### Table of Contents

FOUNDRY NETWORKS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


(in thousands, except per share data)





Three Months Ended March 31,2002

2001Revenue, net.

$
62,420

$
82,551Cost of revenue


29,841


38,888Gross profit


32,579


43,663Operating expensesResearch and development


8,528


7,900Sales and marketing


20,590


24,817General and administrative


3,011


5,947Amortization of deferred stock compensation


382


1,135Total operating expenses


32,511


39,799Income from operations


68


3,864Interest income, net


1,475


2,865Income before provision for income taxes


1,543


6,729Provision for income taxes


494


2,557Net income

$
1,049

$
4,172Basic net income per share

$
0.01

$
0.04Weighted average shares used in computing basic net income per share


118,742


115,829Diluted net income per share

$
0.01

$
0.03Weighted average shares used in computing diluted net income per share


123,085


124,857








See accompanying notes to condensed consolidated
financial statements.




4




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##### Table of Contents

FOUNDRY NETWORKS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


(in thousands)





Three Months Ended March 31,2002


2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
1,049


$
4,172Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


1,169



706Amortization of deferred stock compensation


382



1,136Provision for (recovery of) allowance for doubtful accounts


(222
)


3,044Provision for excess and obsolete inventories


2,494



7,464Deferred tax assets


3,000



3Tax benefit from stock option exercises


411



Change in operating assets and liabilities:Accounts receivable


6,854



4,992Inventories


(3,981
)


(19,230
)Prepaid expenses and other assets


926



6,458Accounts payable


(4,144
)


(116
)Accrued payroll and related benefits


(1,422
)


(1,788
)Income taxes payable


117



3,546Other accrued liabilities


(638
)


(351
)Deferred revenue


690



(408
)Net cash provided by operating activities


6,685



9,628CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(583
)


(2,038
)Maturities of short-term investments


81,678



78,532Purchases of short-term investments


(76,366
)


(46,420
)Purchase of minority investment






(2,500
)Net cash provided by investing activities


4,729



27,574CASH FLOWS FROM FINANCING ACTIVITYProceeds from issuances of common stock


2,874



3,925Net cash provided by financing activity


2,874



3,925INCREASE IN CASH AND CASH EQUIVALENTS


14,288



41,127Effect of exchange rate changes on cash


(400
)


120CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


98,210



168,429CASH AND CASH EQUIVALENTS, END OF PERIOD

$
112,098


$
209,676





See accompanying notes to condensed consolidated financial statements.




5




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##### Table of Contents

FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(Information for the three months ended March 31, 2002
and 2001 is unaudited)





1.    DESCRIPTION OF BUSINESS:





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





|2. |  | SIGNIFICANT ACCOUNTING POLICIES:
|-- |  | --------------------------------




Basis of Presentation





The condensed consolidated financial statements included herein have been
prepared by Foundry Networks, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include the accounts of Foundry Networks, Inc. and its wholly-owned subsidiaries (collectively
Foundry or the Company). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. The condensed consolidated balance sheet as of December 31, 2001 has been derived from the audited financial statements as of that date, but does not include all disclosures required by generally accepted accounting
principles. These financial statements and notes should be read in conjunction with the Companys audited consolidated financial statements and notes thereto included in Foundrys Annual Report on Form 10-K filed with the SEC.





The unaudited condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. These adjustments are of a normal, recurring nature. The results of operations for the three months ended March 31,
2002 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2002.





Principles of Consolidation and Foreign Currency Translation





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





Reclassifications





Certain items previously reported in specific
financial captions have been reclassified to conform with the March 31, 2002 presentation.





Use of Estimates in Preparation of Financial
Statements





The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the




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##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used in accounting for, but not limited to, the accounting for excess and obsolete inventory, product warranty, allowances for doubtful accounts, sales returns, income taxes and depreciation. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined.





Cash, Cash Equivalents and Short-Term Investments





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





Foundry accounts for its investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Investments in highly liquid financial instruments with original maturities greater than three months but less than one year are classified as short-term investments. As
of March 31, 2002 and December 31, 2001, Foundrys short-term investments, which were stated at amortized cost and classified as held-to-maturity, consisted of corporate and investment grade U.S. debt securities and commercial paper.





March 31, 2002Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


Estimated Fair ValueMoney market funds

$
1,543

$


$



$
1,543Commercial paper


63,792









63,792Government debt securities


177,366


36


(113
)


177,289$
242,701

$
36

$
(113
)

$
242,624Included in cash and cash equivalents

$
71,489

$


$



$
71,489Included in short-term investments


171,212


36


(113
)


171,135$
242,701

$
36

$
(113
)

$
242,624December 31, 2001Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


Estimated Fair ValueMoney market funds

$
33,135

$


$



$
33,135Commercial paper


58,807









58,807Government debt securities


149,583


127


(27
)


149,683$
241,525

$
127

$
(27
)

$
241,625Included in cash and cash equivalents

$
65,001

$


$



$
65,001Included in short-term investments


176,524


127


(27
)


176,624$
241,525

$
127

$
(27
)

$
241,625




7




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##### Table of Contents

FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Inventories





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





March 31, 2002

December 31, 2001Purchased parts

$
16,761

$
20,305Work-in-process


23,954


22,706Finished goods


4,049


266$
44,764

$
43,277





The networking industry is characterized by rapid technological change, frequent
new product introductions, changes in customer requirements, and evolving industry standards. We regularly monitor inventory quantities on hand and record a provision for excess and obsolete inventories based primarily on our estimated forecast of
product demand and production requirements for the next three months. Provisions for excess and obsolete inventory in the amounts of $2.5 million and $7.5 million were recorded for the three months ended March 31, 2002 and 2001, respectively.
Inventory write-offs were approximately $7.9 million and $1.2 million for the three months ended March 31, 2002 and 2001, respectively. The increase in write-offs during the first quarter of 2002 was primarily associated with the major product
transition to incorporate JetCore ASICs in our product offering.





Concentrations





Financial instruments that potentially subject Foundry to a concentration of credit risk principally consist of cash equivalents, short-term investments
and accounts receivable. Foundry seeks to reduce credit risk on financial instruments by investing almost exclusively in high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer or fund. Exposure to customer
credit risk is controlled through credit approvals, credit limits, continuous monitoring procedures and establishment of an allowance for potential doubtful accounts when deemed necessary. Specific allowances for bad debts are recorded when Foundry
becomes aware of a specific customers inability to meet its financial obligation to us such as in the case of bankruptcy filings or deterioration of financial position. Estimates are used in determining our allowances for all other customers
based on factors such as current trends, the length of time the receivables are past due and historical collection experience. In determining the allowance for doubtful accounts, Foundry also considers its agreement with GE Capital, a third party
leasing partner, which allows GE Capital a right of recourse against Foundry for defaults by customers financed through GE Capital based on certain criteria. The impact on operating results for the first quarter of 2002 as a result of defaults by
customers financed through GE Capital was insignificant. Foundry mitigates some collection risk by requiring most customers in the Asian region to secure letters of credit prior to placing an order with the Company.





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





Minority Investment





In February 2001, Foundry made a $2.5 million minority investment in a development stage private company, which is also a customer. Sales to this customer during 2001 and 2000 were
insignificant. This




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##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




customer did not make any purchases from Foundry during the three months ended March 31, 2002. Foundrys interest in the company is significantly less than 20% and, as such, the Company does
not have the ability to exercise significant influence. In December 2001, the Company wrote down the entire minority investment as it was determined that the investment declined in fair value on an other than temporary basis based on a number of
factors including the value of the most recent round of financing, general market and industry conditions and the financial condition of and business outlook for the company.





Revenue Recognition





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





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





Services.    Revenue from customer support services is recognized ratably over the contractual period, generally one year. Amounts invoiced to customers
in excess of revenue recognized on support contracts are recorded as deferred revenue until the revenue recognition criteria are met. Revenue from customer support services accounted for 12% and 8% of total revenue for the three months ended March
31, 2002 and 2001, respectively. Revenue for training and installation services is recognized as services are rendered. Revenue from software, training and installation services accounted for less than 1% of total revenue for the three months ended
March 31, 2002 and 2001.





Segment Reporting





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





For the three months ended March 31, 2002, one customer accounted for 15% of revenue. For
the three months ended March 31, 2001, no customer accounted for greater than 10% of our revenue.




9




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##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Foundry sells to various countries in North and South America, Europe, Asia,
Australia and the Middle East through its foreign sales offices and subsidiaries. Foreign operations consist of sales, marketing and support activities. Foundrys export sales represented 46% for the quarter ended March 31, 2002 compared to 38%
for the same period in 2001. Sales to one individual country outside of the United States represented 15% of revenue for the first quarter ended March 31, 2002.





Computation of Per Share Amounts





Basic net income per
common share and diluted net income per common share are presented in conformity with SFAS No. 128, Earnings Per Share for all periods presented. In accordance with SFAS No. 128, basic net income per common share has been calculated
using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. For the three months ended March 31, 2002 and 2001, diluted net income per common share has been calculated assuming the
conversion of all dilutive potential common stock. The common equivalent shares which were anti-dilutive and therefore, excluded from the diluted earnings per share computation for the three months ended March 31, 2002 and 2001 were 18.2 million and
10.7 million shares, respectively.





Three Months Ended March 31,2002


2001(in thousands, except per share data)Net income

$
1,049


$
4,172Basic:Weighted average shares of common stock outstanding


119,522



118,697Less: Weighted average shares subject to repurchase


(780
)


(2,868
)Weighted average shares used in computing basic net income per share


118,742



115,829Basic net income per share

$
0.01


$
0.04Diluted:Weighted average shares of common stock outstanding


119,522



118,697Add: Weighted average dilutive potential common stock


3,563



6,160Weighted average shares used in computing diluted net income per share


123,085



124,857Diluted net income per share

$
0.01


$
0.03





Stock-Based Compensation





In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. This accounting standard permits the use of either a
fair value based method or the method defined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion 25) to account for stock-based compensation arrangements. Foundry has elected to determine
the value of stock-based compensation arrangements under the provisions of APB Opinion 25, and accordingly, recognizes no compensation expense for stock option grants with an exercise price equal to the fair value of the shares at the date of grant.





Recent Accounting Pronouncements





In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 provides new guidance on
the accounting for a business




10




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##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




combination at the date a business combination is completed. Specifically, it requires use of the purchase method of accounting for all business combinations initiated after June 30, 2001,
thereby eliminating use of the pooling-of-interests method. SFAS No. 142 establishes new guidance on how to account for goodwill and intangible assets after a business combination is completed. Among other things, it requires that goodwill and
certain other intangible assets with indefinite lives no longer be amortized and will be tested for impairment at least annually and written down only when impaired. The Company will follow the requirements of SFAS No. 141 for any future business
acquisitions. The Company adopted SFAS No. 142 on January 1, 2002 and this adoption did not have a material impact on the Companys financial position, results of operations, or cash flows.





In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121 by requiring that one
accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired and by broadening the presentation of discontinued operations to include more disposal transactions. The adoption of SFAS
No. 144 did not have a material impact on the Companys financial position, results of operations, or cash flows.





In April
2001, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products. This issue concluded that certain
consumer and trade sales promotion expenses are presumed to be a reduction of the selling prices of the vendors products and therefore, should be characterized as a reduction of revenue when recognized in the vendors income statement.
The Company adopted this pronouncement on January 1, 2002 and the adoption of EITF 00-25 did not have a material impact on the Companys financial position, results of operation, or cash flows.





3.    COMPREHENSIVE INCOME





Foundry adopted SFAS No. 130, Reporting Comprehensive Income in 1998. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income. This standard defines comprehensive income as the changes in equity
of an enterprise except those resulting from stockholder transactions. Other components of comprehensive income for the three months ended March 31, 2002 and 2001 were immaterial and comprised only of foreign currency translation adjustments.





|4.COMMITMENTS |  | AND CONTINGENCIES
|------------- |  | -----------------




Leases





The Company leases office space in a number of locations in the United States, as well as in the Americas, Europe, Middle
East, Australia, and Asia. At March 31, 2002, future minimum lease payments under all noncancelable operating leases are as follows (in thousands):





Operating Leases2002 (remaining nine months)

$
3,6752003


4,1862004


4,2032005


4,2392006


2,485Thereafter


6,001Total lease payments

$
24,789




11




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##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Purchase Commitments





The Company uses two primary contract manufacturers to assemble and test our circuit boards and backplane products. During the normal course of business, in order to reduce
manufacturing lead times and ensure adequate inventories, the Companys agreements with these contract manufacturers allow them to procure long lead-time component inventory on the Companys behalf based upon a rolling production forecast
provided by Foundry with lead times of up to 6 months. Foundry is contractually obligated to the purchase of long lead-time component inventory procured by our contract manufacturers in accordance with the forecast, unless Foundry gives notice of
order cancellation at least 30 to 90 days prior to the delivery date. As of March 31, 2002, the Company was committed to purchase approximately $21.2 million of such inventory over the next four months.





Litigation





In December
2000, several similar shareholder class action lawsuits were filed against Foundry and certain of its officers in the United States Court for the Northern District of California, following Foundrys announcement in December 2000 of its
anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated by the Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead
plaintiffs were selected as required by law and they filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of shareholders who purchased Foundrys common
stock during the period from September 7, 2000 to December 19, 2000. On October 26, 2001, the Court granted the Companys motion to dismiss the consolidated amended complaint without prejudice to amend. On December 13, 2001, attorneys for lead
plaintiffs filed a second amended complaint. The Company has reviewed the second amended complaint and moved to dismiss that complaint as well. A hearing on the dismissal is set for June 7, 2002. Whatever the outcome of that hearing, the Company
believes the lawsuit is without merit and intends to defend itself vigorously.





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




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FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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





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




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





The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere
in this Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of
many factors, including but not limited to those discussed in the section entitled Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors That May Affect Future Results and Market Price of
Stock. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results
of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents the Company files from time to time with the Securities and Exchange Commission.





Critical Accounting Policies and Estimates





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





Revenue Recognition





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





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




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Revenue from customer support services is recognized ratably over the contractual period,
generally one year. Amounts invoiced to customers in excess of revenue recognized on support contracts are recorded as deferred revenue until the revenue recognition criteria are met. Revenue from customer support services accounted for 12% and 8%
of total revenue for the three months ended March 31, 2002 and 2001, respectively. Revenue for training and installation services is recognized as services are rendered. Revenue from software, training and installation services, combined, accounted
for less than 1% of total revenue for each comparative quarter.





Inventories





The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and
evolving industry standards. Foundry regularly monitors inventory quantities on hand and records a provision for excess and obsolete inventories based primarily on estimated forecast of product demand and production requirements for the next three
months. Demand for Foundrys products has been adversely affected as a result of the economic slowdown and reduced telecommunications and infrastructure capital spending, particularly in the United States. As demonstrated during fiscal 2001, a
significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Consequently, provisions for excess and obsolete inventory of $7.5 million were recorded for the three months ended March 31, 2001.
During the three months ended March 31, 2002, the provision was reduced to $2.5 million as inventory levels decreased. During the first quarter of 2001, Foundry recorded inventory write-offs of $1.2 million. During the first quarter of 2002,
Foundry wrote off $7.9 million of excess and obsolete inventory as a result of a product transition to incorporate JetCore ASICs in the new product lines. Although the Company makes every effort to ensure the accuracy of its forecasts of future
product demand, any significant unanticipated changes in demand or technological developments would significantly impact the value of inventory and reported operating results. Estimates of future product demand may prove to be inaccurate, in which
case Foundry may have understated or overstated the provision required for excess and obsolete inventory. In the future, if inventory is determined to be overvalued, Foundry would be required to recognize such costs in cost of revenue at the time of
such determination. If inventory is determined to be undervalued, Foundry may have overstated cost of revenue in previous periods and would be required to recognize additional operating income at the time of sale.





Accounts Receivable





We
continually monitor and evaluate the collectibility of our trade receivables based on a combination of factors. We record specific allowances for bad debts when we become aware of a specific customers inability to meet its financial obligation
to us such as in the case of bankruptcy filings or deterioration of financial position. Estimates are used in determining our allowances for all other customers based on factors such as current trends, the length of time the receivables are past due
and historical collection experience. In determining our allowance for doubtful accounts, we also consider our agreement with GE Capital (formerly Heller Financial Corp.), our third party leasing partner, which allows GE Capital a right of recourse
against Foundry for defaults by customers financed through GE Capital based on certain criteria. We mitigate some collection risk by requiring most of our customers in the Asian region to secure letters of credit prior to placing an order with us.
During the quarter ended March 31, 2002, Foundry decreased its allowance for doubtful accounts from $6.6 million at December 31, 2001 to $6.1 million as a result of the Companys increased collection efforts. While we believe that our allowance
for doubtful accounts receivable is adequate and that the judgment applied is appropriate, such amounts estimated could differ materially from what will actually transpire in the future. If the historical data used by the Company to calculate the
estimated allowance for doubtful accounts does not properly reflect future bad debts, net income could be overstated.





Deferred Tax Asset Valuation Allowance





We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against
our net deferred tax assets. Management makes an assessment of the likelihood that our deferred tax assets will be recovered from




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future taxable income, and to the extent that recovery is not believed to be more likely than not, a valuation allowance must be established. For the three months ended March 31, 2002, we did not
record a valuation allowance to reduce our deferred tax assets because we believe the amount is more likely than not to be realized. In the event Foundry is unable to realize some or all of its deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such determination was made. Our net deferred tax assets as of March 31, 2002 were $26.7 million.





Purchase Commitments





We currently subcontract substantially all of our manufacturing to
two companies located in San Jose, California. Celestica assembles and tests our printed circuit boards, and Sanmina Corporation assembles and tests our backplane products. Our agreements with Sanmina and Celestica allow them to procure long
lead-time component inventory on our behalf based upon a rolling production forecast provided by Foundry with lead times of up to 6 months. Foundry is contractually obligated to the purchase of long lead-time component inventory procured by our
contract manufacturers in accordance with the forecast, unless Foundry gives notice of order cancellation at least 30 to 90 days prior to the delivery date. As of March 31, 2002, the Company was committed to purchase approximately $21.2 million of
such inventory over the next four months. If actual demand of our products is below the projections, we may have excess inventory as a result of our purchase commitments of long lead-time components with our contract manufacturers. This would be
recorded as additional provisions for excess inventory as a component of cost of revenue.





Litigation





We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation
in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in the lawsuits pending against us as indicated in
Part II. Item 1 Legal Proceedings, and we are vigorously contesting these allegations. Responding to the allegations has been, and probably will be, expensive and time-consuming for us. An unfavorable resolution of the lawsuits could
adversely affect our business, results of operations, or financial condition.





Results of Operations





The following table sets forth selected items from our statements of income as a percentage of revenue for the periods indicated (unaudited):





Three Months Ended March 31,2002


2001(unaudited)Revenue, net

100.0
%

100.0
%Cost of revenue

47.8


47.1Gross profit

52.2


52.9Operating expenses:Research and development

13.7


9.6Sales and marketing

33.0


30.0General and administrative

4.8


7.2Amortization of deferred stock compensation

0.6


1.4Total operating expenses

52.1


48.2Income from operations

0.1


4.7Interest income, net

2.4


3.5Income before provision for income taxes

2.5


8.2Provision for income taxes

0.8


3.1Net income

1.7
%

5.1
%




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Revenue.     Revenue decreased 24% from $82.6 million for the first
quarter of 2001 to $62.4 million for the first quarter of 2002 as a result of unfavorable economic conditions which significantly reduced general demand for networking products compared to the same period a year ago. For the three months ended March
31, 2002, one customer accounted for 15% of our revenue. For the three months ended March 31, 2001, no customers accounted for greater than 10% of our revenue. For the quarter ended March 31, 2002, revenue from customer support contracts accounted
for approximately 12% of our revenue compared to 8% for the same period last year due to significantly higher revenue in the first quarter of 2001.





Sales to customers outside of the United States increased as a percentage of revenue, accounting for approximately 46% and 38% for the three months ended March 31, 2002 and 2001, respectively. One individual country
accounted for 15% of total revenue for the quarter ended March 31, 2002 while no individual country accounted for greater than 10% in the same period a year ago. Sales to certain countries or regions are unpredictable and may continue to fluctuate
in the future.





Market and economic conditions continue to be challenging. If economic conditions in the United States and
globally do not improve, or if we experience a worsening in economic conditions, we may continue to experience material adverse effects on our revenue, operating results, and financial condition.





Gross profit.    Gross profit decreased from $43.7 million for the first quarter of 2001 to $32.6 million for the first quarter of 2002. As a percentage
of revenue, gross profit decreased slightly from 53% for the first quarter of 2001 to 52% for the first quarter of 2002 due to lower average selling prices in the first quarter of 2002 as a result of increased competition and difficult economic
conditions. This decrease in average selling prices was offset by a reduction in provisions for excess and obsolete inventory from $7.5 million in the first quarter of 2001 to $2.5 million the first quarter of 2002 as a result of reduced inventory
levels in 2002. Due to a number of factors which are discussed in more detail below, our selling prices and gross margins have and may continue to decrease as a result of macro-economic factors and our efforts to compete aggressively, reduce our
inventory levels and maintain sales levels.





Research and development.    Research and development
expenses consist primarily of salaries and related personnel expenses, prototype expenses related to the development of our ASICs, software development and testing costs, and the depreciation of property and equipment related to research and
development activities. Research and development expenses increased $0.6 million from $7.9 million for the first quarter of 2001 to $8.5 million for the first quarter of 2002. The increase was due to an increase in payroll expenses associated
with the hiring of additional engineering personnel, offset by a decrease in prototype expenses as the development of our new products incorporating our third generation JetCore ASICs approached its final stages of completion during the first
quarter of 2002. Research and development costs are expensed as incurred. We believe continued investment in product enhancements and new product development is critical to attaining our strategic objectives, and as a result, we expect research and
development expenses to continue to increase in absolute dollars.





Sales and marketing.    Sales and
marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions, as well as trade shows, advertising, promotional expenses and the cost of facilities. Sales
and marketing expenses decreased $4.2 million from $24.8 million for the first quarter of 2001 to $20.6 million for the first quarter of 2002. The decrease was primarily due to a decrease in the size of our sales force.





General and administrative.    General and administrative expenses consist primarily of salaries and related expenses for
executive, finance and administrative personnel, provisions for doubtful accounts receivable, facilities, legal expenses and other general corporate expenses. General and administrative expenses decreased from $5.9 million for the first quarter of
2001 to $3.0 million for the first quarter of 2002. The decrease was primarily due to an addition of $3.0 million for the provision for doubtful accounts during the first quarter of




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2001. During the first quarter of 2002, we did not record any additional provisions for doubtful accounts, but instead recorded a benefit of $0.2 million to the provision as a result of a
significant improvement in the quality of our accounts receivable and increased collection efforts.





Amortization of deferred
stock compensation.    In connection with the grant of stock options to employees and a director, we recorded deferred stock compensation in the aggregate amount of $17.3 million in 1999 and $300,000 in 2000, representing the
difference between the exercise price and the deemed fair market value of our common stock on the date these stock options were granted. This amount is reflected within stockholders equity and is being amortized to operations over the
respective vesting periods. We recorded amortization of deferred stock compensation expense of approximately $0.4 million and $1.1 million for the three months ended March 31, 2002 and 2001, respectively. At March 31, 2002, we had approximately
$0.9 million remaining to be amortized as follows: $0.7 million for the remainder of 2002 and $0.2 million in 2003.





Interest
income.    Interest and other income is primarily the result of the interest earned on our short-term investments and cash held in interest bearing accounts. Interest and other income decreased from $2.9 million in the first
quarter of 2001 to $1.5 million in the first quarter of 2002. The decrease was due to lower short-term interest rates earned on investments during the quarter ended March 31, 2002 as a result of Federal interest rate cuts throughout 2001 and 2002.





Income taxes.    We have recorded an income tax provision for the three months ended March 31, 2002
of $0.5 million as compared to $2.6 million for the same period in 2001. The effective tax rates for the three months ended March 31, 2002 and 2001 were 32% and 38%, respectively, based upon the estimated annualized tax rates. The decrease in our
effective tax rate between periods reflect the impact of non-taxable income and tax credits on a lower level of pretax income.





Liquidity and Capital
Resources





At March 31, 2002 Foundry had cash and cash equivalents and short-term investments totaling $283.3 million
as compared to $274.7 million at December 31, 2001, an increase of $8.6 million. For the three months ended March 31, 2002, Foundry generated cash of $6.7 million from operations, $2.9 million from the issuances of common stock under our
employee stock purchase and stock option plans, offset by $0.6 million used for the purchase of fixed assets. Cash provided by operations decreased $2.9 million from $9.6 million for the quarter ended March 31, 2001 to $6.7 million for the quarter
ended March 31, 2002, primarily due to lower net income during 2002. Net income decreased from $4.2 million for the quarter ended March 31, 2001 to $1.0 million for the quarter ended March 31, 2002 as a result of a decrease in revenue due
to an overall decline in the U.S. economy and in particular, reduced capital spending by our customer base.





As of March 31,
2002, we did not have any material commitments for capital expenditures. However, we expect to incur capital expenditures as we expand our operations. Although we do not have any current plans or commitments to do so, from time to time, we may also
consider the acquisition of, or evaluate investments in, products and businesses complementary to our business. Any acquisition or investment may require additional capital.





We believe that our cash and short-term investment balances at March 31, 2002 will enable us to meet our working capital requirements for at least the next 12 months.




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





We may not be able to maintain profitability in the
future.





We generated net income of $2.9 million for the year ended December 31, 2001 on revenues of $311.2 million and
net income of $1.0 million for the quarter ended March 31, 2002 on revenues of $62.4 million. As of March 31, 2002, we had retained earnings of $94.6 million. When economic conditions improve, we may incur increased costs and expenses related
to sales and marketing, including expansion of our direct sales operation and distribution channels, product development, customer support, expansion of our corporate infrastructure, and facilities expansion. We base our operating expenses on
anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, any significant shortfall in revenue relative to our expectations could cause a significant decline in our quarterly operating results. In
order to be profitable, we must generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels. We may not be able to sustain or increase profitability on a quarterly or annual basis in the future.





The current economic downturn may continue to adversely affect our revenues, gross margins and expenses.





Our quarterly revenue and operating results have and may continue to fluctuate due to the effects of general economic conditions in the United States
and globally, and, in particular, market conditions in the communications and networking industries. In recent quarters, our operating results have been adversely affected as a result of the economic slowdown and reduced capital spending,
particularly in the United States. The downturn has also contributed to the decline in revenue during the first quarter of 2002 compared to the same period in 2001. We have experienced gross margin declines, reflecting the effect of competitive
pressures as well as write-downs for inventories and other asset impairments as a result of the downturn. We are uncertain about the extent, severity, and length of the economic downturn. If the economic conditions in the United States and globally
do not improve, or if we experience a worsening in the global economic slowdown, we may continue to experience material negative effects on our business, operating results, and financial condition.





We may not meet quarterly financial expectations, which could cause our stock price to decline.





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





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





Terrorist acts and acts of war may harm our business and operating results.





The terrorist attacks in New York and Washington D.C. on September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the United States and global economies. The long-term effects on our business from these
attacks are unknown. The continued threat of terrorism and heightened security and military action in response to this threat may cause further disruption to the economy. To the extent that such disruptions result in delays or cancellations of
customer orders, the manufacture or shipment of our products, our business and results of operations could be materially and adversely affected.




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





For the
three months ended March 31, 2002, one customer accounted for 15% of our net revenue. For the year ended December 31, 2001, no customers accounted for greater than 10% of our net revenue. This may not necessarily be indicative of future customer
concentrations. Although our customer base remains less concentrated, the loss of continued orders from our more significant customers could cause our revenue and profitability to suffer.





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





| |  |  | our reseller agreements generally do not require minimum purchases;
| | - |  | -------------------------------------------------------------------




| |  |  | our customers can stop purchasing and our resellers can stop marketing our products at any time;
| | - |  | ------------------------------------------------------------------------------------------------




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




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




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





Financial results for any particular period will not predict results
for future periods.





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 should not rely on the results for any period as an indication of future performance. In the future, our revenue may remain flat, decrease or grow. As a
consequence, operating results for a particular quarter are extremely difficult to predict. We expect that our operating expenses will increase if we expand our sales and marketing operations and as we continue to develop new products. Further, we
are subject to employer payroll taxes when our employees exercise their non-qualified stock options. The employer payroll taxes are assessed on each employees gain, which is the difference between the price of our common stock on the date of
exercise and the exercise price. During a particular period, these payroll taxes could be material depending on the number of stock options exercised and the fair market value of our common stock during such period. These employer payroll taxes
would be recorded as a charge to operations in the period such options are exercised based on actual gains realized by employees. In addition to the net proceeds we would receive upon the exercise of stock options, we would receive tax deductions
for gains realized by employees on the exercise of non-qualified stock options for which the benefit is recorded as additional paid-in capital. However, because we are unable to predict our future stock price and the number of optionees who may
exercise during any particular period, we cannot predict what, if any, expense will be recorded in a future period and the impact on our future financial results.





Intense competition in the market for network solutions could prevent us from 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.





We also compete with other companies, such as Nortel Networks and Enterasys Networks, Juniper Networks,
Extreme Networks and Riverstone Networks. Some of our current and potential competitors have




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greater market leverage, longer operating histories, greater financial, technical, sales, marketing and other resources, more name recognition and larger installed customer bases. Additionally,
we may face competition from unknown companies and emerging technologies that may offer new LAN, MAN and LAN/WAN solutions to enterprises and ISPs. Furthermore, a number of these competitors may merge or form strategic relationships that would
enable them to offer, or bring to market earlier, products that are superior to ours in terms of features, quality, pricing or other factors.





In order to remain competitive, we must, among other things, invest significant resources in developing new products with superior performance at lower prices than our competitors. We must also enhance our current
products and maintain customer satisfaction. If we fail to do so, our products may not compete favorably with those of our competitors and our revenue and profitability could suffer.





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





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





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





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





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





The current life cycle of our products is typically 18 to 24 months. In June 2001, we introduced JetCore, our third generation of ASICs which will be
incorporated within our existing product lines by the end of June 2002. The introduction of new products or product enhancements may shorten the life cycle of our existing products, replace sales of some of our current products, thereby offsetting
the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products. This could harm our operating results by decreasing sales, increasing our inventory levels
of older products and exposing us to greater risk of product obsolescence. In addition, we have experienced, and may in the future experience, delays in developing and releasing new products and product enhancements. This has led to, and may in the
future lead to, delayed sales, increased expenses and lower quarterly revenue than anticipated. During the development of our products, we have also experienced delays in the prototyping of our ASICs, which in turn has led to delays in product
introductions.




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





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





Our revenue may be adversely affected by a reduction in outside financing
made available to our emerging company customers.





Our customer base includes emerging enterprise, telecommunications and
Internet companies who rely on venture capital firms, banks and other similar financing sources to fund their operations and growth. Due to the slowdown of the economy and other factors, some such customers experienced cash flow problems and found
it difficult to obtain financing on attractive terms, if at all. Some of these companies have reduced or ceased their purchases of our products and some have been unable to pay or have delayed payment for products they had previously purchased. In
response, the Company has tightened our credit standards. Tighter credit criteria may mean that the Company loses some potential high risk sales opportunities. However, the new standards have helped improve the quality of our trade receivables and
days sales outstanding.





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





Hewlett-Packard (HP), currently our most significant OEM, accounted for 5% of revenue for the three
months ended March 31, 2002. Sales to HP accounted for 4% and 6% of revenue for fiscal years 2000 and 2001, respectively. The recent merger between HP and Compaq Computer Corp. may have adverse effects on our revenue if HP chooses to reduce or
terminate its networking division as it restructures the company to focus on certain market sectors, and therefore, discontinue its OEM relationship with Foundry. In addition to providing revenue through sales of our products to HP, we believe this
relationship enhances our sales, marketing and distribution capabilities. If HP chooses to reduce or terminate its OEM relationship with Foundry, our revenue and ability to market and sell our products to prospective customers may be harmed.





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





Our gross margins may be further 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




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demand for our products could result in additional provision for excess and obsolete inventories. Additionally, our gross margins may be affected by fluctuations in manufacturing volumes,
component costs, the mix of product configurations sold and the mix of distribution channels through which our products are sold. For example, we generally realize higher gross margins on direct sales to the end user than on sales through resellers
or our OEMs. As a result, any significant shift in revenue through resellers or our OEMs could harm our gross margins. If product or related warranty costs associated with our products are greater than we have experienced, gross margin may also be
adversely affected.





We need additional qualified personnel to maintain and expand our business. If we are unable to promptly attract and retain
qualified personnel, our business may be harmed.





We believe our future success will depend in large part upon our ability
to identify, attract and retain highly skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. In spite of the economic downturn, competition for these personnel can be intense, especially in the San Francisco Bay
Area, and we may experience some difficulty hiring employees in the timeframe we desire, particularly engineers. Volatility or lack of positive performance in our stock price may also adversely affect our ability to retain key employees, all of whom
have been granted stock options. We may not succeed in identifying, attracting and retaining personnel. The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as timely product introductions.





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





Our expansion in international markets will 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 Pan Dacom and Total Network Solutions in Europe, Mitsui in Japan, Shanghai Gentek and GTI in China and
Samsung in Korea. Although we expect international revenue to increase as a percentage of our total revenue, the failure of our resellers to sell our products internationally would limit our ability to sustain and grow our revenue. In particular,
our revenue from Japan depends on Mitsuis ability to sell our products and on the strength of the Japanese economy, which has been weak in recent years.





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





| |  |  | potential recessions in economies outside the United States;
| | - |  | ------------------------------------------------------------




| |  |  | longer accounts receivable collection cycles;
| | - |  | ---------------------------------------------




| |  |  | seasonal reductions in business activity;
| | - |  | -----------------------------------------




| |  |  | higher costs of doing business in foreign countries;
| | - |  | ----------------------------------------------------




| |  |  | difficulties in managing operations across disparate geographic areas;
| | - |  | ----------------------------------------------------------------------




| |  |  | difficulties associated with enforcing agreements through foreign legal systems;
| | - |  | --------------------------------------------------------------------------------




| |  |  | political instability and export restrictions;
| | - |  | ----------------------------------------------




| |  |  | potential adverse tax consequences; and
| | - |  | ---------------------------------------




| |  |  | unexpected changes in regulatory requirements.
| | - |  | ----------------------------------------------



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One or more of such factors may have a material adverse effect on the Companys future
international operations and, consequently, on its 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.





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





We currently purchase several key components used in our products from single or limited sources and depend on supply from these sources to meet our needs. Our principal suppliers of key
components include Celestica, Texas Instruments, Sanmina, Finisar, Hewlett-Packard, Intel, Fujitsu, Samsung and QCS Limited. The inability of our suppliers to provide us with adequate supplies of key components or the loss of any of our suppliers
may cause a delay in our ability to fulfill orders and may have a material adverse effect on our business and financial condition.





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





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





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





We currently subcontract substantially all of our manufacturing to two companies located in San
Jose, California. Celestica assembles and tests our printed circuit boards, and Sanmina Corporation assembles and tests our backplane products. Our agreements with Sanmina and Celestica allow them to procure long lead-time component inventory on our
behalf based upon a rolling production forecast provided by Foundry with lead times of up to 6 months. Foundry is contractually obligated to the purchase of long lead-time component inventory procured by our contract manufacturers in accordance with
the forecast, unless Foundry gives notice of order cancellation at least 30 to 90 days prior to the delivery date. If actual demand of our products is below the projections, we may have excess inventory as a result of our purchase commitments of
long lead-time components with our contract manufacturers. We do not have long-term contracts with either of these manufacturers.





We have experienced delays in product shipments from our contract manufacturers, which in turn delayed product shipments to our customers. We may in the future experience similar delays or other problems, such as inferior quality and
insufficient quantity of product, any of which could harm our business and operating results. We intend to regularly introduce new products and product enhancements, which will require us to rapidly




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achieve volume production by coordinating our efforts with our suppliers and contract manufacturers. We attempt to increase our material purchases, contract manufacturing capacity and internal
test and quality functions to meet anticipated demand. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products, the loss of either of our contract manufacturers, or the ability to obtain raw
materials, could cause a delay in our ability to fulfill orders.





Due to the lengthy sales cycles of some of our products, the timing of our revenue
is difficult to predict and may cause us to miss our revenue expectations.





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





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





Our success depends in part on both the adoption of industry standards for new technologies in our market and our
products compliance with industry standards. Many technological developments occur prior to the adoption of the related industry standard. The absence of an industry standard related to a specific technology may prevent market acceptance of
products using the technology. For example, we introduced Gigabit Ethernet products in May 1997, over a year prior to the adoption of the industry standard for this technology. We intend to develop products using other technological advancements,
such as 10 Gigabit Ethernet, MPLS Draft-Martini, and may develop these products prior to the adoption of industry standards related to these technologies. As a result, we may incur significant expenses and losses due to lack of customer demand,
unusable purchased components for these products and the diversion of our engineers from future product development efforts. Further, we may develop products that do not comply with a later-adopted industry standard, which could hurt our ability to
sell these products. If the industry evolves to new standards, we may not be able to successfully design and manufacture new products in a timely fashion that meet these new standards. Even after industry standards are adopted, the future success of
our products depends upon widespread market acceptance of their underlying technologies. At least one networking equipment standards body has reportedly stopped all work on a standard in response to assertions by Nortel that it controls the patent
rights to certain industry standards. Attempts to impose licensing fees of industry standards could undermine the adoption of such standards and lessen industry opportunities.





If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and lost sales and be subject to product liability claims.





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





| |  |  | negative customer reactions;
| | - |  | ----------------------------




| |  |  | product liability claims;
| | - |  | -------------------------




| |  |  | negative publicity regarding us and our products;
| | - |  | -------------------------------------------------




| |  |  | delays in or loss of market acceptance of our products;
| | - |  | -------------------------------------------------------




| |  |  | product returns;
| | - |  | ----------------




| |  |  | lost sales; and
| | - |  | ---------------




| |  |  | unexpected expenses to remedy errors.
| | - |  | -------------------------------------



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If we do not manage our growth effectively, our business will be harmed.





We experienced rapid growth from 1999 to 2000 which placed a significant strain on our resources. Our revenue increased significantly during those years, and our headcount increased from
222 employees in 1999 to 572 in 2000. Our headcount grew, at a much slower rate, to 600 employees in 2001. We may make mistakes in operating our business, such as inaccurately forecasting our sales, which may result in unanticipated fluctuations in
our operating results. To accommodate any future growth, we must:





| |  |  | improve existing and implement new operational and financial systems, procedures and controls;
| | - |  | ----------------------------------------------------------------------------------------------




| |  |  | hire, train and manage additional qualified personnel; and
| | - |  | ----------------------------------------------------------




| |  |  | effectively manage multiple relationships with our customers, suppliers and other third parties.
| | - |  | ------------------------------------------------------------------------------------------------




Our current or planned personnel systems, procedures and controls may not be adequate to support our future operations. During the second quarter of 2001, we completed the implementation
of an Enterprise Resource Planning system to meet the needs associated with the growth of our operations. As our international operations grow, we will need to expand our support and communications infrastructure overseas as well. Any delay in the
implementation of or disruption in the transition to new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a
timely and accurate basis.





Our products may not meet the legal foreign and international standards required for their sale, which will 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 with recommendations of the
International Telecommunication Union. Although our products are currently in compliance with domestic and international standards and regulations in countries we currently sell to, there is no assurance that our existing and future product
offerings will continue to comply with evolving standards and regulations. If we fail to obtain timely domestic or foreign regulatory approvals or certificates, we would not be able to sell our products where these standards or regulations apply,
which may prevent us from sustaining our revenue or maintaining profitability.





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





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





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




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




| |  |  | risks of entering geographic and business markets in which we have no or limited prior experience; and
| | - |  | ------------------------------------------------------------------------------------------------------




| |  |  | potential loss of key employees of acquired organizations.
| | - |  | ----------------------------------------------------------



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





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





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





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





Our success and ability to compete are substantially dependent upon our internally
developed technology and know-how. Our proprietary technology includes our ASICs, our IronCore and JetCore hardware architecture, and our IronWare software. We rely on a combination of copyright, trademark and trade secret laws and contractual
restrictions on disclosure to protect our intellectual property rights in these proprietary technologies. We do not own any patents although we do have patent applications pending. There can be no assurance that patents will be issued from pending
applications, or that claims allowed on any future patents will be sufficiently broad to protect our technology.





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





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





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





From time to time third parties have asserted exclusive patent, copyright and trademark rights
to technologies and related standards that are important to us. Such third parties may assert claims or initiate litigation against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our
existing or future products. In March 2001, Nortel filed a lawsuit against Foundry in the




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United States District Court for the District of Massachusetts alleging that certain of the Companys products infringe several of Nortels patents and seeking injunctive relief as well
as unspecified damages. Nortel has also brought suit, on the same or similar patents, against a number of other networking companies. Foundry has analyzed the validity of Nortels claims and believes that Nortels suit is without merit.
Foundry is committed to vigorously defending itself against these claims. However, irrespective of the merits of the Companys position, we may incur substantial expenses in defending against third party claims. In the event of a determination
adverse to the Company, the Company could incur substantial monetary liability, and be required to change its business practices. Either of these could have a material adverse effect on the Companys financial position, results of operations,
or cash flows.





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





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





We face litigation risks.





We are a party to
lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal
proceedings are difficult to predict. We believe that we have defenses in the lawsuits pending against us as indicated in Part II. Item 1 Legal Proceedings, and we are vigorously contesting these allegations. Responding to the
allegations has been, and probably will be, expensive and time-consuming for us. An unfavorable resolution of the lawsuits could adversely affect our business, results of operations, or financial condition.





Management beneficially owns approximately 22.5% of our stock; their interests could conflict with yours; significant sales of stock held by them could have a negative effect
on Foundrys stock price.





Foundrys directors and executive officers beneficially own approximately 22.5% of our
outstanding common stock as of March 31, 2002. As a result of their ownership and positions, our directors and executive officers collectively are able to significantly influence all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of Foundry. In addition, sales of significant amounts of shares held by
Foundrys directors and executive officers, or the prospect of these sales, could adversely affect the market price of Foundrys common stock.





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





Our board of directors
has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The
rights of the holders of common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The




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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, other catastrophic event, or power shortages.





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





Our independent
auditor, Arthur Andersen LLP, has been indicted by the United States Department of Justice, creating uncertainties for the Company in making its SEC filings.





On March 14, 2002, the United States Department of Justice obtained an indictment against Arthur Andersen LLP, the Companys auditors. The indictment has created questions about
Andersens survival ability and raises a number of uncertainties for the Company. The SEC has announced that it will continue to accept financial statements audited by Andersen in its SEC filings, as long as companies obtain certain financial
representations from Andersen concerning audit quality controls for audit reports issued after March 14, 2002. However, if Andersen is convicted, the SEC may bar Andersen from doing public company audit work, or may refuse to accept financial
statements audited by Andersen in future SEC filings. If financial statements audited by Andersen are no longer accepted by the SEC, we would have to seek another auditing firm. The Company has interviewed alternative auditors and believes that
alternative services can be procured in a satisfactory basis.





Item 3.Quantitative and Qualitative Disclosures about Market Risk.





Foundrys investments are made in accordance with an investment policy approved by the Board of Directors. The primary objective of the Companys investment activities is to preserve capital while maximizing
yields without significantly increasing risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We generally place our
investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer or fund. A hypothetical 100 basis point decline in short-term interest rates would reduce the annualized earnings on our $283.3
million of cash equivalents and short-term investments at March 31, 2002 by approximately $2.8 million. Our investment portfolio includes only marketable securities with original maturities of less than one year and with secondary or resale
markets to ensure portfolio liquidity.




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In December 2001, the Company wrote-off a $2.5 million minority investment as it was determined that the investment had declined in value and that the decline was other-than temporary.





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





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




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PART II.    OTHER INFORMATION





Item 1.Legal Proceedings.





In December 2000, several
similar shareholder class action lawsuits were filed against Foundry and certain of its officers in the United States Court for the Northern District of California, following Foundrys announcement in December 2000 of its anticipated financial
results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated by the Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead plaintiffs were
selected as required by law and such plaintiffs filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of shareholders who purchased Foundrys common stock
during the period from September 7, 2000 to December 19, 2000. On October 26, 2001, the Court granted the Companys motion to dismiss the consolidated amended complaint without prejudice to amend. On December 13, 2001, attorneys for lead
plaintiffs filed a second amended complaint. The Company reviewed the second amended complaint and moved to dismiss that complaint as well. A hearing on the dismissal is set for June 7, 2002. Whatever the outcome of that hearing, the Company
believes the lawsuit is without merit and intends to defend itself vigorously.





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





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





From time to time the Company is subject to other
legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual property rights. In addition, from time to time, third parties assert patent
infringement claims against the Company in the form of letters, lawsuits and other forms of communication. In March 2001, Nortel filed a lawsuit against Foundry in the United States District Court for the District of Massachusetts alleging that
certain of the Companys products infringe several of Nortels patents and seeking injunctive relief as well as




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unspecified damages. Nortel has also brought suit, on the same or similar patents, against a number of other networking companies. Foundry has analyzed the validity of Nortels claims and
believes that Nortels suit is without merit. Foundry is committed to vigorously defending itself against these claims. Irrespective of the merits of the Companys position, we may incur substantial expenses in defending against third
party claims. In the event of a determination adverse to the Company, the Company could incur substantial monetary liability, and be required to change its business practices. Either of these could have a material adverse effect on the
Companys financial position, results of operations, or cash flows.





Item 2.Changes in Securities and Use of Proceeds.





None.





Item 3.Defaults Upon Senior Securities.





None.





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





None.





Item 5.Other Information.





None.





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





(a)Exhibits





Number

Description3.1

Amended and Restated Certificate of Incorporation of Foundry Networks, Inc. (Amended and Restated Certificate of Incorporation filed as Exhibit 3.2 to Registrants
Registration Statement on Form S-1 (Commission File No. 333-82577) and incorporated herein by reference; Certificate of Amendment to the foregoing filed as Exhibit 3.1 to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 and incorporated herein by reference.)3.2

Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference.)10.1

1996 Stock Plan *10.2

1999 Employee Stock Purchase Plan **10.3

1999 Directors Stock Option Plan **10.5

OEM Purchase Agreement dated January 6, 1999 between Foundry Networks, Inc. and HewlettPackard Company, Workgroup Networks Division. ***10.6

Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd. ***10.7

2000 Non-Executive Stock Option Plan****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.
*****


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|* |  | 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
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | Annual Meeting of Stockholders incorporated by reference to the Companys Definitive Proxy Statement for such meeting (Commission File No. 000-26689).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | 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).
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**** |  | Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the quarter ended September 30, 2001 (Commission File No. 000-26689).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|***** |  | 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).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




(b)    Reports on Form 8-K.





None.




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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 14, 2002




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