##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from           to
 Commission File Number 000-26689
 FOUNDRY NETWORKS, INC.
  Delaware
    
    77-0431154(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 4980 Great America Parkway
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 207-1700
(Registrants telephone number, including area code)
 N/A
(Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,

a non-accelerated filer, or a smaller reporting company.

See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ




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##### 



FOUNDRY NETWORKS, INC.
 Table of Contents
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Income
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42SIGNATURE
    
    
    43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  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 per share amounts)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    386,821
    
    
    $
    331,961Short-term investments
    
    
    449,589
    
    
    
    575,645Accounts receivable, net of allowances for doubtful accounts of
$2,249 and $2,107 and sales returns of $2,400 and $2,626 at March
31, 2008 and December 31, 2007, respectively
    
    
    109,606
    
    
    
    124,234Inventories
    
    
    49,394
    
    
    
    42,384Deferred tax assets
    
    
    45,246
    
    
    
    44,207Prepaid expenses and other assets
    
    
    10,497
    
    
    
    12,439Total current assets
    
    
    1,051,153
    
    
    
    1,130,870Property and equipment, net
    
    
    8,596
    
    
    
    9,658Investments
    
    
    110,538
    
    
    
    58,062Deferred tax assets
    
    
    37,650
    
    
    
    35,007Other assets
    
    
    4,981
    
    
    
    5,234Total assets
    
    $
    1,212,918
    
    
    $
    1,238,831LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,033
    
    
    $
    23,892Accrued payroll and related expenses
    
    
    32,352
    
    
    
    50,806Income taxes payable
    
    
    8,172
    
    
    
    Other accrued expenses
    
    
    12,100
    
    
    
    12,382Deferred revenue
    
    
    63,318
    
    
    
    52,981Total current liabilities
    
    
    138,975
    
    
    
    140,061Deferred support revenue
    
    
    28,079
    
    
    
    27,786Income taxes payable
    
    
    12,531
    
    
    
    11,860Other long-term liabilities
    
    
    532
    
    
    
    475Total liabilities
    
    
    180,117
    
    
    
    180,182Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value:Authorized - 5,000 shares at March 31, 2008 and December 31, 2007;
None issued and outstanding as of March 31, 2008 and December 31,
2007
    
    
    
    
    
    
    Common stock, $0.0001 par value:Authorized - 300,000 shares at March 31, 2008 and December 31, 2007:Issued and outstanding  145,674 and 148,700 shares at March 31,
2008 and December 31, 2007, respectively
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    854,282
    
    
    
    829,910Accumulated other comprehensive loss
    
    
    (5,003
    )
    
    
    (789
    )Retained earnings
    
    
    183,507
    
    
    
    229,513Total stockholders equity
    
    
    1,032,801
    
    
    
    1,058,649Total liabilities and stockholders equity
    
    $
    1,212,918
    
    
    $
    1,238,831
 
 (1)
    
    Derived from audited consolidated financial statements as of December 31, 2007.  3




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended March 31,2008
    
    
    2007Net revenue:Product
    
    $
    125,863
    
    
    $
    115,218Service
    
    
    24,192
    
    
    
    20,595Total net revenue
    
    
    150,055
    
    
    
    135,813Cost of revenue:Product
    
    
    48,415
    
    
    
    51,137Service
    
    
    8,183
    
    
    
    5,466Total cost of revenue
    
    
    56,598
    
    
    
    56,603Gross margin
    
    
    93,457
    
    
    
    79,210Operating expenses:Research and development
    
    
    21,729
    
    
    
    21,250Sales and marketing
    
    
    47,135
    
    
    
    40,090General and administrative
    
    
    11,839
    
    
    
    10,933Other charges, net
    
    
    
    
    
    
    2,533Total operating expenses
    
    
    80,703
    
    
    
    74,806Income from operations
    
    
    12,754
    
    
    
    4,404Interest and other income, net
    
    
    9,299
    
    
    
    10,383Income before provision for income taxes
    
    
    22,053
    
    
    
    14,787Provision for income taxes
    
    
    8,147
    
    
    
    5,696Net income
    
    $
    13,906
    
    
    $
    9,091Basic net income per share
    
    $
    0.09
    
    
    $
    0.06Weighted-average shares used in computing basic net income per share
    
    
    147,235
    
    
    
    147,202Diluted net income per share
    
    $
    0.09
    
    
    $
    0.06Weighted-average shares used in computing diluted net income per share
    
    
    151,271
    
    
    
    153,386
  4




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Three Months Ended March 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    13,906
    
    
    $
    9,091Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,839
    
    
    
    2,777Stock-based compensation expense
    
    
    14,001
    
    
    
    9,622Provision for doubtful accounts
    
    
    142
    
    
    
    (242
    )Provision for sales returns
    
    
    (226
    )
    
    
    (617
    )Inventory provisions
    
    
    2,442
    
    
    
    1,818Benefit for deferred income taxes
    
    
    (3,682
    )
    
    
    (3,895
    )Excess tax benefits from stock-based compensation
    
    
    (245
    )
    
    
    (2
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    14,712
    
    
    
    (13,245
    )Inventories
    
    
    (9,425
    )
    
    
    (4,328
    )Prepaid expenses and other assets
    
    
    1,481
    
    
    
    (2,688
    )Accounts payable
    
    
    (859
    )
    
    
    984Accrued payroll and related expenses
    
    
    (18,454
    )
    
    
    (1,165
    )Income taxes payable
    
    
    8,458
    
    
    
    8,891Other accrued expenses
    
    
    (226
    )
    
    
    (1,381
    )Deferred revenue
    
    
    10,629
    
    
    
    8,187Net cash provided by operating activities
    
    
    35,493
    
    
    
    13,807CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale investments
    
    
    (25,950
    )
    
    
    (12,050
    )Purchases of held-to-maturity investments
    
    
    (142,974
    )
    
    
    (169,389
    )Proceeds from sales of available-for-sale investments
    
    
    25,300
    
    
    
    29,675Proceeds from maturities of held-to-maturity investments
    
    
    213,234
    
    
    
    116,160Purchases of property and equipment, net
    
    
    (1,054
    )
    
    
    (2,508
    )Net cash provided by (used in) investing activities
    
    
    68,556
    
    
    
    (38,112
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuances of common stock under stock plans, net of repurchases
    
    
    10,721
    
    
    
    (587
    )Repurchase and retirement of common stock
    
    
    (59,912
    )
    
    
    Excess tax benefits from stock-based compensation
    
    
    245
    
    
    
    2Net cash used in financing activities
    
    
    (48,946
    )
    
    
    (585
    )Decrease in cash and cash equivalents
    
    
    55,103
    
    
    
    (24,890
    )Effect of exchange rate changes on cash
    
    
    (243
    )
    
    
    (3
    )Cash and cash equivalents, beginning of period
    
    
    331,961
    
    
    
    258,137Cash and cash equivalents, end of period
    
    $
    386,821
    
    
    $
    233,244SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net of refunds
    
    $
    838
    
    
    $
    722
  5




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FOUNDRY NETWORKS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(information for the three months ended March 31, 2008 and 2007 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of Business
  Basis of Presentation
   Principles of Consolidation
  Reclassifications
  Use of Estimates
  6




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Revenue Recognition
 General. Revenue Recognition,
 Revenue Arrangements with Multiple Deliverables
 Product.
 Services.
 Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts.
 Returns.
 Cash Equivalents and Investments
   7




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##### Table of Contents



Valuation of Investments
  Fair Value Measurement
   
    
    Level 1Valuations based on quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access. Valuation adjustments and block
discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices
that are readily and regularly available in an active market, valuation of these products does
not entail a significant degree of judgment. Foundrys cash equivalents and investments
utilizing Level 1 inputs include U.S. Government Treasuries and money market funds.
    
    Level 2Valuations based on quoted prices in markets that are not considered to be active,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price
transparency. Foundrys cash equivalents and investments utilizing Level 2 inputs include
government sponsored securities and municipal bonds.
 8




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##### Table of Contents




    
    Level 3Valuations based on inputs that are unobservable and significant to the overall
fair value measurement. Investments utilizing Level 3 inputs are the Companys auction rate
securities that are not traded in active markets or are subject to transfer restrictions.
Valuations are performed to adjust for illiquidity and/or non-transferability, and such
adjustments are generally based on available market evidence. In the absence of such evidence,
managements best estimate is used.
   Stock-Based Compensation
 Share-Based Payment
 Valuation of Stock-Based Compensation
   Three Months Ended March 31, 2008
    
    Three Months Ended March 31, 2007Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    
    2.0
    %
    
    
    3.5
    %
    
    
    4.7
    %
    
    
    4.9
    %Expected term (in years)
    
    3.0 years
    
    1.6 years
    
    3.5 years
    
    1.3 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    42
    %
    
    
    42
    %
    
    
    39
    %
    
    
    43
    %Weighted-average fair value
    
    $
    3.88
    
    
    $
    4.68
    
    
    $
    4.91
    
    
    $
    3.67
 Expected Term.
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Expected Volatility.
 Expected Dividend.
 Risk-Free Interest Rate.
 Estimated Forfeitures.
 Computation of Per Share Amounts
  Income Taxes
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109
 Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities
  10




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The Fair Value Option
for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115
 2. CASH EQUIVALENTS AND INVESTMENTS
  March 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    94,679
    
    
    $
    
    
    
    $
    
    
    
    $
    94,679U.S. Treasuries and Government-sponsored enterprise securities
    
    
    255,752
    
    
    
    58
    
    
    
    (5
    )
    
    
    255,805Available-for-sale:Auction rate municipal bonds
    
    
    83,150
    
    
    
    
    
    
    
    (3,971
    )
    
    
    79,179Held-to-maturity:Municipal bonds
    
    
    36,370
    
    
    
    247
    
    
    
    
    
    
    
    36,617Government-sponsored enterprise securities
    
    
    444,577
    
    
    
    1,759
    
    
    
    (44
    )
    
    
    446,292$
    914,528
    
    
    $
    2,064
    
    
    $
    (4,020
    )
    
    $
    912,572Cash equivalents
    
    $
    350,431
    
    
    $
    58
    
    
    $
    (5
    )
    
    $
    350,484Short-term investments
    
    
    449,588
    
    
    
    1,704
    
    
    
    (44
    )
    
    
    451,248Long-term investments
    
    
    114,509
    
    
    
    302
    
    
    
    (3,971
    )
    
    
    110,840$
    914,528
    
    
    $
    2,064
    
    
    $
    (4,020
    )
    
    $
    912,572
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    158,080
    
    
    $
    
    
    
    $
    
    
    
    $
    158,080Government-sponsored enterprise securities
    
    
    114,445
    
    
    
    29
    
    
    
    
    
    
    
    114,474Available-for-sale:Auction rate municipal bonds
    
    
    82,500
    
    
    
    
    
    
    
    
    
    
    
    82,500Held-to-maturity:Municipal bonds
    
    
    42,362
    
    
    
    133
    
    
    
    
    
    
    
    42,495Government-sponsored enterprise securities
    
    
    508,845
    
    
    
    551
    
    
    
    (9
    )
    
    
    509,387$
    906,232
    
    
    $
    713
    
    
    
    (9
    )
    
    $
    906,936Cash equivalents
    
    $
    272,525
    
    
    
    29
    
    
    
    
    
    
    $
    272,554Short-term investments
    
    
    575,645
    
    
    
    550
    
    
    
    (9
    )
    
    
    576,186Long-term investments
    
    
    58,062
    
    
    
    134
    
    
    
    
    
    
    
    58,196$
    906,232
    
    
    $
    713
    
    
    $
    (9
    )
    
    $
    906,936
 11




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US Treasuries and Government-sponsored enterprise securities (GSEs).
 Auction rate municipal bonds (auction rate securities).
  The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
 Loss Less Than 12 months
    
    
    Loss Greater Than 12 months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable-for-sale:Auction rate municipal bonds
    
    $
    76,679
    
    
    $
    (3,971
    )
    
    
    
    
    
    
    
    
    
    $
    76,679
    
    
    $
    (3,971
    )Held-to-maturity:U.S. Treasuries and
Government-sponsored
enterprise securities
    
    
    154,137
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    154,137
    
    
    
    (49
    )$
    230,816
    
    
    $
    (4,020
    )
    
    $
    
    
    
    $
    
    
    
    $
    230,816
    
    
    $
    (4,020
    )
  3. FAIR VALUE DISCLOSURES
 Fair Value Measurements
  12




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Fair Value Measurements at Reporting Date UsingQuoted Prices InActive Markets
    
    
    Significant
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs3/31/2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market funds
    
    $
    94,679
    
    
    $
    94,679
    
    
    $
    
    
    
    $
    U.S. Treasuries and Government-sponsored enterprise securities
    
    
    255,805
    
    
    
    170,934
    
    
    
    84,871
    
    
    
    Available-for-sale:Auction rate municipal bonds
    
    
    79,179
    
    
    
    
    
    
    
    
    
    
    
    79,179Held-to-maturity:Municipal bonds
    
    
    36,617
    
    
    
    
    
    
    
    36,617
    
    
    
    Government-sponsored enterprise securities
    
    
    446,292
    
    
    
    
    
    
    
    446,292
    
    
    
    Total
    
    $
    912,572
    
    
    $
    265,613
    
    
    $
    567,780
    
    
    $
    79,179
  Fair Value MeasurementsUsing SignificantUnobservable Inputs (Level 3)Available-for-saleBeginning Balance
    
    $
    Total realized gains or (losses) included in net income
    
    
    Total unrealized losses included in other comprehensive income
    
    
    (3,971
    )Purchases, sales and settlements, net
    
    
    Transfers in Level 3
    
    
    83,150Ending balance
    
    $
    79,179The total amount of total gains or losses for the period
included in earnings attributable to the change in unrealized
gains or losses relating to assets still held at the reporting
date
    
    $
    
  Interest and otherincome, netTotal gains included in earnings
    
    $
    12Change in unrealized gains or (losses) relating to assets still held at the reporting date
    
    $
    
 4. CONCENTRATIONS
   13




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5. INVENTORIES
  March 31, 2008
    
    
    December 31, 2007Purchased parts
    
    $
    6,667
    
    
    $
    4,279Work-in-process
    
    
    20,357
    
    
    
    17,195Finished goods
    
    
    22,370
    
    
    
    20,910$
    49,394
    
    
    $
    42,384
  6. DEFERRED REVENUE
  March 31, 2008
    
    
    December 31, 2007Product
    
    $
    5,860
    
    
    $
    3,095Support
    
    
    85,537
    
    
    
    77,672Total
    
    $
    91,397
    
    
    $
    80,767Reported as:Current
    
    $
    63,318
    
    
    $
    52,981Non Current
    
    
    28,079
    
    
    
    27,786Total
    
    $
    91,397
    
    
    $
    80,767
  Deferred support revenue at December 31, 2007
    
    $
    77,672New support arrangements
    
    
    31,591Recognition of support revenue
    
    
    (23,726
    )Ending balance at March 31, 2008
    
    $
    85,537
 7. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments with Suppliers and Third-Party Manufacturers
  14




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Guarantees and Product Warranties
    Balance, December 31, 2007
    
    $
    2,251Liabilities accrued for warranties issued during the period
    
    
    327Warranty claims settled during the period
    
    
    (353
    )Changes in liabilities for pre-existing warranties during the period, including changes in estimates
    
    
    (358
    )Balance, March 31, 2008
    
    $
    1,867
  Litigation
 Intellectual Property Proceedings.
  15




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##### Table of Contents



Securities Litigation. In re Foundry Networks, Inc. Initial Public Offering
Securities Litigation, related to In re Initial Public Offering
Securities Litigation,
 In re Initial Public Offering
Securities Litigation, 471 F.3d 24 (2d Cir. Dec. 5, 2006).
 16




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##### Table of Contents



In re Foundry Networks, Inc. Derivative Litigation
 Patel v. Akin, et al Patel v. Akin, et al.
 Desai v. Johnson, et al McDonald v. Johnson, et al. Jackson v. Akin, et al. Edrington v. Johnson, Jr., et al. In re Foundry Networks, Inc.
Derivative Litigation, Edrington v. Johnson, Jr., et al
 Vanessa Simmonds v. Deutsche Bank AG, Merrrill Lynch & Co and JPMorgan
Chase & Co. Defendants, and Foundry Networks, Inc., Nominal Defendant
 17




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SEC Information Inquiry.
 United States Attorneys Office Subpoena for Production of Documents.
 General. Accounting for Contingencies,
 8. STOCKHOLDERS EQUITY
 Share Repurchase Program.
  Total Number
    
    
    Average Priceof Shares
    
    
    Paid per
    
    
    Amount ofThree Months Ended March 31, 2008
    
    Purchased
    
    
    Share
    
    
    RepurchasesCumulative balance at December 31, 2007
    
    
    4,381
    
    
    $
    18.93
    
    
    $
    82,930Repurchase of common stock
    
    
    4,420
    
    
    
    13.56
    
    
    
    59,912Cumulative balance at March 31, 2008
    
    
    8,801
    
    
    $
    16.23
    
    
    $
    142,842
  Other Repurchases of Common Stock.
 Stock-Based Compensation Plans.
 18




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##### Table of Contents



Weighted-Average
    
    RemainingOptions
    
    Exercise
    
    Contractual
    
    AggregateOutstanding
    
    Price
    
    Life (years)
    
    Intrinsic Value(in thousands)Balance, December 31, 2007
    
    
    30,528,237
    
    
    $
    16.38Granted
    
    
    857,250
    
    
    $
    12.70Exercised
    
    
    (141,516
    )
    
    $
    9.17Forfeited/expired
    
    
    (197,921
    )
    
    $
    16.39Balance, March 31, 2008
    
    
    31,046,050
    
    
    $
    16.31
    
    
    
    4.19
    
    
    $
    29,667Vested and expected to vest at March 31, 2008
    
    
    29,568,908
    
    
    $
    16.35
    
    
    
    4.20
    
    
    $
    29,431Exercisable at March 31, 2008
    
    
    21,973,820
    
    
    $
    16.62
    
    
    
    4.18
    
    
    $
    28,427
   Restricted Stock Awards.
 Restricted Stock
    
    Weighted AverageOutstanding
    
    Grant Date Fair Value(in thousands)Balance, December 31, 2007
    
    
    953
    
    
    $
    16.59Granted
    
    
    
    
    
    $
    Vested
    
    
    (159
    )
    
    $
    15.03Forfeited
    
    
    
    
    
    $
    Balance, March 31, 2008
    
    
    794
    
    
    $
    16.90
  19




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##### Table of Contents



Restricted Stock Units.
 RemainingContractual
    
    AggregateShares
    
    Life (years)
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    (in thousands)Balance, December 31, 2007
    
    
    1,639Awarded
    
    
    Released
    
    
    Forfeited/expired
    
    
    (14
    )Balance, March 31, 2008
    
    
    1,625
    
    
    
    1.43
    
    
    $
    18,817Vested and expected to vest at March 31, 2008
    
    
    1,399
    
    
    
    1.38
    
    
    $
    16,200Exercisable at March 31, 2008
    
    
    
    
    
    
    
    
    
    $
    
   Employee Stock Purchase Plan.
   Three Months Ended March 31,2008
    
    
    2007Cost of revenue  Product
    
    $
    475
    
    
    $
    315Cost of revenue  Service
    
    
    970
    
    
    
    449Research and development
    
    
    4,880
    
    
    
    3,338Sales and marketing
    
    
    5,478
    
    
    
    3,695General and administrative
    
    
    2,198
    
    
    
    1,825Total
    
    $
    14,001
    
    
    $
    9,622
  20




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##### Table of Contents



9. NET INCOME PER SHARE
  Three Months Ended March 31,2008
    
    
    2007(in thousands, except per share amounts)Net income
    
    $
    13,906
    
    
    $
    9,091Basic:Weighted-average shares outstanding
    
    
    147,235
    
    
    
    147,202Basic EPS
    
    $
    0.09
    
    
    $
    0.06Diluted:Weighted-average shares outstanding
    
    
    147,235
    
    
    
    147,202Add: Weighted-average dilutive potential shares
    
    
    4,036
    
    
    
    6,184Weighted-average shares used in computing diluted EPS
    
    
    151,271
    
    
    
    153,386Diluted EPS
    
    $
    0.09
    
    
    $
    0.06
  10. COMPREHENSIVE INCOME
  Three Months Ended March 31,2008
    
    
    2007Net income
    
    $
    13,906
    
    
    $
    9,091Other comprehensive income:Net unrealized loss on available-for-sale securities
    
    
    (3,971
    )
    
    
    Foreign currency translation adjustments
    
    
    (243
    )
    
    
    (3
    )Total comprehensive income
    
    $
    9,692
    
    
    $
    9,088
 11. SEGMENT AND GEOGRAPHIC INFORMATION
   Three Months Ended March 31,2008
    
    2007Americas
    
    
    63
    %
    
    
    67
    %EMEA
    
    
    22
    %
    
    
    15
    %Asia Pacific
    
    
    10
    %
    
    
    10
    %Japan
    
    
    5
    %
    
    
    8
    %
 21




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12. INCOME TAXES
        22




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our condensed consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q . This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions, including our expectations that our
interest income will decline over the next several quarters, that our remaining cash, cash
equivalents, short term investments and cash generated from operations will satisfy our working
capital needs, capital expenditures, commitments and other liquidity requirements associated with
our operations through at least the next 12 months, regarding our intention to vigorously defend
ourselves in certain litigation, regarding our expectation that our operating expenses will
increase modestly in 2008, and regarding the impact of the recent auction market failures on our
liquidity. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of many factors, including, but not limited to, those discussed in Part II,
Item 1A. Risk Factors. Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect managements opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in this document as well as
in other documents we file from time to time with the SEC. All public reports filed by us with the
SEC are available free of charge on our website at www.foundrynetworks.com or from the SEC at
www.sec.gov as soon as practicable after we electronically file such reports with the SEC.
 Overview
  Critical Accounting Policies and Use of Estimates
  Results of Operations
 Net Revenue
  23




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Three Months Ended March 31,2008
    
    
    2007% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    125,863
    
    
    
    84
    %
    
    $
    115,218
    
    
    
    85
    %
    
    $
    10,645
    
    
    
    9
    %Service
    
    
    24,192
    
    
    
    16
    %
    
    
    20,595
    
    
    
    15
    %
    
    
    3,597
    
    
    
    17
    %Total net revenue
    
    $
    150,055
    
    
    
    100
    %
    
    $
    135,813
    
    
    
    100
    %
    
    $
    14,242
    
    
    
    10
    %Net product revenue:Chassis
    
    
    94,397
    
    
    
    75
    %
    
    
    82,957
    
    
    
    72
    %
    
    
    11,440
    
    
    
    14
    %Stackable
    
    
    31,466
    
    
    
    25
    %
    
    
    32,261
    
    
    
    28
    %
    
    
    (795
    )
    
    
    (2
    %)Total net product revenue
    
    $
    125,863
    
    
    
    100
    %
    
    $
    115,218
    
    
    
    100
    %
    
    $
    10,645
    
    
    
    9
    %
  Three Months Ended March 31,2008
    
    2007Americas
    
    
    63
    %
    
    
    67
    %EMEA
    
    
    22
    %
    
    
    15
    %Asia Pacific
    
    
    10
    %
    
    
    10
    %Japan
    
    
    5
    %
    
    
    8
    %
     24




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Gross Margin
  Three Months Ended March 31,2008
    
    
    2007Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin %
    
    
    $
    
    
    Margin %Gross margins:Product
    
    $
    77,448
    
    
    
    62
    %
    
    $
    64,081
    
    
    
    56
    %Service
    
    
    16,009
    
    
    
    66
    %
    
    
    15,129
    
    
    
    73
    %Total gross margins
    
    $
    93,457
    
    
    
    62
    %
    
    $
    79,210
    
    
    
    58
    %
    Operating Expenses
  Three Months Ended March 31,2008
    
    2007% of Net
    
    
    
    
    
    % of Net
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    ChangeResearch and development
    
    $
    21,729
    
    
    
    14
    %
    
    $
    21,250
    
    
    
    16
    %
    
    
    2
    %Sales and marketing
    
    
    47,135
    
    
    
    31
    %
    
    
    40,090
    
    
    
    30
    %
    
    
    18
    %General and administrative
    
    
    11,839
    
    
    
    8
    %
    
    
    10,933
    
    
    
    8
    %
    
    
    8
    %Other charges, net
    
    
    
    
    
    
    
    
    
    
    2,533
    
    
    
    2
    %
    
    
    (100
    %)
  25




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Interest and Other Income, Net
  26




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Provision for Income Taxes
  Liquidity and Capital Resources
      27




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Off-Balance Sheet Arrangements and Contractual Obligations
 Contractual Commitments
  Less Than
    
    
    1-3
    
    
    3-5
    
    
    More ThanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases of facilities
    
    $
    14,247
    
    
    $
    5,850
    
    
    $
    8,023
    
    
    $
    374
    
    
    $
    Purchase commitments with contract manufacturers
    
    
    69,555
    
    
    
    69,555
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    83,802
    
    
    $
    75,405
    
    
    $
    8,023
    
    
    $
    374
    
    
    $
    
   28




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Off-Balance Sheet Arrangements
  Indemnifications
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Limitations on Effectiveness of Controls.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
 29




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Intense competition in the market for networking solutions could prevent us from maintaining or
increasing revenue and sustaining profitability.
    We must continue to introduce new products with superior performance and features in a timely
manner in order to sustain and increase our revenue, and if we fail to predict and respond to
emerging technological trends and customers changing needs, our operating results may suffer.
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Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue,
gross margins and expenses.
  Our gross margins and average selling prices of our products have decreased in the past and could
decrease as a result of competitive pressures and other factors.
   Our investments in adjustable rate securities are subject to risks which may cause losses and
affect the liquidity of these investments.
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We depend on large, recurring purchases from certain significant customers, and a loss,
cancellation or delay in purchases by these customers could negatively affect our revenue.
   
    
    our reseller agreements generally do not require substantial minimum purchases;
    
    our customers can stop purchasing and our resellers can stop marketing our products at
any time; and
    
    our reseller agreements generally are not exclusive and are for one-year terms, with no
obligation of the resellers to renew the agreements.
  The United States government is a significant customer and has been one key to our financial
success. However, government demand is unpredictable and there is no guarantee of future contract
awards.
  We purchase several key components for our products from sole sources; if these components are not
available, our revenue may be adversely affected.
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We may be subject to litigation risks and intellectual property infringement claims that are
costly to defend and could limit our ability to use certain technologies in the future.
Additionally, we may be found to infringe on intellectual property rights of others.
    If we fail to protect our intellectual property, our business and ability to compete could suffer.
   33




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The matters relating to our Special Committee investigation into our stock option granting
practices and the restatement of our financial statements have exposed us to civil litigation
claims, regulatory proceedings and government proceedings which could burden Foundry and have a
material adverse effect on us.
  Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in
our ability to fill orders which could cause us to lose revenue.
    Our ability to increase our revenue depends on expanding our direct sales operations and reseller
distribution channels and providing excellent customer support.
  34




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Our operations in international markets involve inherent risks that we may not be able to control.
As a result, our business may be harmed if we are unable to successfully address these risks.
  
    
    seasonal reductions in business activity;
    
    potential recessions in economies outside the United States;
    
    adverse fluctuations in currency exchange rates;
    
    difficulties in managing operations across disparate geographic areas;
    
    export restrictions;
    
    unexpected changes in regulatory requirements;
    
    higher costs of doing business in foreign countries;
    
    longer accounts receivable collection cycles;
    
    potential adverse tax consequences;
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    infringement claims on foreign patents, copyrights, or trademark rights;
    
    natural disasters and widespread medical epidemics;
    
    military conflict and terrorist activities; and
    
    political instability.
  35




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Because our financial results are difficult to predict and may fluctuate significantly, we may not
meet quarterly financial expectations, which could cause our stock price to decline.
       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.
  36




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Due to the lengthy sales cycles of some of our products, the timing of our revenue is difficult to
predict and may cause us to fail to meet our revenue expectations.
  We are required to expense equity compensation given to our employees, which has reduced our
reported earnings, will significantly impact our operating results in future periods and may
reduce our stock price and our ability to effectively utilize equity compensation to attract and
retain employees.
  If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
  We had a material weakness in our internal control over financial reporting in the past, and we
cannot assure you that additional material weaknesses will not be identified in the future. If our
internal control over financial reporting or disclosure controls and procedures are not effective,
there may be errors in our financial statements that could require a restatement or our filings
may not be timely and investors may lose confidence in our reported financial information, which
could lead to a decline in our stock price.
  37




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##### Table of Contents



We may engage in acquisitions that could result in dilution for our stockholders, disrupt our
operations, cause us to incur substantial expenses and harm our business if we cannot successfully
integrate the acquired business, products, technologies or personnel.
  
    
    difficulties in the assimilation of products, operations, personnel and technologies of
the acquired companies;
    
    diversion of managements attention from other business concerns;
    
    disruptions to our operations, including potential difficulties in completing ongoing
projects in a timely manner;
    
    risks of entering geographic and business markets in which we have no or limited prior
experience;
    
    exposure to third party intellectual property infringement claims; and
    
    potential loss of key employees of acquired organizations.
  38




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The timing of the adoption of industry standards may negatively affect widespread market
acceptance of our products.
  If our products do not interoperate with our customers networks, our sales may be delayed or
cancelled and our business could be harmed.
  If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and lost sales and be subject to product liability claims.
  
    
    negative customer reactions;
    
    product liability claims;
    
    negative publicity regarding us and our products;
    
    delays in or loss of market acceptance of our products;
    
    product returns;
    
    lost sales; and
    
    unexpected expenses to remedy defects or errors.
 We may incur liabilities that are not subject to maximum loss clauses.
  39




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Our products may not continue to comply with the regulations governing their sale, which may harm
our business.
  Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  Anti-takeover provisions could make it more difficult for a third party to acquire us.
  Our operations could be significantly hindered by the occurrence of natural disasters, terrorist
acts or other catastrophic events.
  40




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Changes in our provision for income taxes or adverse outcomes resulting from examination of our
income or other tax returns could adversely affect our results.
 Accounting for
Uncertainty in Income Taxes
 41




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  MaximumApproximate DollarTotal
    
    Value of SharesTotal Number
    
    Average Price
    
    Number of Shares
    
    That May Yet Beof Shares
    
    Paid per
    
    Purchased as Part of
    
    Purchased Under thePeriod
    
    Purchased (1)
    
    Share (1)
    
    Repurchase Program(2)
    
    Repurchase Program (2)January 1  31.
    
    
    70,813
    
    
    $
    13.80
    
    
    
    
    
    
    $
    116,982,060February 1  29
    
    
    4,419,607
    
    
    $
    13.56
    
    
    
    4,419,607
    
    
    $
    56,982,069March 1  31
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    56,982,069Total
    
    
    4,490,420
    
    
    $
    13.56
    
    
    
    4,419,607
    
    
    $
    56,982,069
 
 (1)
    
    Includes 70,813 shares repurchased to satisfy tax withholding
obligations that arise on the vesting of restricted stock awards.(2)
    
    In July 2007, the Companys Board of Directors approved a share
repurchase program authorizing the Company to purchase up to $200
million of its common stock. In April 2008, the Companys Board of
Directors approved an increase to the size of the share repurchase
program of an additional $100 million. This approval expands the share
repurchase authorization to $300 million. During the three months
ending March 31, 2008, the Company repurchased and retired 4,419,607
shares of common stock at a weighted average price of $13.56 per share
for an aggregate purchase price of approximately $60.0 million
including the related transaction fees. From March  31, 2008 to
May 8, 2008, the Company repurchased an additional 1,220,200
shares of its common stock through open marked purchases at an
average price of $12.84 per share for an aggregate purchase price of
approximately $15.7  million including the related transaction
fees. As of May 8, 2008, since
inception of the stock repurchase program, the Company repurchased and
retired 10,020,922 shares of our common stock at a weighted-average
price of $15.82 per share for an aggregate purchase price of
$158.7 million including the related transaction fees. The remaining
authorized amount for stock repurchases under this program, including
the expansion amount announced in April 2008, was approximately
$141.3 million and will expire on December 31, 2008. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Number
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of
the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350.32.2
    
    Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350.
 42




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##### Table of Contents



SIGNATURE
  Foundry Networks, Inc.(Registrant)By:
    
    /s/   Daniel W.
FairfaxDaniel W. FairfaxVice President, Finance and Administration and 
Chief Financial Officer(Principal Financial and Accounting Officer)
  43




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Exhibit Index
 Number
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
of the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a)
of the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350.32.2
    
    Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350.