<PAGE>

================================================================================

                                 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, 2001

                                      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                                    77-0431154
  (State or other Jurisdiction              (I.R.S. Employer Identification No.)
of Incorporation or organization)

                               2100 Gold Street
                                P.O. Box 649100
                            San Jose, CA 95164-9100
         (Address of principal executive offices, including zip code)

                                (408) 586-1700
             (Registrant's telephone number, including area code)

                                      N/A
  (Former name, former address and former fiscal year, if changed since last
                                    report)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                               Yes [X]    No [_]

     As of May 10, 2001, there were 119,362,981 shares of the registrant's
common stock outstanding, par value $0.0001.

================================================================================

                                                                               1
<PAGE>

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                                         Page
                                                                                                                         ----
<S>                                                                                                                      <C>
PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements:

          Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000.........................         3

          Condensed Consolidated Statements of Income for the Three Months Ended
          March 31, 2001 and 2000..................................................................................         4

          Condensed Consolidated Statements of Cash Flows for the Three Months Ended March
          31, 2001 and 2000........................................................................................         5

          Notes to Condensed Consolidated Financial Statements.....................................................         6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations....................        11

          Risk Factors That May Affect Future Results and Market Price of Stock....................................        15

Item 3.   Quantitative and Qualitative Disclosures About Market Risk...............................................        24

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings........................................................................................        25

Item 2.   Changes in Securities and Use of Proceeds................................................................        25

Item 3.   Defaults Upon Senior Securities..........................................................................        25

Item 4.   Submission of Matters to a Vote of Security Holders......................................................        25

Item 5.   Other Information........................................................................................        25

Item 6.   Exhibits and Reports on Form 8-K.........................................................................        25

SIGNATURES.........................................................................................................        27
</TABLE>

                                                                               2
<PAGE>

                         PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

                            FOUNDRY NETWORKS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                           March 31,    December 31,
                                                                                             2001           2000
                                                                                             ----           ----
                                          ASSETS                                          (unaudited)        (1)
<S>                                                                                       <C>           <C>
Current assets:
  Cash and cash equivalents..............................................................  $ 209,676     $ 168,429
  Short-term investments.................................................................     51,704        83,816
  Accounts receivable, net...............................................................     56,537        64,573
  Inventories, net.......................................................................     63,359        51,593
  Deferred tax assets....................................................................     13,712        13,715
  Prepaid expenses and other current assets..............................................      3,845        10,693
                                                                                           ---------     ---------
     Total current assets................................................................    398,833       392,819
                                                                                           ---------     ---------

  Property and equipment, net............................................................      6,198         4,866
  Other long-term assets.................................................................      3,671           781
                                                                                           ---------     ---------
                                                                                           $ 408,702     $ 398,466
                                                                                           =========     =========

                                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable.......................................................................  $  20,316     $  20,432
  Accrued payroll and related expenses...................................................      9,342        11,130
  Warranty accrual.......................................................................      2,999         2,841
  Other accrued expenses.................................................................      8,679         5,642
  Deferred revenue.......................................................................     12,997        13,405
                                                                                           ---------     ---------
     Total current liabilities...........................................................     54,333        53,450
                                                                                           ---------     ---------

Stockholders' equity:
  Common stock and additional paid-in capital:
     Issued and outstanding-- 119,130,077 and 118,076,155 shares at March 31, 2001 and
     December 31, 2000, respectively.....................................................    267,113       263,188
  Treasury stock.........................................................................         (4)           (4)
  Note receivable from stockholder.......................................................     (3,270)       (3,270)
  Deferred stock compensation............................................................     (4,444)       (5,580)
  Cumulative translation adjustment......................................................        181            61
  Retained earnings......................................................................     94,793        90,621
                                                                                           ---------     ---------
     Total stockholders' equity..........................................................    354,369       345,016
                                                                                           ---------     ---------
                                                                                           $ 408,702     $ 398,466
                                                                                           =========     =========
</TABLE>

(1) Derived from audited financial statements

    See accompanying notes to condensed consolidated financial statements.

                                                                               3
<PAGE>

                            FOUNDRY NETWORKS, INC.

                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                      March 31,
                                                                                 2001            2000
                                                                               --------        --------
                                                                                     (unaudited)
<S>                                                                            <C>             <C>
Revenue, net...............................................................    $ 82,551        $ 70,014
Cost of revenue............................................................      38,888          24,843
                                                                               --------        --------
     Gross profit..........................................................      43,663          45,171
                                                                               --------        --------
Operating expenses
  Research and development.................................................       7,900           3,941
  Sales and marketing......................................................      24,817          10,093
  General and administrative...............................................       5,947           1,818
  Amortization of deferred stock compensation..............................       1,135           1,953
                                                                               --------        --------
     Total operating expenses..............................................      39,799          17,805
                                                                               --------        --------
Income from operations.....................................................       3,864          27,366
Interest income, net.......................................................       2,865           2,041
                                                                               --------        --------
Income before provision for income taxes...................................       6,729          29,407
Provision for income taxes.................................................       2,557          11,321
                                                                               --------        --------
     Net income............................................................    $  4,172        $ 18,086
                                                                               ========        ========
Basic net income per share.................................................    $   0.04        $   0.17
                                                                               ========        ========
Weighted average shares used in computing basic net income per
 share.....................................................................     115,829         105,084
                                                                               ========        ========
Diluted net income per share...............................................    $   0.03        $   0.14
                                                                               ========        ========
Weighted average shares used in computing diluted net income per
 share.....................................................................     124,857         126,639
                                                                               ========        ========
</TABLE>


    See accompanying notes to condensed consolidated financial statements.

                                                                               4
<PAGE>

                            FOUNDRY NETWORKS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                             Three Months Ended
                                                                                                 March 31,
                                                                                             2001          2000
                                                                                           --------      --------
                                                                                                (unaudited)
<S>                                                                                        <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income............................................................................   $  4,172      $ 18,086
  Adjustments to reconcile net income to net cash provided by operating activities:
     Depreciation.......................................................................        706           207
     Amortization of deferred stock compensation........................................      1,136         1,953
     Provision for allowance for doubtful accounts......................................      3,044           193
     Provision for excess and obsolete inventories......................................      7,464           646
     Tax benefit from stock option exercises............................................         --         5,927
  Change in operating assets and liabilities:
     Accounts receivable................................................................      4,992       (10,972)
     Inventories........................................................................    (19,230)       (4,247)
     Other assets.......................................................................      6,461        (2,422)
     Accounts payable...................................................................       (116)       12,782
     Accrued payroll and related benefits...............................................     (1,788)        1,763
     Income taxes payable...............................................................      3,546          (580)
     Other accrued liabilities..........................................................       (351)         (485)
     Deferred revenue...................................................................       (408)        2,391
                                                                                           --------      --------
        Net cash provided by operating activities.......................................      9,628        25,242
                                                                                           --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment...................................................     (2,038)         (881)
  Maturities of short-term investments..................................................     78,532        25,000
  Purchases of short-term investments...................................................    (46,420)      (51,580)
  Purchase of equity investment.........................................................     (2,500)           --
                                                                                           --------      --------
        Net cash provided by (used in) investing activities.............................     27,574       (27,461)
                                                                                           --------      --------
CASH FLOWS FROM FINANCING ACTIVITY
  Proceeds from issuance of common stock................................................      3,925         1,427
                                                                                           --------      --------
        Net cash provided by financing activity.........................................      3,925         1,427
                                                                                           --------      --------

     Effect of exchange rate changes on cash............................................        120            --
                                                                                           --------      --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................     41,247          (792)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..........................................    168,429       120,378
                                                                                           --------      --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................   $209,676      $119,586
                                                                                           ========      ========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.

                                                                               5
<PAGE>

                            FOUNDRY NETWORKS, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Information for the three months ended March 31, 2001 and 2000 is unaudited)


1. 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, 2000 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, 2001 are not
necessarily indicative of the results that may be expected for future quarters
or for the year ending December 31, 2001.


2. SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation and Basis of Presentation

     The Company's condensed consolidated financial statements reflect the
operations of the Company and its wholly-owned subsidiaries in the United
States, Barbados, France, Canada, Germany, the Netherlands, United Kingdom,
Singapore 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. Foreign currency transaction gains and losses
have not been material to date. Translation adjustments have not been material
to date and are included as a separate component of stockholders' equity.

     Certain items previously reported in specific financial statement captions
have been reclassified to conform with the March 31, 2001 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
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
inventories, 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 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.

                                                                               6
<PAGE>

     Foundry accounts for its investments under the provision 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,
2001 and December 31, 2000, Foundry's short-term investments, which were stated
at amortized cost and classified as held-to-maturity, consisted of commercial
paper, corporate and investment grade U.S. debt securities.

     Cash equivalents and short-term investments are all due within one year and
consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          March 31, 2001
                                                                                          --------------
                                                                                       Gross         Gross
                                                                        Amortized    Unrealized    Unrealized    Estimated
                                                                          Cost         Gains         Losses      Fair Value
                                                                          ----         -----         ------      ----------
     <S>                                                                <C>          <C>           <C>           <C>
     Money market funds...............................................  $  11,397    $       --    $       --    $   11,397
     Commercial paper.................................................    101,344            --            (3)      101,341
     Government securities............................................     84,654            58            (3)       84,709
     Corporate debt securities........................................      7,900            --            --         7,900
                                                                        ---------    ----------    ----------    ----------
                                                                        $ 205,295    $       58    $       (6)   $  205,347
                                                                        =========    ==========    ==========    ==========

     Included in cash and cash equivalents............................  $ 153,591    $       --    $       --    $  153,591
     Included in short-term investments...............................     51,704            58            (6)       51,756
                                                                        ---------    ----------    ----------    ----------
                                                                        $ 205,295    $       58    $       (6)   $  205,347
                                                                        =========    ==========    ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                         December 31, 2000
                                                                                         -----------------
                                                                                       Gross         Gross
                                                                        Amortized    Unrealized    Unrealized    Estimated
                                                                          Cost         Gains         Losses      Fair Value
                                                                          ----         -----         ------      ----------
     <S>                                                                <C>          <C>           <C>           <C>
     Money market funds...............................................  $   9,844    $       --    $       --    $    9,844
     Commercial paper.................................................     91,779            --           (19)       91,760
     Government securities............................................     97,648            28            --        97,676
     Corporate debt securities........................................      3,080            --            --         3,080
                                                                        ---------    ----------    ----------    ----------
                                                                        $ 202,351    $       28    $      (19)   $  202,360
                                                                        =========    ==========    ==========    ==========

     Included in cash and cash equivalents............................  $ 118,535    $       --    $       (6)   $  118,529
     Included in short-term investments...............................     83,816            28           (13)       83,831
                                                                        ---------    ----------    ----------    ----------
                                                                        $ 202,351    $       28    $      (19)   $  202,360
                                                                        =========    ==========    ==========    ==========
</TABLE>

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,    December 31,
                                                     2001           2000
                                                     ----           ----
      Purchased parts............................   $42,366       $31,975
      Work-in-process............................    17,776        16,935
      Finished goods.............................     3,217         2,683
                                                    -------       -------
                                                    $63,359       $51,593
                                                    =======       =======

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 credit risk is controlled through credit approvals, credit limits,
continuous monitoring procedures and establishment of an allowance for potential
doubtful accounts when deemed necessary.

                                                                               7
<PAGE>

     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.


Equity Investment

     Foundry has a $2.5 million equity investment in a development stage private
company, who is also a customer. Foundry's interest in the company is
significantly less than 20% and, as such, Foundry will not have the ability to
exercise significant influence. Accordingly, this investment is carried at the
lesser of cost or estimated realizable value and any gains or losses, net of
tax, are included in stockholders' equity. As of March 31, 2001, no unrealized
gains or losses have been recorded. This investment is included in other long-
term assets in the accompanying condensed consolidated balance sheet as of March
31, 2001.


Revenue Recognition

     Foundry's revenue recognition policy follows SEC Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements." Specifically,
Foundry recognizes product revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. In general, this results in revenue being recorded
at the time of shipment, unless we have future obligations for installation or
have to obtain customer acceptance, in which case revenue is deferred until such
obligations have been satisfied or customer acceptance has been received.
Revenue from customer support services is deferred and recognized on a straight-
line basis over the contractual period, generally one year. At shipment date,
Foundry establishes an accrual for estimated warranty expenses associated with
its sales. Foundry's warranty period extends 12 months from the date of sale.
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.

     For the three months ended March 31, 2001, no customers individually
accounted for greater than 10% of our net revenue.

     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 37.5% and 18.8% of net revenue
for the three months ended March 31, 2001 and 2000, respectively. Sales to
individual countries outside of the United States represent less than 10% of
revenue.


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, switching routers, server load balancing
and transparent caching switches. Management uses one measurement for evaluating
profitability and does not disaggregate its business for internal reporting.


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, 2001 and 2000, diluted net income per common share
has been calculated assuming the conversion of all dilutive potential common
stock.

                                                                               8
<PAGE>

<TABLE>
<CAPTION>

                                                                                                  Three Months
                                                                                                 Ended March 31,
                                                                                                -----------------
                                                                                                2001         2000
                                                                                                ----         ----
                                                                                              (in thousands, except
                                                                                                 per share data)
<S>                                                                                           <C>          <C>
Net income.................................................................................   $  4,172     $ 18,086
                                                                                              ========     ========
Basic:
  Weighted average shares of common stock outstanding......................................    118,697      114,580
  Less: Weighted average shares subject to repurchase......................................     (2,868)      (9,496)
                                                                                              --------     --------
  Weighted average shares used in computing basic net income per common share..............    115,829      105,084
                                                                                              ========     ========
Basic net income per common share..........................................................   $   0.04     $   0.17
                                                                                              ========     ========
Diluted:
  Weighted average shares of common stock outstanding......................................    118,697      114,580
  Add: Weighted average dilutive potential common stock....................................      6,160       12,059
                                                                                              ========     ========
  Weighted average shares used in computing diluted net income per common share............    124,857      126,639
                                                                                              ========     ========
Diluted net income per common share........................................................   $   0.03     $   0.14
                                                                                              ========     ========
</TABLE>

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 Pronouncement

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended, is effective for fiscal years beginning after
June 15, 2000. The adoption of SFAS No. 133 has not had a material effect on
Foundry's financial position or results of operations.


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,
2000 and 2001 were immaterial and comprised only of foreign currency translation
adjustments.


4. LITIGATION

     In December 2000, a shareholder class action lawsuit was filed against
Foundry and certain of its officers in the United States District 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 lawsuit alleges violation of federal securities laws and purports
to seek damages on behalf of a class of shareholders who purchased Foundry's
common stock during the period from October 18, 2000 to December 19, 2000.
Following the filing of the lawsuit, several virtually identical lawsuits were
filed making essentially the same allegations. On April 6, 2001, the court
consolidated all actions and directed plaintiffs to file a consolidated
complaint. The court also selected lead plaintiffs and approved lead plaintiffs'
choice of counsel. Foundry has reviewed the lawsuits, believes them to be
without merit and intends to seek dismissal of the lawsuits at its first
opportunity.

     In addition, the Company from time to time is a party to various legal
proceedings arising from the ordinary course of its business and/or third-party
claims alleging infringement of proprietary rights with respect to Foundry's
existing or future products. In fiscal 2000, Foundry received letters from both
IBM and Nortel alleging that certain of Foundry's products that operate on
industry standards may infringe one or more of their patents. 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

                                                                               9
<PAGE>

several of Nortel's patents and seeking injunctive relief as well as unspecified
damages. Foundry is currently analyzing the validity of these claims.


                                                                              10
<PAGE>

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.


Overview

     Foundry designs, develops, manufactures and markets a comprehensive, end-
to-end suite of high performance networking products for enterprises,
educational institutions, government agencies, web-hosting companies,
Application Service Providers (ASPs), electronic banking and finance service
providers, and Internet Service Providers. From our inception in May 1996
through December 1997, our operating activities related primarily to developing,
building and testing prototype products, building our engineering and
manufacturing infrastructure, commencing the staffing of our marketing, sales
and technical support organizations, and establishing relationships with
customers. We commenced commercial shipments of our FastIron workgroup Layer 2
switch in May 1997, the initial product released in our family of stackable
products. We shipped NetIron, our first generation Layer 3 switch, in June 1997.
During the second quarter of 1998, we shipped the first products in our Layer 4-
7 ServerIron family. We shipped BigIron, our second generation of midsize and
large-scale chassis-based products, in the third quarter of 1998. In May 2000,
we began shipping our new product line of high-performance Internet backbone
routers, NetIron400 and NetIron800.

     We derive our revenue substantially from sales of our stackable and
chassis-based products, including fees for customer support services related to
our products. Foundry's revenue recognition policy follows Securities and
Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." Specifically, Foundry recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the sales
price is fixed or determinable and collectibility is probable. In general, this
results in revenue being recorded at the time of shipment, unless we have future
obligations for installation or have to obtain customer acceptance, in which
case revenue is deferred until such obligations have been satisfied or customer
acceptance has been received. Revenue from customer support services is deferred
and recognized on a straight-line basis over the contractual period, generally
one year. At shipment date, Foundry establishes an accrual for estimated
warranty expenses associated with its sales. Foundry's warranty period extends
12 months from the date of sale. 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.

     Our cost of revenue consists primarily of material, labor, manufacturing
overhead, provision for excess and obsolete inventories and warranty costs. We
market and sell our products primarily through a direct sales and marketing
organization and, to a lesser extent, through resellers and through our OEM/Co-
branding relationships with Hewlett-Packard, Lucent Technologies and UTstarcom.
We have sales representatives in the United States, Singapore, Italy, Canada,
France, United Kingdom, Sweden, China, Mexico, Brazil, Netherlands, Germany,
Australia, New Zealand, Dubai, Hong Kong, South Korea, and Taiwan. We have made
significant investments to expand our international operations and expect
international revenue to increase as a percentage of total revenue.

     We generated net income of $88.1 million for the year ended December 31,
2000 and $4.2 million for the three months ended March 31, 2001. As of March 31,
2001, we had retained earnings of $94.8 million. Although we have been
profitable in each quarter since the first quarter of fiscal 1999, our ability
to remain profitable depends on our ability to generate and sustain
substantially higher revenue while maintaining reasonable cost and expense
levels. In addition, our results will fluctuate from quarter to quarter due to
factors in our industry and the broad macro-economic arena that are outside of
our control, including the recent economic downturn. During the first quarter of
2001, we received a lower than anticipated amount of product orders as a result
of decreased or delayed capital spending by existing and prospective customers
and the slowing U.S. economy. As

                                                                              11
<PAGE>

a result of our lower than expected sales, higher inventory balances, sale price
reductions for certain products and variations in our product sales mix, our
gross margins as a percentage of revenue decreased in the first quarter. Due to
a number of factors which are discussed in more detail below, our selling prices
and gross margins may decrease as a result of our efforts to compete
aggressively, reduce our inventory levels and maintain sales levels.


Results of Operations

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

                                                        Three Months
                                                       Ended March 31,
                                                       ---------------
                                                       2001      2000
                                                       -----     -----
                                                         (unaudited)
     Revenue, net....................................  100.0%    100.0%
     Cost of revenue.................................   47.1      35.5
                                                       -----     -----
          Gross profit...............................   52.9      64.5
                                                       -----     -----
     Operating expenses:
        Research and development.....................    9.6       5.6
        Sales and marketing..........................   30.0      14.4
        General and administrative...................    7.2       2.6
        Amortization of deferred stock compensation..    1.4       2.8
                                                       -----     -----
          Total operating expenses...................   48.2      25.4
                                                       -----     -----
     Income from operations..........................    4.7      39.1
     Interest income, net............................    3.5       2.9
                                                       -----     -----
     Income before provision for income taxes........    8.2      42.0
     Provision for income taxes......................    3.1      16.2
                                                       -----     -----
     Net income......................................    5.1%     25.8%
                                                       =====     =====

     Net revenue. Net revenue increased 18% from $70.0 million for first quarter
2000 to $82.6 million for first quarter 2001. The increase in revenue was due to
the market's growing acceptance of Foundry's Gigabit Ethernet technology,
expanded product offerings and our increased sales and marketing efforts.
Historical growth rates of revenue may not be indicative of future results.

     For the three months ended March 31, 2001, no customers accounted for
greater than 10% of our net revenue. Sales to customers outside of the United
States accounted for approximately 37.5% of our net revenue for the three months
ended March 31, 2001. No individual country accounted for 10% or more of total
revenue.

     Gross profit. Gross profit decreased slightly from $45.2 million for first
quarter 2000 to $43.7 million for first quarter 2001. As a percentage of
revenue, gross profit decreased from 64.5% for first quarter 2000 to 52.9% for
first quarter 2001. The decrease as a percentage of revenue was due to a
combination of lower average selling prices, fluctuations in the product mix and
lower volume efficiencies combined with a higher provision for excess and
obsolete inventories resulting from lower than anticipated product demand. Our
gross profit may be adversely affected by increases in material or labor costs,
heightened price competition, component shortages, changes in channels of
distribution, product and geographic mix, as well as the mix of configurations
within each product group. Downward pressures on our gross profit may be further
impacted by increased percentage of revenue from service providers,
international purchasers or through our OEMs, all of which may have lower
margins, or an increase in product costs. Although management continues to
closely monitor inventory levels, declines in demand for our products could
result in additional provision for excess and obsolete inventories. See also
"Risk Factors That May Affect Future Results and Market Price of Stock - 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."

     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 from $3.9 million for
first quarter 2000 to $7.9 million for first quarter 2001. The increase was due
to the hiring of

                                                                              12
<PAGE>

additional engineering personnel, expenses associated with the development of
our new product offerings and expenses associated with enhancements to existing
product lines. 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
increased from $10.1 million for first quarter 2000 to $24.8 million for first
quarter 2001. The increase was primarily due to a significant increase in our
sales and marketing personnel, related commissions expense, increased
advertising, trade show and promotional expenses associated with the
introduction of new products and general corporate branding. We expect sales and
marketing expenses will not change significantly in the near term due to the
uncertainty of customers' spending patterns in the current economic environment.

     General and administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and
administrative personnel, bad debt expense, facilities expenses and other
general corporate expenses. General and administrative expenses increased from
$1.8 million for first quarter 2000 to $5.9 million for first quarter 2001. The
increase was due to the addition of personnel, an increase in the provision for
doubtful accounts receivable and increases in related facilities expenses and
other general corporate expenses consistent with the increased scale of
operations. During the first quarter of 2001, we recorded a provision for
doubtful accounts receivable of $3.0 million to provide for potential
uncollectible accounts due to the impact of the softening economy on our
customer base. We expect general and administrative expenses will not change
significantly in the near term due to the uncertainty of customers' spending
patterns in the current economic environment.

     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 $2.0 million and $1.1
million for the three month periods ended March 31, 2000 and 2001, respectively.
At March 31, 2001, we had approximately $4.4 million remaining to be amortized
over the corresponding vesting period of each respective option, generally four
years.

     Interest income, net. Interest income is primarily the result of the
interest earned on our short-term investments and cash held in interest bearing
accounts less any interest expense incurred on capital lease obligations. Net
interest income increased from $2.0 million in first quarter 2000 to $2.9
million in first quarter 2001. The increase was due to higher cash and
investment balances generated primarily from operating cash flows.

     Income taxes. We have recorded an income tax provision for the three months
ended March 31, 2001 of $2.6 million compared to $11.3 million for the same
period in 2000. The effective tax rates for the three months ended March 31,
2001 and 2000 were 38.0% and 38.7%, respectively, based upon the estimated
annualized tax rates.


Liquidity and Capital Resources

     At March 31, 2001 Foundry had cash and cash equivalents and short-term
investments totaling $261.4 million compared to $252.2 million at December 31,
2000, an increase of $9.2 million. The increase was due to the Company's
continued profitability for the ninth consecutive quarter. Cash equivalents
consisted of commercial paper, corporate and government debt securities and cash
deposited in money market accounts with original maturities of less than three
months. Short-term investments were comprised of commercial paper, corporate and
U.S. debt securities with original maturities greater than three months but less
than one year.

     Cash provided by operating activities was $25.2 million and $9.6 million
for the three months ended March 31, 2000 and 2001, respectively. The decrease
was primarily due to lower net income, the absence of a tax benefit from stock
option exercises, lower accounts payable and higher inventory purchases in the
first quarter of 2001 offset by an increase in income taxes payable and a
significant decrease in accounts receivable. Our inventory levels increased
during the first quarter of 2001 due to lower than anticipated sales volume and
increased purchases to secure the supply of certain components to support our
new product introductions. Such increases in inventories reduce our cash and
short-term investments. We will continue to focus on inventory management to
achieve strategic inventory levels.

                                                                              13
<PAGE>

     For the three months ended March 31, 2000, cash utilized in investing
activities was $27.5 million, which primarily represents purchases of short-term
investments offset by proceeds from maturities of short-term investments and, to
a lesser extent, purchases of fixed assets. During the three months ended March
31, 2001, cash provided from investing activities was $27.6 million, which
primarily consisted of proceeds from maturities of our short-term investments
offset by reinvestments of those proceeds into other short-term securities and,
to a lesser extent, purchases of fixed assets and an equity investment.

     Financing activities provided $1.4 million and $3.9 million in cash for the
three months ended March 31, 2000 and 2001, respectively, and consisted of
proceeds from the issuance of common stock upon the exercise of stock options.

     As of March 31, 2001, 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,
2001 will enable us to meet our working capital requirements for at least the
next 12 months. However, there can be no assurance that we will not require
additional financing within this time frame or that such additional funding, if
needed, will be available on acceptable terms.

                                                                              14
<PAGE>

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

Although we have been profitable since first quarter 1999, we may not be able to
maintain profitability in the future.

     We generated net income of $4.2 million for the three months ended March
31, 2001 and $88.1 million for the year ended December 31, 2000. As of March 31,
2001, we had retained earnings of $94.8 million. 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.

     With increased levels of spending, an inability to meet expected revenue
levels in a particular quarter could have a material, negative impact on our
operating results for that period as we will not be able to react quickly enough
to scale back operations. Although we have been profitable in each quarter since
the first quarter of fiscal 1999, our ability to remain profitable depends on
our ability to 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.


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 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.

     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.

     When market conditions stabilize, we may increase our operating expenses to
expand our sales and marketing efforts, expand our customer support
capabilities, finance increased levels of research and development and build our
operational and administrative infrastructure. 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 shortfall in revenue relative to our
expectations could cause a significant decline in our quarterly operating
results.


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.

     Prior to fiscal 2000, a limited number of customers and resellers accounted
for a significant portion of our revenue. For the first quarter ended March 31,
2001 and the year ended December 31, 2000, 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 has become 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 have binding commitments from any of
them. For example:

                                                                              15
<PAGE>

     .    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 to a significant extent 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
grow at a slower rate or not at all and on a quarter-to-quarter basis may be
significantly lower than our historical quarterly growth rate. 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 large public companies, such as Nortel Networks,
Lucent Technologies, Juniper Networks and Extreme Networks as well as other
smaller public and private companies. Some of our current and potential
competitors have greater market leverage, longer operating histories, greater
financial, technical, sales, marketing and other resources, more name
recognition and larger installed customer bases. Additionally, we may face
competition from unknown companies and emerging technologies that may offer new
LAN, MAN and LAN/WAN solutions 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 North American
direct sales operation and reseller distribution channels and continuing to
provide excellent customer support.

                                                                              16
<PAGE>

     If we are unable to effectively expand, train and retain our domestic sales
and support staff or establish our indirect distribution channels, our ability
to grow and increase revenue could be harmed. Expansion of our direct sales
operation may not be successfully implemented and the cost of any expansion may
exceed the revenue generated.

     If we are unable to develop relationships with significant resellers, or if
these resellers are not successful in their sales efforts, sales of our products
may decrease and our operating results would suffer.

     We need to increase our customer service and support staff to support new
and existing customers and resellers. The design and installation of networking
products can be complex and our customers, particularly our ISP customers,
require a high level of sophisticated support and services. Hiring highly
trained customer service and support personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of our products.


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

     The current life cycle of our products is typically 18 to 24 months. To
remain competitive, 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. 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. In
addition, when we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing 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.


We sell to Internet Service Providers, whose unpredictable demands, requirements
and business models subject us to potential adverse revenue fluctuations.

     We have introduced products specifically targeted at the ISP market and
currently have under development other products to address their requirements.
As a result, our success depends on increased sales to ISPs. We believe that
there are a number of risks arising from doing business with ISPs which may not
arise in our relationships with our other customers, including:

     .    ISPs demonstrate a low level of brand loyalty and may switch to
          another supplier which provides superior performance;

     .    any failure of an ISP's service to its customers, particularly in the
          case of our largest ISP customer, America Online, that is correctly or
          incorrectly attributed to our products could lead to substantial
          negative publicity and undermine our efforts to increase our sales in
          both this market and other markets;

     .    we have lost and may lose ISP customers who fail due to the highly
          competitive nature of their business or do not survive as a result of
          mergers and acquisitions in the ISP industry; and

     .    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 decline.

     Due to these factors, we may not successfully increase our penetration of
the ISP market or maintain our current level of sales in this market.


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 and other similar financing
sources to fund their operations and growth. Due to the slowdown of the economy
and other factors, many of these customers are finding it increasingly difficult
to obtain financing on attractive terms, if at all. Some of these companies have
been unable to raise adequate capital and 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. Such reductions in spending or payment
defaults by this segment of our customer base have had and may have an adverse
effect on our operating results.

                                                                              17
<PAGE>

Some of our revenue may be derived through vendor financing programs which may
be difficult to administer and may expose us to increased credit risks.

     Our existing and potential customers may increasingly demand vendor
financing programs through which they can finance their purchase of networking
equipment. We currently have one such program in place, but only on a limited
basis. Several of our large competitors, in contrast, currently offer vendor
financing programs on a broad basis. In the future we may also offer them on a
broad basis in order to meet increased demand and remain competitive. Although
vendor financing programs can increase customer opportunities, they can also be
difficult and costly to administer and may be utilized by customers who carry
heightened credit risk. If we are unable to effectively administer vendor
financing programs on a broad basis, or if we incur material losses due to
customer defaults under the programs, our business could be harmed which could
cause our stock price to decline.


Hewlett-Packard is a major customer and our most significant OEM, and our
business could be harmed if our relationship with Hewlett-Packard is terminated.

     Hewlett-Packard, currently our most significant OEM, accounted for
approximately 4.4% of our revenue in 2000 and 14% of our revenue in 1999. We
anticipate that it will continue to be a major customer. In addition to
providing revenue through sales of our products to Hewlett-Packard, we believe
that this relationship is important to facilitate broad market acceptance of our
products and enhance our sales, marketing and distribution capabilities.
Therefore, in addition to directly affecting our revenue, the cancellation of
our agreement with Hewlett-Packard could harm our ability to market and sell our
products to potential customers.

     In addition, if we were to default under conditions specified in the
agreement, Hewlett-Packard could use our source code to develop and manufacture
competing products. This could harm our performance and ability to compete.

     This agreement creates the potential that we and Hewlett-Packard may
compete for sales to the same customer. If this situation occurs, it could harm
our relationship with Hewlett-Packard and also harm our business.


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. We anticipate that the average selling
prices of our products will 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, with 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 costs
and effectively manage our inventory levels. 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.


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 is intense, especially in the San
Francisco Bay Area, and we have had 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. In addition, companies in
the networking industry whose employees accept positions with competitors
frequently claim that

                                                                              18
<PAGE>

competitors have engaged in unfair hiring practices. We have received one claim
like this from another company and we may receive additional claims in the
future. We could incur substantial costs in defending ourselves against any such
claims, regardless of the merits of such claims.

     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, Bell Canada in Canada, Shanghai Gentek 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 international sales 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.

     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 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. 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

                                                                              19
<PAGE>

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. 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 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 an enterprise or Internet
service provider. 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, 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 the eventual 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.


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;

                                                                              20
<PAGE>

     .    delays in or loss of market acceptance of our products;

     .    product returns;

     .    lost sales; and

     .    unexpected expenses to remedy errors.


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

     We experienced rapid growth which placed, and continues to place, a
significant strain on our resources. Our revenue increased significantly from
fiscal 1999 to 2000, and our headcount increased from 222 employees in 1999 to
572 in 2000. Our management team has relatively limited experience managing
rapidly growing companies. As a result, 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 anticipated
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. We are currently implementing an
Enterprise Resource Planning (ERP) 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.

     As part of our business strategy, we may review acquisition prospects that
would complement our existing business or enhance our technological
capabilities. 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.
<PAGE>

     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. We do not own any patents although
we do have patent applications pending. We may not have taken actions that
adequately protect our intellectual property rights.

     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 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.
We do not currently own any patents, although we have patent applications
pending.

     From time to time third parties have asserted exclusive patent, copyright,
trademark and other intellectual property 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 fiscal 2000, we received letters from both IBM and Nortel
alleging that certain of our products that operate on industry standards may
infringe one or more of their patents. 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. We are currently analyzing the validity of these claims. Regardless of
the merit of these claims, our investigation could be time-consuming, result in
costly litigation and diversion of technical management personnel, or require us
to develop non-infringing technology or enter into royalty or license
agreements. If there is a successful claim of infringement by any third party,
or if we fail to develop non-infringing technology or license the proprietary
rights, our business could be harmed.


Our stock price has been volatile historically, which may make it more difficult
for you to resell shares when you want at prices you find attractive.
<PAGE>

     The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During the year ended December 31, 2000, the
closing sale prices of our common stock on the Nasdaq Stock Market (taking into
consideration any stock splits) ranged from $13.00 to $207.56. 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 class action lawsuits pending against us as
indicated in 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 27.3% 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
27.3% of our outstanding common stock as of March 31, 2001. 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 and its 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 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 are located in Northern California, an area
susceptible to earthquakes. In recent months, the western United States (and
California in particular) has experienced repeated episodes of diminished
electrical power supply. As a result of these episodes, certain of our
operations or facilities may be subject to "rolling blackouts" or other
unscheduled interruptions of electrical power. The prospect of such unscheduled
interruptions may continue for the forseeable 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
<PAGE>

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.


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. With the exception of a
high-risk $2.5 million investment made in a development stage private company,
who is also our customer, in February 2001, our investment portfolio includes
only marketable securities with original maturities of less than one year and
with active secondary or resale markets to ensure portfolio liquidity.

     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, 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.
<PAGE>

     PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

     In December 2000, a shareholder class action lawsuit was filed against
Foundry and certain of its officers in the United States District 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 lawsuit alleges violation of federal securities laws and purports
to seek damages on behalf of a class of shareholders who purchased Foundry
common stock during the period from October 18, 2000 to December 19, 2000.
Following the filing of the lawsuit, several virtually identical lawsuits were
filed making essentially the same allegations. On April 6, 2001, the court
consolidated all actions and directed plaintiffs to file a consolidated
complaint. The court also selected lead plaintiffs and approved lead plaintiffs'
choice of counsel. Foundry has reviewed the lawsuits, believes them to be
without merit and intends to seek dismissal of the lawsuits at its first
opportunity.

     In addition, the Company is a party to various legal proceedings arising
from the ordinary course of its business and/or third-party claims alleging
infringement of proprietary rights with respect to our existing or future
products. In fiscal 2000, we received letters from both IBM and Nortel alleging
that certain of our products that operate on industry standards may infringe one
or more of their patents. 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. Foundry is currently
analyzing the validity of these claims. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors That May
Affect Future Results and Market Price of Stock."


Item 2. Changes in Securities.

     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  Description
  ------  -----------

    3.1   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'sQuarterly Report on Form 10-Q for the
          quarter ended September 30, 2000 and incorporated herein by
          reference.)

    10.1  1996 Stock Plan *
<PAGE>


   10.2   1999 Employee Stock Purchase Plan **

   10.3   1999 Directors' Stock Option Plan **

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

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

   10.6   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. ****

   10.7   2000 Non-Executive Stock Option Plan *****

_________

*    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).
**   Incorporated herein by reference to the exhibit filed with the Company's
     Registration Statement on Form S-1 (Commission File No. 333-82577).
***  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, 1999 (Commission File No.
     000-26689).

*****Incorporated herein by reference to the exhibit filed with the Company's
     Registration Statement on Form S-8 filed on October 25, 2000 (Commission
     File No. 333-48560).

(b) Reports on Form 8-K.

    None.
<PAGE>

  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. Heffner
                                        ------------------------------------
                                    Timothy D. Heffner
                                    Vice President, Finance and Administration,
                                    Chief Financial Officer (Principal Financial
                                    and Accounting Officer)

Date: May 14, 2001