##### Table of Contents

---

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 June 30, 2002





OR





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




For the transition period from
 to





Commission file number 000-26689





---




FOUNDRY NETWORKS, INC.


(Exact name of registrant
as specified in its charter)





Delaware

77-0431154(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)





2100 Gold Street


P.O. Box 649100


San Jose, CA 95164-9100


(Address of principal executive offices, including zip code)





(408) 586-1700


(Registrants telephone number, including area code)





N/A


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





---




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





Yes    þNo  ̈





As of August 12, 2002, there were 120,417,229 shares of the
registrants common stock outstanding, par value $0.0001.





---



---

##### Table of Contents

INDEX





PagePART I

FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of June 30, 2002 andDecember 31, 2001

3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the Six Months EndedJune 30, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

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

13Risk Factors That May Affect Future Results and Market Price of Stock

19Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

29Item 2.

Changes in Securities and Use of Proceeds

30Item 3.

Defaults Upon Senior Securities

30Item 4.

Submission of Matters to a Vote of Security Holders

30Item 5.

Other Information

30Item 6.

Exhibits and Reports on Form 8-K

30SIGNATURES

32




2




---

##### Table of Contents

PART I.    FINANCIAL INFORMATION





Item 1.Financial Statements.





FOUNDRY NETWORKS, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)





June 30,2002


December 31, 2001(unaudited)


(1)ASSETSCurrent assets:Cash and cash equivalents

$
112,514


$
98,210Short-term investments


185,977



176,524Accounts receivable, net of allowances for doubtful accounts of $5,753 and $6,648 and sales returns of $1,501 and $1,501
at June 30, 2002 and December 31, 2001, respectively


49,921



51,830Inventories


37,978



43,277Deferred tax assets


29,657



29,656Prepaid expenses and other current assets


3,370



4,863Total current assets


419,417



404,360Property and equipment


15,692



13,184Less: Accumulated depreciation


(9,230
)


(6,868
)Net property and equipment


6,462



6,316Other long-term assets


1,273



1,462Total assets

$
427,152


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

$
19,085


$
15,300Accrued payroll and related expenses


10,923



10,932Warranty accrual


2,499



2,499Other accrued expenses


5,274



4,601Income taxes payable


2,152



1,193Deferred revenue


16,766



15,781Total current liabilities


56,699



50,306Commitments and contingencies (Note 4)Stockholders equity:Common stock, $0.0001 par value:Authorized300,000,000 shares at June 30, 2002 and December 31, 2001, respectivelyIssued and outstanding119,984,032 and 119,298,814 shares at June 30, 2002 and December 31, 2001,
respectively


12



12Treasury stock


(14,996
)


(14,996
)Additional paid-in capital


288,027



284,740Note receivable from stockholder


(480
)


(480
)Deferred stock compensation


(613
)


(1,302
)Cumulative translation adjustment


(76
)


351Retained earnings


98,579



93,507Total stockholders equity


370,453



361,832Total liabilities and stockholders equity

$
427,152


$
412,138


---

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




See accompanying notes to condensed consolidated financial statements.




3




---

##### Table of Contents

FOUNDRY NETWORKS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


(in thousands, except per share data)





Three Months Ended June 30,

Six Months EndedJune 30,2002

2001

2002

2001Revenue, net

$
75,008

$
88,569

$
137,428

$
171,120Cost of revenue


35,462


41,318


65,303


80,206Gross profit


39,546


47,251


72,125


90,914Operating expenses:Research and development


8,855


8,251


17,383


16,151Sales and marketing


22,571


23,266


43,161


48,083General and administrative


3,351


5,095


6,362


11,042Amortization of deferred stock compensation


306


833


688


1,968Total operating expenses


35,083


37,445


67,594


77,244Income from operations


4,463


9,806


4,531


13,670Interest and other income


1,284


2,304


2,759


5,169Income before provision for income taxes


5,747


12,110


7,290


18,839Provision for income taxes


1,724


4,602


2,218


7,159Net income

$
4,023

$
7,508

$
5,072

$
11,680Basic net income per share

$
0.03

$
0.06

$
0.04

$
0.10Weighted average shares used in computing basic net income per share


119,523


117,324


118,965


116,457Diluted net income per share

$
0.03

$
0.06

$
0.04

$
0.09Weighted average shares used in computing diluted net income per share


123,173


126,241


123,174


125,448








See accompanying notes to condensed
consolidated financial statements.




4




---

##### Table of Contents

FOUNDRY NETWORKS, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


(in thousands)





Six Months EndedJune 30,2002


2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
5,072


$
11,680Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


2,362



1,671Amortization of deferred stock compensation


688



1,968Provision for (recovery of) allowance for doubtful accounts


(222
)


5,349Provision for excess and obsolete inventories


3,877



8,668Tax benefit from stock option exercises


411



3,792Change in operating assets and liabilities:Accounts receivable


2,131



(9,744
)Inventories


1,422



(7,876
)Prepaid expenses and other assets


1,681



6,201Accounts payable


3,785



(11,952
)Accrued payroll and related benefits


(9
)


(920
)Income taxes payable


959



Other accrued liabilities


673



1,256Deferred revenue


985



(3,118
)Net cash provided by operating activities


23,815



6,975CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(2,508
)


(3,294
)Maturities of short-term investments


143,719



137,469Purchases of short-term investments


(153,172
)


(123,871
)Purchase of minority investment






(2,500
)Net cash (used in) provided by investing activities


(11,961
)


7,804CASH FLOWS FROM FINANCING ACTIVITYProceeds from issuances of common stock


2,877



6,609Net cash provided by financing activity


2,877



6,609INCREASE IN CASH AND CASH EQUIVALENTS


14,731



21,388Effect of exchange rate changes on cash


(427
)


(111
)CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


98,210



168,429CASH AND CASH EQUIVALENTS, END OF PERIOD

$
112,514


$
189,706





See accompanying notes to condensed consolidated financial statements.




5




---

##### Table of Contents

FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(Information for the three and six months ended June 30, 2002 and 2001 is unaudited)





1.    DESCRIPTION OF BUSINESS:





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





2.    SIGNIFICANT ACCOUNTING POLICIES:





Basis of Presentation





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





The unaudited condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows
for the periods presented. These adjustments are of a normal, recurring nature. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for future quarters or for
the year ending December 31, 2002.





Principles of Consolidation and Foreign Currency Translation





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





Reclassifications





Certain items previously reported in specific financial captions have been reclassified to conform with the June 30, 2002 presentation.





Use of Estimates in Preparation of Financial Statements





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




6




---

##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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





Cash, Cash Equivalents and Short-Term Investments





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





Foundry accounts for its investments under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments in highly liquid financial instruments with original maturities greater than three months but less than one year
are classified as short-term investments. As of June 30, 2002 and December 31, 2001, Foundrys short-term investments, which were stated at amortized cost and classified as held-to-maturity, consisted of corporate and investment grade U.S. debt
securities and commercial paper.





June 30, 2002Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


Estimated Fair ValueMoney market funds

$
595

$


$



$
595Commercial paper


80,265









80,265Government securities


163,097


136


(9
)


163,224$
243,957

$
136

$
(9
)

$
244,084Included in cash and cash equivalents

$
57,980

$


$



$
57,980Included in short-term investments


185,977


136


(9
)


186,104$
243,957

$
136

$
(9
)

$
244,084December 31, 2001Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses


Estimated Fair ValueMoney market funds

$
33,135

$


$



$
33,135Commercial paper


58,807









58,807Government securities


149,583


127


(27
)


149,683$
241,525

$
127

$
(27
)

$
241,625Included in cash and cash equivalents

$
65,001

$


$



$
65,001Included in short-term investments


176,524


127


(27
)


176,624$
241,525

$
127

$
(27
)

$
241,625




7




---

##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Inventories





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





June 30, 2002

December 31, 2001Purchased parts

$
15,248

$
20,305Work-in-process


19,404


22,706Finished goods


3,326


266$
37,978

$
43,277





The networking industry is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements, and evolving industry standards. We regularly monitor inventory quantities on hand and record a provision for excess and obsolete inventories based primarily on our
estimated forecast of product demand and production requirements for up to twelve months. Provisions for excess and obsolete inventory in the amounts of $1.4 million and $3.4 million were recorded for the three months ended June 30, 2002 and 2001,
respectively. For the six months ended June 30, 2002 and 2001, provisions for excess and obsolete inventory were $3.9 million and $8.7 million, respectively. The decreases in the provisions during 2002 were due to lower inventory levels and the
write-off and scrapping of $8.0 million of inventory during the first quarter of 2002. Inventory write-offs were approximately $0.6 million and $0.1 million for the three months ended June 30, 2002 and 2001, respectively. For the six-month periods
ended June 30, 2002 and 2001, inventory write-offs totaled $8.6 million and $1.1 million, respectively.





Concentrations





Financial instruments that potentially subject Foundry to a concentration
of credit risk principally consist of cash equivalents, short-term investments and accounts receivable. Foundry seeks to reduce credit risk on financial instruments by investing almost exclusively in high credit quality issuers and, by policy,
limits the amount of credit exposure to any one issuer or fund. Exposure to customer credit risk is controlled through credit approvals, credit limits, continuous monitoring procedures and establishment of an allowance for doubtful accounts when
deemed necessary. Specific allowances for bad debts are recorded when Foundry becomes aware of a specific customers inability to meet its financial obligation to us such as in the case of bankruptcy filings or deterioration of financial
position. Estimates are used in determining our allowances for all other customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. Foundry mitigates some collection risk
by requiring some international customers to secure letters of credit or bank guarantees prior to placing an order with the Company.





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





Revenue Recognition





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





Products.    Revenue is generally recorded at the time of shipment when title and risk of loss passes to the
customer, unless Foundry has future obligations for installation or has to obtain customer acceptance, in which




8




---

##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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





Services.    Revenue from customer support services is recognized ratably over the
contractual period, generally one year. Amounts invoiced to customers in excess of revenue recognized on support contracts are recorded as deferred revenue until the revenue recognition criteria are met. Revenue from customer support services
accounted for 12% and 7% of total revenue for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, revenue from support services also accounted for 12% and 7%, respectively. The increase in
support revenue in 2002 was a result of a higher installed base of our networking equipment. Revenue for training and installation services is recognized as services are rendered. Revenue from software, training and installation services accounted
for less than 1% of total revenue for the three and six months ended June 30, 2002 and 2001.





Segment Reporting





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





For the three months ended June 30, 2002, one customer accounted for 11% of revenue. For the six months ended June 30, 2002, no customers accounted for greater than 10% of revenue. For the three and six months ended June 30, 2001, no
customer accounted for greater than 10% of our 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 30% and 40% for the three months
ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001 export sales represented 38% and 39%, respectively. Sales to any individual country outside of the United States represent less than 10% of revenue for the
quarter ended June 30, 2002.





Computation of Per Share Amounts





Basic net income per common share and diluted net income per common share are presented in conformity with SFAS No. 128, Earnings
Per Share for all periods presented. In accordance with SFAS No. 128, basic net income per common share has been calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to
repurchase. For the three and six months ended June 30,




9




---

##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




2002 and 2001, diluted net income per common share has been calculated assuming the conversion of all dilutive potential common stock. The common equivalent shares which were anti-dilutive and
therefore, excluded from the diluted earnings per share computation for the three and six months ended June 30, 2002 were 17.5 million and 17.8 million shares, respectively. Anti-dilutive shares for the three and six months ended June 30, 2001 were
10.5 million and 11.4 million shares, respectively.





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


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

$
4,023


$
7,508


$
5,072


$
11,680Basic:Weighted average shares of common stock outstanding


119,977



119,477



119,582



118,981Less: Weighted average shares subject to repurchase


(454
)


(2,153
)


(617
)


(2,524
)Weighted average shares used in computing basic net income per share


119,523



117,324



118,965



116,457Basic net income per share

$
0.03


$
0.06


$
0.04


$
0.10Diluted:Weighted average shares of common stock outstanding


119,977



119,477



119,582



118,981Add: Weighted average dilutive potential common stock


3,196



6,764



3,592



6,467Weighted average shares used in computing diluted net income per share


123,173



126,241



123,174



125,448Diluted net income per share

$
0.03


$
0.06


$
0.04


$
0.09





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 intrinsic value 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 determines 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.





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 and six months ended June 30, 2002 and 2001 were
immaterial and comprised only of foreign currency translation adjustments.




10




---

##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







4.    COMMITMENTS AND CONTINGENCIES





Leases





The Company leases office space in a number of locations in the United States, as well as in the Americas, Europe, Middle East, Australia, and Asia. At June 30, 2002, future minimum lease payments under all noncancelable operating
leases are as follows (in thousands):





Operating Leases2002 (remaining six months)

$
2,7582003


4,5622004


4,3692005


4,3732006


2,371All years thereafter


6,148Total lease payments

$
24,581





Purchase Commitments





The Company uses contract manufacturers to assemble and test our products. In order to reduce manufacturing lead times and ensure adequate
inventories, the Companys agreements with some of these contract manufacturers allow them to procure long lead-time component inventory on the Companys behalf based upon a rolling production forecast provided by Foundry with lead times
of up to 6 months. Foundry may be contractually obligated to the purchase of long lead-time component inventory procured by certain contract manufacturers in accordance with the forecast, unless Foundry gives notice of order cancellation at least 30
to 90 days prior to the delivery date. As of June 30, 2002, the Company was potentially committed to purchase approximately $31.4 million of such inventory.





Litigation





In December 2000, several similar shareholder
class action lawsuits were filed against Foundry and certain of its officers in the United States Court for the Northern District of California, following Foundrys announcement in December 2000 of its anticipated financial results for the
fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated by the Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead plaintiffs were selected as required
by law and they filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of shareholders who purchased Foundrys common stock during the period from September
7, 2000 to December 19, 2000. On October 26, 2001, the Court granted the Companys motion to dismiss the consolidated amended complaint without prejudice and with leave to amend. On December 13, 2001, attorneys for lead plaintiffs filed a
second amended complaint. The Company reviewed the second amended complaint and moved to dismiss that complaint as well. On June 6, 2002, the Court granted the Companys motion to dismiss the second amended complaint without prejudice and with
leave to amend. On July 8, 2002, attorneys for lead plaintiffs filed a third amended complaint. On August 5, 2002, the Company filed a motion to dismiss that complaint. A hearing on that motion is set for October 4, 2002.





A class action lawsuit was filed on November 27, 2001 in the United States District Court for the Southern District of New York on behalf
of purchasers of Foundry common stock alleging violation of federal securities laws. The case is now designated as In re Foundry Networks, Inc. Initial Public Offering Securities Litigation,




11




---

##### Table of Contents



FOUNDRY NETWORKS, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




No. 01-CV-10640 (SAS) (S.D.N.Y.),related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS) (S.D.N.Y.). The case is brought purportedly on behalf of all
persons who purchased the common stock of the Company from September 27, 1999 through December 6, 2000. The Company and its officers were served with the complaint, only after the maximum 120 days for service allowed under the Federal Rules of Civil
Procedure had elapsed. On or about April 19, 2002, plaintiffs electronically served an amended complaint. The amended complaint names as defendants, the Company, three of its officers, and investment banking firms that served as underwriters for the
Companys initial public offering in September 1999. The amended complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the prospectus
incorporated in the registration statement for the offering failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the
underwriters allocated to those investors material portions of the shares of the Companys stock sold in the initial public offering, and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to
allocate shares of the Companys stock sold in the initial public offering to those customers in exchange for which the customers agreed to purchase additional shares of the Companys stock in the aftermarket at pre-determined prices. The
amended complaint also alleges that false analyst reports were issued following the IPO. No specific damages are claimed. We are aware that similar allegations have been made in lawsuits relating to more than 300 other initial public offerings
conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. Motions to dismiss have been filed on behalf of all named defendants (over 1,000 in total) in the litigation. No
hearing date has been set as of this time.





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





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





5.    INCOME TAXES





The Company recorded tax provisions of $2.2 million and $7.2 million for the six months ended June 30, 2002 and 2001,
respectively. The tax provisions represent effective tax rates of 30% and 38%. These amounts reflect the federal statutory tax rate and an estimated state tax rate, offset by research and development tax credits, foreign sales corporation tax
benefits, and tax-exempt interest income.




12




---

##### Table of Contents

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





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





Critical Accounting Policies and Estimates





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





Revenue Recognition





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





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




13




---

##### Table of Contents

does not properly reflect future returns, revenue could be overstated. In addition, if the Companys actual warranty costs are greater than the accrual, cost of revenues will increase in the
future.





Revenue from customer support services is recognized ratably over the contractual period, generally one
year. Amounts invoiced to customers in excess of revenue recognized on support contracts are recorded as deferred revenue until the revenue recognition criteria are met. Revenue from customer support services accounted for 12% and 7% of total
revenue for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, revenue from support services also accounted for 12% and 7%, respectively. Revenue for training and installation services is
recognized as services are rendered. Revenue from software, training and installation services, combined, accounted for less than 1% of total revenue for each comparative quarter and six month period.





Inventories





The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Foundry regularly monitors inventory quantities on hand
and records a provision for excess and obsolete inventories based primarily on estimated forecast of product demand and production requirements for up to twelve months. Demand for Foundrys products has been adversely affected as a result of
the economic slowdown and reduced telecommunications and infrastructure capital spending. As demonstrated during fiscal 2001, a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand.
Consequently, provisions for excess and obsolete inventory of $3.4 million and $8.7 million were recorded for the three and six months ended June 30, 2001 as compared to $1.4 million and $3.9 million for the same periods in 2002. The decreases in
the provision were due to reduced inventory levels as a result of scrapping $8.0 million of inventory during the first quarter of 2002 and the write-off of an additional $0.6 million of inventory during the second quarter of 2002. During the first
half of 2001, Foundry recorded inventory write-offs totaling $1.1 million. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological
developments would significantly impact the value of inventory and reported operating results. Estimates of future product demand may prove to be inaccurate, in which case Foundry may have understated or overstated the provision required for excess
and obsolete inventory.





Accounts Receivable





We continually monitor and evaluate the collectibility of our trade receivables based on a combination of factors. We record specific allowances for bad debts when we
become aware of a specific customers inability to meet its financial obligation to us such as in the case of bankruptcy filings or deterioration of financial position. Estimates are used in determining our allowances for all other customers
based on factors such as current trends, the length of time the receivables are past due and historical collection experience. We mitigate some collection risk by requiring some international customers to secure letters of credit or bank guarantees
prior to placing an order with us. During the six months ended June 30, 2002, Foundry decreased its allowance for doubtful accounts from $6.6 million at December 31, 2001 to $5.8 million as a result of the Companys increased collection efforts
and improved credit quality of our customers. While we believe that our allowance for doubtful accounts receivable is adequate and that the judgment applied is appropriate, such amounts estimated could differ materially from what will actually
transpire in the future.





Deferred Tax Asset Valuation Allowance





We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax
basis of assets and liabilities. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. Management makes an assessment of the
likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not believed to be more likely than not, a valuation




14




---

##### Table of Contents

allowance must be established. For the six months ended June 30, 2002, we did not record a valuation allowance to reduce our deferred tax assets because we believe the amount is more likely than
not to be realized. In the event Foundry is unable to realize some or all of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Our net deferred tax
assets as of June 30, 2002 were $29.7 million.





Purchase Commitments





We currently subcontract substantially all of our manufacturing to companies that assemble and test our products. Our agreements with some
of these companies allow them to procure long lead-time component inventory on our behalf based upon a rolling production forecast provided by Foundry with lead times of up to 6 months. Foundry may be contractually obligated to the purchase of long
lead-time component inventory procured by certain contract manufacturers in accordance with the forecast, unless Foundry gives notice of order cancellation at least 30 to 90 days prior to the delivery date. As of June 30, 2002, the Company was
potentially committed to purchase approximately $31.4 million of such inventory. If actual demand of our products is below the projections, we may have excess inventory as a result of our purchase commitments of long lead-time components with our
contract manufacturers.





Litigation





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




15




---

##### Table of Contents




Results of Operations





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





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Revenue, net

100.0
%

100.0
%

100.0
%

100.0
%Cost of revenue

47.2


46.6


47.5


46.9Gross profit

52.8


53.4


52.5


53.1Operating expenses:Research and development

11.8


9.3


12.7


9.4Sales and marketing

30.1


26.3


31.4


28.1General and administrative

4.5


5.8


4.6


6.4Amortization of deferred stock compensation

0.4


0.9


0.5


1.2Total operating expenses

46.8


42.3


49.2


45.1Income from operations

6.0


11.1


3.3


8.0Interest and other income

1.7


2.6


2.0


3.0Income before provision for income taxes

7.7


13.7


5.3


11.0Provision for income taxes

2.3


5.2


1.6


4.2Net income

5.4
%

8.5
%

3.7
%

6.8
%





Net revenue.    Net revenue for the
quarter ended June 30, 2002 was $75.0 million, a decrease of 15% from $88.6 million for the same period in 2001. Net revenue for the six months ended June 30, 2002 was $137.4 million, a decrease of $33.7 million from $171.1 million for the same
period a year ago. The decreases were a result of the unfavorable economic conditions and general decline in demand for networking products in 2002.





No customers accounted for greater than 10% of our net revenue for the three and six months ended June 30, 2001. For the three months ended June 30, 2002, one customer accounted for 11% of our net
revenue. For the six months ended June 30, 2002, no customers accounted for greater than 10% of our net revenue.





Sales to customers outside of the United States accounted for approximately 30% and 40% for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, export sales accounted for 38%
and 39% of our net revenue, respectively. During the first half of 2001, sales to one country outside of the United States exceeded 10%. Sales to China accounted for 16% and 11% for the three and six months ended June 30, 2001. During the three and
six months ended June 30, 2002, no individual country outside of the United States accounted for 10% or more of total revenue during these periods.





Gross profit.Gross profit decreased from $47.3 million for the second quarter of 2001 to $39.5 million for the second quarter of 2002 and from $90.9 million for the six
months ended June 30, 2001 to $72.1 million for the six months ended June 30, 2002. As a percentage of revenue, gross profit remained flat at 53% for the three and six months ended June 30, 2002 and 2001. Gross margin may be adversely affected in
the future by increases




16




---

##### Table of Contents

in material or labor costs, excess inventory, obsolescence charges, changes in shipment volume, increased price competition, geographic mix and product mix.





Research and development.Research and development expenses consist primarily of salaries and related
personnel expenses, prototype expenses related to the development of our ASICs, software development and testing costs, and the depreciation of property and equipment related to research and development activities. Research and development expenses
increased $0.6 million from $8.3 million for the second quarter of 2001 to $8.9 million for the second quarter of 2002, and increased $1.2 million from $16.2 million for the six months ended June 30, 2001 to $17.4 million for the six months ended
June 30, 2002. The increases were primarily due to 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 decreased $0.7 million from
$23.3 million for the second quarter of 2001 to $22.6 million for the second quarter of 2002 and decreased $4.9 million from $48.1 million for the six months ended June 30, 2001 to $43.2 million for the six months ended June 30, 2002. The decreases
were primarily due to reductions in headcount and advertising activities as a result of weak capital spending conditions affecting the networking industry.





General and administrative.General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel,
provisions for doubtful accounts receivable, facilities expenses, legal expenses and other general corporate expenses. General and administrative expenses decreased $1.7 million from $5.1 for the second quarter of 2001 to $3.4 million for the second
quarter of 2002 and decreased $4.6 million from $11.0 million for the six months ended June 30, 2001 to $6.4 million for the six months ended June 30, 2002. The decreases were primarily due to a higher provision for doubtful accounts during the
first half of 2001. During the first six months of 2001, we recorded a provision for doubtful accounts totaling $5.3 million. During the three and six months ended June 30, 2002, we did not record any additional provisions for doubtful accounts as a
result of our collection efforts and a significant improvement in the credit quality of our customers.





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 $0.3 million in 2000, representing the difference between the exercise price and the deemed fair market value of our common stock on the date these stock options were granted. This amount is reflected within stockholders equity and is
being amortized to operations over the respective vesting periods. We recorded amortization of deferred stock compensation expense of approximately $0.8 million and $0.3 million for the three months ended June 30, 2002 and 2001, respectively, and
$0.7 million and $2.0 million for the six-month periods ended June 30, 2002 and 2001, respectively. At June 30, 2002, we had approximately $0.4 million to be amortized over the remainder of 2002 and $0.2 million for fiscal 2003.





Interest and other income.Interest and other income are comprised primarily of the interest
earned on our short-term investments and cash held in interest bearing accounts. Interest and other income decreased from $2.3 million in the second quarter of 2001 to $1.3 million in the second quarter of 2002 and from $5.2 million for the six
months ended June 30, 2001 to $2.8 million for the six months ended June 30, 2002. The decreases were due to the impact of lower average interest rates during 2002.





Income taxes.    We have recorded an income tax provision for the six months ended June 30, 2002 of $2.2 million as compared to $7.2 million
for the same period in 2001. The effective tax rates for the six months




17




---

##### Table of Contents

ended June 30, 2001 were 38.0% compared to 30% for the six months ended June 30, 2002 based upon the estimated annualized tax rates.





Liquidity and Capital Resources





At June 30,
2002 Foundry had cash and cash equivalents and short-term investments totaling $298.5 million as compared to $274.7 million at December 31, 2001. For the six months ended June 30, 2002, Foundry generated cash of $23.8 million from operations, $2.9
million of proceeds primarily from the employee stock purchase plan, offset by $12.0 million used for the net purchases of short-term investments and fixed assets. Cash provided from operations increased from $7.0 million for the six months ended
June 30, 2001 to $23.8 million for the six months ended June 30, 2002, due to increases in deferred revenue and accounts payable and a decrease in accounts receivable due to our increased collection efforts and improved credit quality of our
customers. Our inventories also decreased significantly from 2001 as a result of our efforts to minimize inventory levels in response to the economic slowdown and reduction in capital spending by customers.





As of June 30, 2002, we did not have any material commitments for capital expenditures. However, we expect to incur capital expenditures
as we expand our operations. Although we do not have any current plans or commitments to do so, from time to time, we may also consider the acquisition of, or evaluate investments in, products and businesses complementary to our business. Any
acquisition or investment may require additional capital.





We believe that our cash and short-term investment
balances at June 30, 2002 will enable us to meet our working capital requirements for at least the next 12 months.




18




---

##### Table of Contents

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





We may not be able to maintain
profitability.





We generated net income of $2.9 million for the year ended December 31, 2001 on revenues of
$311.2 million and net income of $4.0 million for the quarter ended June 30, 2002 on revenues of $75.0 million. As of June 30, 2002, we had retained earnings of $98.6 million. When economic conditions improve, we may incur increased costs and
expenses related to sales and marketing, including expansion of our direct sales operation and distribution channels, product development, customer support, expansion of our corporate infrastructure, and facilities expansion. We base our operating
expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, any significant shortfall in revenue relative to our expectations could cause a significant decline in our quarterly operating
results. In order to be profitable, we must generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels. We may not be able to sustain or increase profitability on a quarterly or annual basis in the future.





Weak economic and market conditions may adversely affect our revenues, gross margins and expenses.





Our quarterly revenue and operating results have and may continue to fluctuate due to the effects of general economic conditions in the
United States and globally, and, in particular, market conditions in the communications and networking industries. In past quarters, our operating results have been adversely affected as a result of the economic slowdown and reduced capital
spending, particularly in the United States. We are uncertain about the extent, severity, and length of the economic downturn. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global
economic slowdown, we may continue to experience material negative effects on our business, operating results, and financial condition.





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





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





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





Because of the uncertain nature of the economic environment and rapidly changing market we serve, period-to-period comparisons
of operating results may not be meaningful. In addition, you should not rely on the results for any period as an indication of future performance. In the future, our revenue may remain flat, decrease or grow. As a consequence, operating results for
a particular quarter are extremely difficult to predict.





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





Sales to our ten largest customers accounted for 39% and 37% of total revenues for the three and six months ended June 30, 2002, compared to 46% and 39% for the same periods in 2001. The loss of
continued orders from




19




---

##### Table of Contents

our more significant customers could cause our revenue and profitability to suffer. Our ability to attract new customers will depend on a variety of factors, including the cost-effectiveness,
reliability, scalability, breadth and depth of our products.





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





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




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




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




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




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





Intense competition
in the market for network solutions could prevent us from maintaining or increasing revenue and sustaining profitability.





The market for network solutions is intensely competitive. In particular, Cisco Systems Inc. maintains a dominant position in this market and several of its products compete directly with our products.





We also compete with other companies, such as Nortel Networks, Extreme Networks, Riverstone Networks, and Enterasys Networks. 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 direct sales operation and reseller distribution channels and continuing to provide excellent customer support.





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





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




20




---

##### Table of Contents




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





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





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





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





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





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





Hewlett-Packard (HP), currently our most significant OEM, accounted for 6% of revenue for the six months ended June 30, 2002.
The recent merger between HP and Compaq Computer Corp. may have adverse effects on our revenue as HP restructures. If HP chooses to reduce or terminate its OEM relationship with Foundry, our revenue and ability to market and sell our products to
certain prospective customers may be harmed.





Our gross margin may decline over time and the average selling prices of our products
may decrease as a result of competitive pressures and other factors.





Our industry has experienced rapid
erosion of average product selling prices due to a number of factors, particularly competitive and macroeconomic pressures and rapid technological change. The average selling




21




---

##### Table of Contents

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





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





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





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





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





Our presence in international markets involve inherent risks that we may not be able to control. As a result, our business may be harmed if we are unable to successfully address these risks.





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





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





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




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



22




---

##### Table of Contents




| |  |  | 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 our future international operations and, consequently, on our business, operating results and financial condition.





Generally, international sales are denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products less competitive on a price basis in international markets. In the future, we may elect to invoice some of our international customers in local currency, which could subject us to fluctuations
in exchange rates between the U.S. dollar and the local currency.





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





We currently purchase
several key components used in our products from single or limited sources and depend on supply from these sources to meet our needs. The inability of any supplier to provide us with adequate supplies of key components or the loss of any of our
suppliers may cause a delay in our ability to fulfill orders and may have a material adverse effect on our business and financial condition.





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





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





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





We currently subcontract
substantially all of our manufacturing to companies that assemble and test our products. Our agreements with some of these companies allow them to procure long lead-time component inventory on our behalf based upon a rolling production forecast
provided by Foundry with lead times of up to 6 months. Foundry may be contractually obligated to the purchase of long lead-time component inventory procured by our contract manufacturers in accordance with the forecast, unless Foundry gives
notice of order




23




---

##### Table of Contents

cancellation at least 30 to 90 days prior to the delivery date. If actual demand of our products is below the projections, we may have excess inventory as a result of our purchase commitments of
long lead-time components with our contract manufacturers. We do not have long-term contracts with 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 a customer. The decision by customers to purchase our products is often based on their internal budgets and procedures involving rigorous evaluation, testing, implementation and acceptance of new technologies. As a result, the length of
our sales cycle in these situations can be as long as 12 months and may vary substantially from customer to customer. While our customers are evaluating our products and before they may place an order with us, we may incur substantial sales and
marketing expenses and expend significant management effort. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, we may not meet our revenue expectations.





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





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





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





Our success and ability to compete are substantially dependent upon our internally developed technology and know-how. Our proprietary
technology includes our ASICs, our IronCore and JetCore hardware architecture,




24




---

##### Table of Contents

and our IronWare software. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights in
these proprietary technologies. Although we have patent applications pending, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect our
technology.





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





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





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





From time to time third parties have asserted exclusive patent, copyright and trademark rights to technologies and related standards that
are important to us. Such third parties may assert claims or initiate litigation against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our existing or future products. In March
2001, Nortel filed a lawsuit against Foundry in the United States District Court for the District of Massachusetts alleging that certain of the Companys products infringe several of Nortels patents and seeking injunctive relief as well
as unspecified damages. Nortel has also brought suit, on the same or similar patents, against a number of other networking companies. Foundry has analyzed the validity of Nortels claims and believes that Nortels suit is without merit.
Foundry is committed to vigorously defending itself against these claims. However, irrespective of the merits of the Companys position, we may incur substantial expenses in defending against third party claims. In the event of a determination
adverse to the Company, the Company could incur substantial monetary liability, and be required to change its business practices. Either of these could have a material adverse effect on the Companys financial position, results of operations,
or cash flows.





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





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





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




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




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




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



25




---

##### Table of Contents




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




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




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




If we do not adequately manage our systems and processes, our business may be harmed.





Our
ability to successfully implement our business plan requires an effective planning and management process. Our current or planned personnel systems, procedures and controls may not be adequate to support our future operations. We need to continue to
improve existing and implement new operational and financial systems, procedures and controls. 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 standards required for their sale, which may harm our business.





In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop may be required to comply
with standards established by telecommunications authorities in various countries as well as those of certain international bodies. Although we believe our products are currently in compliance with domestic and international standards and
regulations in countries 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 certification, we may 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 acquisitions that could result in the dilution of our stockholders, cause us to incur substantial expenses and harm our business if we cannot successfully integrate the acquired
business, products, technologies or personnel.





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





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




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




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




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




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 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




26




---

##### Table of Contents

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.





We face litigation risks.





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





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





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





If we are required to record stock option grants as compensation expense
on our income statement, our profitability may be reduced significantly.





There is an ongoing debate among
regulators and companies regarding the expensing of stock options. The current methodology for expensing such stock options is based on, among other things, the historical volatility of the underlying stock. As noted above, our stock price has been
historically volatile. Therefore, the adoption of an accounting standard requiring companies to expense stock options would negatively impact our profitability and may adversely impact our stock price.





Management beneficially owns approximately 21.0% 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 21.0% of our outstanding common stock as of June 30, 2002. As a result of their ownership and positions, our directors and executive officers collectively are able to significantly influence all matters requiring stockholder
approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of Foundry. In addition, sales of significant
amounts of shares held by Foundrys directors and executive officers, or the prospect of these sales, could adversely affect the market price of Foundrys common stock.




27




---

##### Table of Contents




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





Item 3.Quantitative and Qualitative Disclosures about Market Risk.





Foundrys investments are made in accordance with an investment policy approved by our Board of Directors. The primary objective of the Companys investment activities is to preserve capital while maximizing yields
without significantly increasing risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We generally place our
investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer or fund. A hypothetical 100 basis point decline in short-term interest rates would reduce the annualized earnings on our $298.5
million of cash equivalents and short-term investments at June 30, 2002 by approximately $3.0 million. Our investment portfolio includes only marketable securities with original maturities of less than one year and with secondary or resale markets
to ensure portfolio liquidity.





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 some sales denominated in
Canadian dollars, and, as a result, we have not experienced significant foreign exchange gains and losses to date. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative
financial instruments for trading or speculative purposes. However, in the event our exposure to foreign currency risk increases, we may choose to hedge those exposures.




28




---

##### Table of Contents

PART II.    OTHER INFORMATION





Item 1.Legal Proceedings.





In December
2000, several similar shareholder class action lawsuits were filed against Foundry and certain of its officers in the United States Court for the Northern District of California, following Foundrys announcement in December 2000 of its
anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated by the Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead
plaintiffs were selected as required by law and such plaintiffs filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of shareholders who purchased
Foundrys common stock during the period from September 7, 2000 to December 19, 2000. On October 26, 2001, the Court granted the Companys motion to dismiss the consolidated amended complaint without prejudice and with leave to amend. On
December 13, 2001, attorneys for lead plaintiffs filed a second amended complaint. The Company reviewed the second amended complaint and moved to dismiss that complaint as well. On June 6, 2002, the Court granted the Companys motion to dismiss
the second amended complaint without prejudice and with leave to amend. On July 8, 2002 attorneys for lead plaintiffs filed a third amended complaint. On August 5, 2002, the Company filed a motion to dismiss that complaint. A hearing on that motion
is set for October 4, 2002.





A class action lawsuit was filed on November 27, 2001 in the United States District
Court for the Southern District of New York on behalf of purchasers of Foundry common stock alleging violations of federal securities laws. The case is now designated as In re Foundry Networks, Inc. Initial Public Offering Securities Litigation,No. 01-CV-10640 (SAS) (S.D.N.Y.),related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS) (S.D.N.Y.). The case is brought purportedly on behalf of all persons who purchased the common stock of the Company from
September 27, 1999 through December 6, 2000. The Company and its officers were served with the complaint, only after the maximum 120 days for service allowed under the Federal Rules of Civil Procedure had elapsed. On or about April 19, 2002,
plaintiffs electronically served an amended complaint. The amended complaint names as defendants, the Company, three of its officers, and investment banking firms that served as underwriters for the Companys initial public offering in
September 1999. The amended complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the prospectus incorporated in the registration statement for
the offering failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material
portions of the shares of the Companys stock sold in the initial public offering, and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate shares of the Companys stock sold in the
initial public offering to those customers in exchange for which the customers agreed to purchase additional shares of the Companys stock in the aftermarket at pre-determined prices. The amended complaint also alleges that false analyst
reports were issued following the IPO. No specific damages are claimed. We are aware that similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000. Those cases have been
consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. Motions to dismiss have been filed on behalf of all named defendants (over 1,000 in total) in the litigation. No hearing date has been set as of this time.





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





From time to time the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights, patents and other intellectual property rights. In addition, from time to time, third parties assert patent infringement claims against the Company in the form of letters, lawsuits and other forms of communication. In March
2001, Nortel filed a




29




---

##### Table of Contents

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





Item 2.Changes in Securities and Use of Proceeds.





None.





Item 3.Defaults Upon Senior Securities.





None.





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





On June 14, 2002, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders re-elected as the Companys directors Bobby R. Johnson, Jr. (with 100,727,846 affirmative votes, 4,532,700
abstaining, and no votes withheld), Andrew K. Ludwick (with 101,604,754 affirmative votes, 3,655,792 abstaining, and no votes withheld), Alfred J. Amoroso (with 98,791,253 affirmative votes, 6,469,293 abstaining and no votes withheld), C. Nicholas
Keating, Jr. (with 101,605,820 affirmative votes, 3,654,726 abstaining and no votes withheld) and J. Steven Young (with 103,603,487 affirmative votes, 1,657,059 abstaining and no votes withheld).





The stockholders also approved an amendment to the Companys 1996 Stock Plan to increase the number of shares of common stock reserved for issuance under the plan
by 2,000,000 shares (with 90,194,044 shares voting in favor, 14,554,646 against, and 511,856 abstaining), and approved an amendment to the Companys 1999 Directors Stock Option Plan to increase the number of shares of common stock
reserved for issuance under the plan by 2,000,000 shares (with 90,189,398 shares voting in favor, 14,905,349 against, and 165,799 abstaining).





Item 5.Other Information.





None.





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





(a)Exhibits





Number

Description3.1

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

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




30




---

##### Table of Contents

Number

Description10.1

1996 Stock Plan *10.2

1999 Employee Stock Purchase Plan **10.3

1999 Directors Stock Option Plan **10.5

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

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

2000 Non-Executive Stock Option Plan****10.11

Lease agreement dated September 28, 1999, between Foundry Networks, Inc., and Legacy Partners Commercial Inc., for
offices located at 2100 Gold Street, San Jose, CA 95002. *****99.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002


---

|* |  | Copy of original 1996 Stock Plan incorporated herein by reference to the exhibit filed with the Companys Registration Statement on Form S-1 (Commission
File No. 333-82577). Copy of 1996 Stock Plan reflecting the amendments approved at the 2000 Annual Meeting of Stockholders incorporated by reference to the Companys Definitive Proxy Statement for such meeting (Commission File No. 000-26689).
Copy of 1996 Stock Plan reflecting the amendments for approval at the 2002 Annual Meeting of Stockholders incorporated by reference to the Companys Definitive Proxy Statement for such meeting (Commission File No. 000-26689).
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|** |  | Incorporated herein by reference to the exhibit filed with the Companys Registration Statement on Form  S-1 (Commission File No. 333-82577). Copy of
Directors Plan reflecting the amendment for approval at the 2002 Annual Meeting of Stockholders incorporated by reference to the Companys Definitive Proxy Statement for such meeting (Commission File No. 000-26689).
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|*** |  | Incorporated herein by reference to the exhibit filed with the Companys Registration Statement on Form  S-1 (Commission File No. 333-82577);
Confidential treatment has been granted by the Securities and Exchange Commission with respect to this exhibit.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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




|***** |  | Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the quarter ended September 30, 1999 (Commission File No.
000-26689).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




(b)    Reports on Form 8-K.





On June 24, 2002, we filed a current report on Form 8-K and an amended Form 8-K/A on July 3, 2002 reporting under Item 4, changes in
Registrants Certifying Accountants, that we had dismissed our independent auditors, Arthur Andersen LLP, and engaged the services of Ernst & Young LLP as our new independent auditors for our fiscal year ending December 31, 2002. The
Companys Board of Directors, upon the recommendation of the audit committee, authorized the termination of Arthur Andersen LLP and the engagement of Ernst & Young LLP.




31




---

##### Table of Contents

SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Foundry Networks, Inc. (Registrant)By:

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





Date:    August 14, 2002




32