##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to
 Commission File Number 000-26689
 FOUNDRY NETWORKS, INC.
  Delaware
    
    77-0431154(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 4980 Great America Parkway
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 207-1700
(Registrants telephone number, including area code)
 N/A
(Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 Yes o No þ
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer þ Accelerated filer o Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
 Yes o No þ




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##### 



FOUNDRY NETWORKS, INC.
 Table of Contents
 EXPLANATORY NOTE
    
    
    3PART I  FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Income
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    44PART II  OTHER INFORMATION
    
    
    47Item 1. Legal Proceedings
    
    
    47Item 1A. Risk Factors
    
    
    47Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    59Item 3. Defaults Upon Senior Securities
    
    
    59Item 4. Submission of Matters to a Vote of Security Holders
    
    
    59Item 5. Other Information
    
    
    59Item 6. Exhibits
    
    
    60SIGNATURE
    
    
    63EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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Explanatory Note
    3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)
    
    
    Restated (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    204,986
    
    
    $
    291,511Short-term investments
    
    
    410,778
    
    
    
    280,868Accounts receivable, net of allowances for doubtful accounts of $2,466
and $2,387 and sales returns of $2,931 and $1,784 at September 30, 2006
and December 31, 2005, respectively
    
    
    80,288
    
    
    
    78,351Inventories
    
    
    41,556
    
    
    
    32,312Deferred tax assets
    
    
    34,832
    
    
    
    34,000Prepaid expenses and other assets
    
    
    10,883
    
    
    
    7,825Total current assets
    
    
    783,323
    
    
    
    724,867Property and equipment, net
    
    
    11,352
    
    
    
    10,986Investments
    
    
    224,385
    
    
    
    173,988Deferred tax assets
    
    
    30,738
    
    
    
    24,657Other assets
    
    
    6,659
    
    
    
    6,467Total assets
    
    $
    1,056,457
    
    
    $
    940,965LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    27,295
    
    
    $
    22,306Accrued payroll and related expenses
    
    
    21,755
    
    
    
    24,132Income taxes payable
    
    
    
    
    
    
    12,457Other accrued expenses
    
    
    16,029
    
    
    
    9,660Deferred support revenue
    
    
    43,491
    
    
    
    38,653Total current liabilities
    
    
    108,570
    
    
    
    107,208Deferred support revenue
    
    
    22,624
    
    
    
    21,827Total liabilities
    
    
    131,194
    
    
    
    129,035Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value:Authorized  5,000 shares at September 30, 2006 and December 31, 2005;
None issued and outstanding as of September 30, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $0.0001 par value:Authorized  300,000 shares at September 30, 2006 and December 31, 2005:Issued and outstanding  146,412 and 141,149 shares at September 30,
2006 and December 31, 2005, respectively
    
    
    15
    
    
    
    14Additional paid-in capital
    
    
    709,992
    
    
    
    622,125Deferred stock compensation
    
    
    
    
    
    
    (2,760
    )Accumulated other comprehensive income (loss)
    
    
    (271
    )
    
    
    44Retained earnings
    
    
    215,527
    
    
    
    192,507Total stockholders equity
    
    
    925,263
    
    
    
    811,930Total liabilities and stockholders equity
    
    $
    1,056,457
    
    
    $
    940,965
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated Financial Statements, to Condensed Consolidated Financial Statements.  4




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restated(1)
    
    
    
    
    
    
    Restated(1)Net revenue:Product
    
    $
    98,968
    
    
    $
    90,354
    
    
    $
    284,320
    
    
    $
    239,534Service
    
    
    19,846
    
    
    
    16,210
    
    
    
    56,920
    
    
    
    48,254Total net revenue
    
    
    118,814
    
    
    
    106,564
    
    
    
    341,240
    
    
    
    287,788Cost of revenue:Product
    
    
    43,468
    
    
    
    38,200
    
    
    
    126,255
    
    
    
    100,988Service
    
    
    3,406
    
    
    
    3,050
    
    
    
    8,474
    
    
    
    9,412Total cost of revenue
    
    
    46,874
    
    
    
    41,250
    
    
    
    134,729
    
    
    
    110,400Gross margin
    
    
    71,940
    
    
    
    65,314
    
    
    
    206,511
    
    
    
    177,388Operating expenses:Research and development
    
    
    16,740
    
    
    
    14,929
    
    
    
    53,771
    
    
    
    39,835Sales and marketing
    
    
    30,454
    
    
    
    28,682
    
    
    
    96,069
    
    
    
    79,485General and administrative
    
    
    10,714
    
    
    
    11,178
    
    
    
    33,890
    
    
    
    20,193Other charges, net
    
    
    4,207
    
    
    
    
    
    
    
    9,887
    
    
    
    Total operating expenses
    
    
    62,115
    
    
    
    54,789
    
    
    
    193,617
    
    
    
    139,513Income from operations
    
    
    9,825
    
    
    
    10,525
    
    
    
    12,894
    
    
    
    37,875Interest and other income, net
    
    
    9,123
    
    
    
    4,745
    
    
    
    24,506
    
    
    
    12,396Income before provision for
income taxes and cumulative
effect of change in accounting
principle
    
    
    18,948
    
    
    
    15,270
    
    
    
    37,400
    
    
    
    50,271Provision for income taxes
    
    
    6,738
    
    
    
    3,752
    
    
    
    14,819
    
    
    
    15,537Income before cumulative effect
of change in accounting
principle
    
    
    12,210
    
    
    
    11,518
    
    
    
    22,581
    
    
    
    34,734Cumulative effect of change in
accounting principle, net of
taxes
    
    
    
    
    
    
    
    
    
    
    439
    
    
    
    Net income
    
    $
    12,210
    
    
    $
    11,518
    
    
    $
    23,020
    
    
    $
    34,734Basic net income per share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.16
    
    
    $
    0.25Weighted-average shares used in
computing basic net income per
share
    
    
    146,082
    
    
    
    139,581
    
    
    
    144,627
    
    
    
    138,711Diluted net income per share
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.15
    
    
    $
    0.24Weighted-average shares used in
computing diluted net income per
share
    
    
    149,830
    
    
    
    144,466
    
    
    
    150,015
    
    
    
    142,720
 
 (1)
    
    See Note 2, Restatement of
Condensed Consolidated Financial Statements, to Condensed Consolidated Financial Statements.  5




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Nine Months Ended September 30,2006
    
    
    2005Restated(1)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    23,020
    
    
    $
    34,734Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,345
    
    
    
    6,683Stock-based compensation expense
    
    
    38,585
    
    
    
    2,063Provision for doubtful accounts
    
    
    79
    
    
    
    135Provision for sales returns
    
    
    1,147
    
    
    
    73Inventory provisions
    
    
    8,534
    
    
    
    12,058Deferred tax assets
    
    
    (6,913
    )
    
    
    (586
    )Tax benefit from stock option exercises
    
    
    
    
    
    
    1,114Excess tax benefits from stock-based compensation
    
    
    (4,721
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,164
    )
    
    
    14,229Inventories
    
    
    (17,600
    )
    
    
    (4,646
    )Prepaid expenses and other assets
    
    
    (4,968
    )
    
    
    (1,870
    )Accounts payable
    
    
    4,988
    
    
    
    2,503Accrued payroll and related expenses
    
    
    (2,376
    )
    
    
    (4,824
    )Income taxes payable
    
    
    (3,888
    )
    
    
    9,027Other accrued expenses
    
    
    6,369
    
    
    
    536Deferred support revenue
    
    
    5,634
    
    
    
    (4,101
    )Net cash provided by operating activities
    
    
    52,071
    
    
    
    67,128CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale investments
    
    
    (81,175
    )
    
    
    (99,900
    )Purchases of held-to-maturity investments
    
    
    (463,899
    )
    
    
    (186,383
    )Proceeds from sales of available-for-sale investments
    
    
    65,075
    
    
    
    281,100Proceeds from maturities of held-to-maturity investments
    
    
    299,693
    
    
    
    55,802Purchases of property and equipment, net
    
    
    (6,222
    )
    
    
    (5,977
    )Net cash provided by (used in) investing activities
    
    
    (186,528
    )
    
    
    44,642CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefits from stock-based compensation
    
    
    4,721
    
    
    
    Proceeds from issuances of common stock
    
    
    43,525
    
    
    
    19,928Net cash provided by financing activities
    
    
    48,246
    
    
    
    19,928Increase (decrease) in cash and cash equivalents
    
    
    (86,211
    )
    
    
    131,698Effect of exchange rate changes on cash
    
    
    (314
    )
    
    
    405Cash and cash equivalents, beginning of period
    
    
    291,511
    
    
    
    112,274Cash and cash equivalents, end of period
    
    $
    204,986
    
    
    $
    244,377SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net of refunds
    
    $
    27,712
    
    
    $
    6,225
 
 (1)
    
    See Note 2, Restatement of Condensed
Consolidated Financial Statements, to Condensed Consolidated Financial Statements.  6




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FOUNDRY NETWORKS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(information for the three and nine months ended September 30, 2006 and 2005 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of Business
  Basis of Presentation
   Principles of Consolidation
  Reclassifications
  Use of Estimates
  Stock-Based Compensation
 Share-Based Payment
 7




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Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
       Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    

2005
    
    
    2006
    
    
    2005(1)Restated(1)
    
    
    
    
    
    
    RestatedCost of revenue  Product
    
    $
    410
    
    
    $
    264
    
    
    $
    1,421
    
    
    $
    81Cost of revenue  Service
    
    
    569
    
    
    
    324
    
    
    
    1,563
    
    
    
    38Research and development
    
    
    3,940
    
    
    
    2,539
    
    
    
    13,447
    
    
    
    770Sales and marketing
    
    
    4,375
    
    
    
    2,894
    
    
    
    16,074
    
    
    
    768General and administrative
    
    
    1,994
    
    
    
    1,628
    
    
    
    6,539
    
    
    
    157Total
    
    $
    11,288
    
    
    $
    7,649
    
    
    $
    39,044
    
    
    $
    1,814
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. Accounting for Income Taxes Intraperiod Tax Allocation of the Effect of Pretax
Income from Continuing Operations
 8




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Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Restated(1)
    
    
    Restated(1)Net income
    
    $
    11,518
    
    
    $
    34,734Add: Total stock-based compensation
expense included in reported net
income, net of tax effect
    
    
    4,651
    
    
    
    1,132Deduct: Total stock-based compensation
expense determined using the fair
value method for all awards, net of
related tax effect
    
    
    (12,034
    )
    
    
    (37,771
    )Pro forma net income (loss)
    
    $
    4,135
    
    
    $
    (1,905
    )Basic net income (loss) per share:As reported
    
    $
    0.08
    
    
    $
    0.25Pro forma
    
    $
    0.03
    
    
    $
    (0.01
    )Diluted net income (loss) per shareAs reported
    
    $
    0.08
    
    
    $
    0.24Pro forma
    
    $
    0.03
    
    
    $
    (0.01
    )Weighted-average
shares used in computing basic EPS
    
    
    139,581
    
    
    
    138,711Weighted-average shares used in computing diluted EPS
    
    
    144,466
    
    
    
    142,720
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. Valuation of Stock-Based Compensation
   Three Months Ended September 30, 2006
    
    Nine Months Ended September 30, 2006Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    4.8%
    
    4.6%
    
    4.7%
    
    
    4.4%Expected term (in years)
    
    3.5 years
    
    1.4 years
    
    3.4 years
    
    1.4 yearsDividend yield
    
    0%
    
    0%
    
    0%
    
    
    0%Volatility of common stock
    
    48%
    
    47%
    
    47%
    
    
    48%
 9




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Three Months Ended September 30, 2005
    
    Nine Months Ended September 30, 2005Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    4.0%
    
    2.7%
    
    3.7%
    
    
    2.5%Expected term (in years)
    
    4.0 years
    
    1.4 years
    
    2.9 years
    
    1.3 yearsDividend yield
    
    0%
    
    0%
    
    0%
    
    
    0%Volatility of common stock
    
    65%
    
    62%
    
    62%
    
    
    63%
 Risk-Free Interest Rate.
 Expected Term. .
 Expected Dividend
 Expected Volatility.
 Estimated Forfeitures.
  Accelerated Vesting of Stock Options
  10




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Cash Equivalents and Investments
       September 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    102,765
    
    
    $
    
    
    
    $
    
    
    
    $
    102,765Government-sponsored enterprise securities
    
    
    74,831
    
    
    
    45
    
    
    
    
    
    
    
    74,876Available-for-sale:Auction rate municipal bonds
    
    
    110,975
    
    
    
    
    
    
    
    
    
    
    
    110,975Held-to-maturity:Municipal bonds
    
    
    24,204
    
    
    
    20
    
    
    
    (9
    )
    
    
    24,215Government-sponsored enterprise securities
    
    
    510,858
    
    
    
    29
    
    
    
    (1,398
    )
    
    
    509,489$
    823,633
    
    
    $
    94
    
    
    $
    (1,407
    )
    
    $
    822,320Cash equivalents
    
    $
    188,470
    
    
    $
    45
    
    
    $
    (6
    )
    
    $
    188,509Short-term investments
    
    
    410,778
    
    
    
    4
    
    
    
    (1,056
    )
    
    
    409,726Long-term investments
    
    
    224,385
    
    
    
    45
    
    
    
    (345
    )
    
    
    224,085$
    823,633
    
    
    $
    94
    
    
    $
    (1,407
    )
    
    $
    822,320
 11




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December 31, 2005 (Restated) (1)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    125,441
    
    
    $
    
    
    
    $
    
    
    
    $
    125,441Government-sponsored enterprise securities
    
    
    102,912
    
    
    
    3
    
    
    
    (61
    )
    
    
    102,854Available-for-sale:Auction rate municipal bonds
    
    
    84,575
    
    
    
    
    
    
    
    
    
    
    
    84,575Held-to-maturity:Municipal bonds
    
    
    22,974
    
    
    
    
    
    
    
    (86
    )
    
    
    22,888Corporate bonds
    
    
    1,511
    
    
    
    
    
    
    
    (9
    )
    
    
    1,502Government-sponsored enterprise securities
    
    
    345,796
    
    
    
    
    
    
    
    (2,619
    )
    
    
    343,177$
    683,209
    
    
    $
    3
    
    
    $
    (2,775
    )
    
    $
    680,437Cash equivalents
    
    $
    228,353
    
    
    $
    3
    
    
    $
    (61
    )
    
    $
    228,295Short-term investments
    
    
    280,868
    
    
    
    
    
    
    
    (1,360
    )
    
    
    279,508Long-term investments
    
    
    173,988
    
    
    
    
    
    
    
    (1,354
    )
    
    
    172,634$
    683,209
    
    
    $
    3
    
    
    $
    (2,775
    )
    
    $
    680,437
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. Municipal and corporate bonds.
 Government-sponsored enterprise securities (GSEs).
 The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments
 Loss Less Than 12 months
    
    
    Loss Greater Than 12 months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal bonds
    
    $
    5,424
    
    
    $
    (8
    )
    
    $
    1,129
    
    
    $
    (1
    )
    
    $
    6,553
    
    
    $
    (9
    )Government-sponsored enterprise securities
    
    
    320,283
    
    
    
    (611
    )
    
    
    126,213
    
    
    
    (787
    )
    
    
    446,496
    
    
    
    (1,398
    )$
    325,707
    
    
    $
    (619
    )
    
    $
    127,342
    
    
    $
    (788
    )
    
    $
    453,049
    
    
    $
    (1,407
    )
  Inventories
  September 30, 2006
    
    
    December 31, 2005Restated(1)Purchased parts
    
    $
    6,137
    
    
    $
    8,008Work-in-process
    
    
    18,514
    
    
    
    11,475Finished goods
    
    
    16,905
    
    
    
    12,829$
    41,556
    
    
    $
    32,312
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. 12




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Concentrations
   Revenue Recognition
 General.
 Revenue Arrangements with Multiple Deliverables
 Product.
  13




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Services.
 Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts.
 Segment and Geographic Information
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Americas
    
    
    63
    %
    
    
    63
    %
    
    
    62
    %
    
    
    65
    %EMEA
    
    
    17
    %
    
    
    21
    %
    
    
    18
    %
    
    
    18
    %Japan
    
    
    10
    %
    
    
    9
    %
    
    
    12
    %
    
    
    10
    %Asia Pacific
    
    
    10
    %
    
    
    7
    %
    
    
    8
    %
    
    
    7
    %
   Computation of Per Share Amounts
  14




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restated(1)
    
    
    
    
    
    
    Restated(1)(in thousands, except per share amounts)Net income
    
    $
    12,210
    
    
    $
    11,518
    
    
    $
    23,020
    
    
    $
    34,734Basic:Weighted-average shares outstanding
    
    
    146,082
    
    
    
    139,581
    
    
    
    144,627
    
    
    
    138,711Basic EPS
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.16
    
    
    $
    0.25Diluted:Weighted-average shares outstanding
    
    
    146,082
    
    
    
    139,581
    
    
    
    144,627
    
    
    
    138,711Add: Weighted-average dilutive potential shares
    
    
    3,748
    
    
    
    4,885
    
    
    
    5,388
    
    
    
    4,009Weighted-average shares used in computing diluted EPS
    
    
    149,830
    
    
    
    144,466
    
    
    
    150,015
    
    
    
    142,720Diluted EPS
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.15
    
    
    $
    0.24
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. Stockholders Equity
 Stock-Based Compensation Plans.
    15




---



##### Table of Contents



Weighted-Average
    
    
    RemainingOptions
    
    
    Exercise
    
    
    Contractual
    
    
    AggregateOutstanding
    
    
    Price
    
    
    Life (years)
    
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Balance, December 31, 2005
    
    
    31,788
    
    
    $
    13.75Granted
    
    
    5,989
    
    
    $
    14.04Exercised
    
    
    (4,176
    )
    
    $
    8.12Forfeited/expired
    
    
    (1,345
    )
    
    $
    20.39Balance, September 30, 2006
    
    
    32,256
    
    
    $
    14.26
    
    
    
    5.6
    
    
    $
    78,925Vested and expected to vest at September 30, 2006
    
    
    31,009
    
    
    $
    14.31
    
    
    
    5.6
    
    
    $
    77,692Exercisable at September 30, 2006
    
    
    22,518
    
    
    $
    14.85
    
    
    
    5.7
    
    
    $
    68,177
    Stock
Award Activity.
 Restricted Stock
    
    Weighted-AverageOutstanding
    
    Grant Date Fair Value(in thousands)Balance, December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    644
    
    
    $
    14.57Vested
    
    
    0
    
    
    $
    Forfeited
    
    
    (12
    )
    
    $
    14.21Balance, September 30, 2006
    
    
    632
    
    
    $
    14.58
  Employee
Stock Purchase Plan.
  16




---



##### Table of Contents



Guarantees and Product Warranties
 Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
   Balance, December 31, 2005
    
    $
    1,511Liabilities accrued for warranties issued during the period
    
    
    598Warranty claims settled during the period
    
    
    (674
    )Balance, September 30, 2006
    
    $
    1,435
  Deferred Support Revenue
  Deferred support revenue at December 31, 2005
    
    $
    60,480New support arrangements
    
    
    61,195Recognition of support revenue
    
    
    (55,560
    )Ending balance at September 30, 2006
    
    $
    66,115
 17




---



##### Table of Contents



Other Charges, Net
  Three months Ended September 30,
    
    
    Nine months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Litigation settlement
    
    $
    37
    
    
    $
    
    
    
    $
    5,417
    
    
    $
    Stock option investigation costs
    
    
    4,170
    
    
    
    
    
    
    
    4,470
    
    
    
    Total
    
    $
    4,207
    
    
    $
    
    
    
    $
    9,887
    
    
    $
    
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Stock
Option Investigation
  18




---



##### Table of Contents



Judgment
          Summary
    of Stock-Based Compensation Adjustments
   19




---



##### Table of Contents



Summary of Stock Option Investigation RestatementDecrease(Increase) toPre-Tax


Income Tax





Capitalized in


RetainedFiscal Year

Adjustments


Benefit(1)


Total Impact


Inventory(2)


Earnings1999

$
0.3


$
(1.4
)

$
(1.1
)

$



$
(1.1
)2000


38.0



(16.5
)


21.5







21.52001


52.3



(21.1
)


31.2







31.22002


24.1



(9.6
)


14.5



(0.3
)


14.22003


74.8



(30.1
)


44.7



(0.7
)


44.0Subtotal


189.5



(78.7
)


110.8



(1.0
)


109.82004


(17.1
)


6.1



(11.0
)


1.2



(9.8
)2005


4.7



(2.0
)


2.7



(0.2
)


2.5Total

$
177.1


$
(74.6
)

$
102.5


$



$
102.5     (1)
    
    Income Tax Benefit includes adjustments to reflect a previously
    unrecorded deferred tax benefit of approximately
    $3.6 million related to our cheap stock
    compensation expense at the time of our initial public offering,
    $1.8 million of which is associated with amortization of
    cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation
    cost capitalized in inventory. They represent the net change to
    cost of product and service revenue by year based on the
    compensation cost incurred as a result of the restatement and
    the respective inventory turnover in each affected period.     20




---



##### Table of Contents



Common Stock &








Net Impact toAdditional Paid-In


Deferred Stock


Retained


StockholdersFiscal Year

Capital


Compensation


Earnings


Equity1999

$
2.2


$
(2.3
)

$
1.1


$
1.02000


96.6



(59.5
)


(21.5
)


15.62001


12.3



38.1



(31.2
)


19.22002


(19.1
)


13.1



(14.2
)


(20.2
)2003


73.8



(13.8
)


(44.0
)


16.0Subtotal


165.8



(24.4
)


(109.8
)


31.62004


(42.0
)


17.0



9.8



(15.2
)2005


(2.6
)


4.6



(2.5
)


(0.5
)Total

$
121.2


$
(2.8
)

$
(102.5
)

$
15.9   Tax
    Impact of Restatement Items
           21




---



##### Table of Contents



Impact on
    SFAS 123 Disclosure




under-amortized






Three months ended September 30, 2005
    
    
    Nine months ended September 30, 2005As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet income
    
    $
    15.9
    
    
    $
    (4.4
    )
    
    $
    11.5
    
    
    $
    35.4
    
    
    $
    (0.7
    )
    
    $
    34.7Add: Total stock-based
compensation expense
included in reported net
income, net of tax effect
    
    
    
    
    
    
    4.6
    
    
    
    4.6
    
    
    
    
    
    
    
    1.1
    
    
    
    1.1Deduct: Total stock-based
compensation expense
determined using the fair
value method for all
awards, net of related
tax effect
    
    
    (9.2
    )
    
    
    (2.8
    )
    
    
    (12.0
    )
    
    
    (28.2
    )
    
    
    (9.5
    )
    
    
    (37.7
    )Pro forma net income (loss)
    
    $
    6.7
    
    
    $
    (2.6
    )
    
    $
    4.1
    
    
    $
    7.2
    
    
    $
    (9.1
    )
    
    $
    (1.9
    )Basic net income (loss)
per share:As reported
    
    $
    0.11
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    
    
    
    
    $
    0.25Pro forma
    
    $
    0.05
    
    
    
    
    
    
    $
    0.03
    
    
    $
    0.05
    
    
    
    
    
    
    $
    (0.01
    )Diluted net income (loss)
per shareAs reported
    
    $
    0.11
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.25
    
    
    
    
    
    
    $
    0.24Pro forma
    
    $
    0.05
    
    
    
    
    
    
    $
    0.03
    
    
    $
    0.05
    
    
    
    
    
    
    $
    (0.01
    )
 22




---



##### Table of Contents



Effect of
    Restatement Adjustments
    December 31, 2005As





AsReported


Adjustments


RestatedASSETSCurrent assets:Cash and cash equivalents

$
291.5


$



$
291.5Short-term investments


280.9







280.9Accounts receivable, net


78.4







78.4Inventories


32.3







32.3Deferred tax assets


29.3



4.7



34.0Prepaid expenses and other assets


7.8







7.8Total current assets


720.2



4.7



724.9Property and equipment, net


11.0







11.0Investments


174.0







174.0Deferred tax assets


10.3



14.4



24.7Other assets


6.4







6.4Total assets

$
921.9


$
19.1


$
941.0LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
22.3


$



$
22.3Accrued payroll and related
    expenses


23.4



0.7



24.1Income taxes payable


10.2



2.3



12.5Other accrued expenses


9.5



0.2



9.7Deferred support revenue


38.6







38.6Total current liabilities


104.0



3.2



107.2Deferred support revenue


21.9







21.9Total liabilities


125.9



3.2



129.1Stockholders equity:Preferred stock










Common stock










Additional paid-in capital


500.9



121.2



622.1Deferred stock compensation






(2.8
)


(2.8
)Accumulated other comprehensive
    income










Retained earnings


295.1



(102.5
)


192.6Total stockholders equity


796.0



15.9



811.9Total liabilities and
    stockholders equity

$
921.9


$
19.1


$
941.0 23




---



##### Table of Contents



Three months ended September 30, 2005
    
    
    Nine months ended September 30, 2005As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet revenue
    
    $
    106.5
    
    
    $
    
    
    
    $
    106.5
    
    
    $
    287.7
    
    
    $
    
    
    
    $
    287.7Cost of revenue
    
    
    40.5
    
    
    
    0.7
    
    
    
    41.2
    
    
    
    110.2
    
    
    
    0.2
    
    
    
    110.4Gross margin
    
    
    66.0
    
    
    
    (0.7
    )
    
    
    65.3
    
    
    
    177.5
    
    
    
    (0.2
    )
    
    
    177.3Operating expenses:Research and development
    
    
    12.4
    
    
    
    2.5
    
    
    
    14.9
    
    
    
    39.0
    
    
    
    0.8
    
    
    
    39.8Sales and marketing
    
    
    25.8
    
    
    
    2.9
    
    
    
    28.7
    
    
    
    78.7
    
    
    
    0.8
    
    
    
    79.5General and administrative
    
    
    9.5
    
    
    
    1.7
    
    
    
    11.2
    
    
    
    20.1
    
    
    
    0.1
    
    
    
    20.2Total operating expenses
    
    
    47.7
    
    
    
    7.1
    
    
    
    54.8
    
    
    
    137.8
    
    
    
    1.7
    
    
    
    139.5Income from operations
    
    
    18.3
    
    
    
    (7.8
    )
    
    
    10.5
    
    
    
    39.7
    
    
    
    (1.9
    )
    
    
    37.8Interest and other income, net
    
    
    4.7
    
    
    
    
    
    
    
    4.7
    
    
    
    12.3
    
    
    
    
    
    
    
    12.3Income before provision for
income taxes
    
    
    23.0
    
    
    
    (7.8
    )
    
    
    15.2
    
    
    
    52.0
    
    
    
    (1.9
    )
    
    
    50.1Provision for income taxes
    
    
    7.1
    
    
    
    (3.4
    )
    
    
    3.7
    
    
    
    16.6
    
    
    
    (1.2
    )
    
    
    15.4Net income
    
    $
    15.9
    
    
    $
    (4.4
    )
    
    $
    11.5
    
    
    $
    35.4
    
    
    $
    (0.7
    )
    
    $
    34.7Basic net income per share
    
    $
    0.11
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    
    
    
    
    $
    0.25Weighted-average shares used
in computing basic net income
per share (in thousands)
    
    
    139,581
    
    
    
    
    
    
    
    139,581
    
    
    
    138,711
    
    
    
    
    
    
    
    138,711Diluted net income per share
    
    $
    0.11
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.25
    
    
    
    
    
    
    $
    0.24Weighted-average shares used
in computing diluted net
income per share (in
thousands)
    
    
    144,087
    
    
    
    
    
    
    
    144,466
    
    
    
    142,213
    
    
    
    
    
    
    
    142,720
 24




---



##### Table of Contents



Nine months ended September 30, 2005As Reported
    
    
    Adjustments
    
    
    As RestatedCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    35.4
    
    
    $
    (0.7
    )
    
    $
    34.7Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    6.7
    
    
    
    
    
    
    
    6.7Stock-based compensation expense
    
    
    
    
    
    
    2.1
    
    
    
    2.1Provision for doubtful accounts
    
    
    0.1
    
    
    
    
    
    
    
    0.1Provision for sales returns
    
    
    0.1
    
    
    
    
    
    
    
    0.1Inventory provisions
    
    
    12.1
    
    
    
    
    
    
    
    12.1Deferred tax assets
    
    
    
    
    
    
    (0.6
    )
    
    
    (0.6
    )Tax benefit from stock option exercises
    
    
    2.5
    
    
    
    (1.4
    )
    
    
    1.1Changes in operating assets and liabilities:Accounts receivable
    
    
    14.2
    
    
    
    
    
    
    
    14.2Inventories
    
    
    (4.4
    )
    
    
    (0.2
    )
    
    
    (4.6
    )Prepaid expenses and other assets
    
    
    (3.3
    )
    
    
    1.5
    
    
    
    (1.8
    )Accounts payable
    
    
    2.5
    
    
    
    
    
    
    
    2.5Accrued payroll and related expenses
    
    
    (4.8
    )
    
    
    
    
    
    
    (4.8
    )Income taxes payable
    
    
    9.4
    
    
    
    (0.4
    )
    
    
    9.0Other accrued expenses
    
    
    0.5
    
    
    
    
    
    
    
    0.5Deferred support revenue
    
    
    (4.1
    )
    
    
    
    
    
    
    (4.1
    )Net cash provided by operating activities
    
    
    66.9
    
    
    
    0.3
    
    
    
    67.2CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale investments
    
    
    (99.9
    )
    
    
    
    
    
    
    (99.9
    )Purchases of held-to-maturity investments
    
    
    (186.4
    )
    
    
    
    
    
    
    (186.4
    )Proceeds from sales of available-for-sale investments
    
    
    281.1
    
    
    
    
    
    
    
    281.1Proceeds from maturities of held-to-maturity investments
    
    
    55.8
    
    
    
    
    
    
    
    55.8Purchases of property and equipment, net
    
    
    (6.0
    )
    
    
    
    
    
    
    (6.0
    )Net cash provided by investing activities
    
    
    44.6
    
    
    
    
    
    
    
    44.6CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuances of common stock
    
    
    20.2
    
    
    
    (0.3
    )
    
    
    19.9Net cash provided by financing activities
    
    
    20.2
    
    
    
    (0.3
    )
    
    
    19.9Increase in cash and cash equivalents
    
    
    131.7
    
    
    
    
    
    
    
    131.7Effect of exchange rate changes on cash
    
    
    0.4
    
    
    
    
    
    
    
    0.4Cash and cash equivalents, beginning of period
    
    
    112.3
    
    
    
    
    
    
    
    112.3Cash and cash equivalents, end of period
    
    $
    244.4
    
    
    $
    
    
    
    $
    244.4SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net of refunds
    
    $
    6.2
    
    
    $
    
    
    
    $
    6.2
 25




---



##### Table of Contents



3. COMPREHENSIVE INCOME (LOSS)
  4. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments with Suppliers and Third-Party Manufacturers
  Litigation,
Settlement and Patent License Agreements
 Intellectual Property Proceedings.
      26




---



##### Table of Contents



Securities Litigation. In re Foundry Networks, Inc. Initial Public
    Offering Securities Litigation No. 01-CV-10640 related to In re Initial Public Offering
    Securities Litigation
  In re Initial Public Offering Securities
    Litigation
 Watkins v.
    Johnson, et al. No. 1-06-CV Rosenbaum v. Johnson, et al. No. 1-06 In re Foundry Networks, Inc. Derivative
    Litigation and/or
 27




---



##### Table of Contents



Patel v. Akin, et al. No. 1-07-CV Patel Patel
 Desai v. Johnson, et al. No. C-06-05598 , McDonald v. Johnson, et al. Jackson v. Akin, et al. Edrington v. Johnson, Jr., et al. In
    re Foundry Networks, Inc. Derivative Litigation No. 5:06-CV-05598-RMW. Edrington v. Johnson, Jr., et al.
 SEC Informal Inquiry.
 United States Attorneys Office Subpoena for Production
    of Documents.
 The Nasdaq Stock Market Proceedings, Docket # 5181N-06
   28




---



##### Table of Contents



General. Accounting for Contingencies
 5. INCOME TAXES
    29




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our condensed consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q . This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors,
including, but not limited to, those discussed in Part II, Item 1A. Risk Factors. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect
managements opinions only as of the date hereof. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this document as well as in other documents we file from time
to time with the SEC. All public reports filed by us with the SEC are available free of charge on
our website at www.foundrynetworks.com or from the SEC at www.sec.gov as soon as practicable after
we electronically file such reports with the SEC.
  Overview
  Restatement
of Previously-Issued Financial Statements
     30




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##### Table of Contents



Background of Our Stock Option Investigation.
     Summary of Stock Option Investigation RestatementDecrease (Increase)Pre-Tax
    
    
    Income Tax Benefit
    
    
    
    
    
    
    Capitalized in
    
    
    to RetainedFiscal Year
    
    Adjustments
    
    
    (1)
    
    
    Total Impact
    
    
    Inventory (2)
    
    
    Earnings1999
    
    $
    0.3
    
    
    $
    (1.4
    )
    
    $
    (1.1
    )
    
    $
    
    
    
    $
    (1.1
    )2000
    
    
    38.0
    
    
    
    (16.5
    )
    
    
    21.5
    
    
    
    
    
    
    
    21.52001
    
    
    52.3
    
    
    
    (21.1
    )
    
    
    31.2
    
    
    
    
    
    
    
    31.22002
    
    
    24.1
    
    
    
    (9.6
    )
    
    
    14.5
    
    
    
    (0.3
    )
    
    
    14.22003
    
    
    74.8
    
    
    
    (30.1
    )
    
    
    44.7
    
    
    
    (0.7
    )
    
    
    44.0Subtotal
    
    
    189.5
    
    
    
    (78.7
    )
    
    
    110.8
    
    
    
    (1.0
    )
    
    
    109.82004
    
    
    (17.1
    )
    
    
    6.1
    
    
    
    (11.0
    )
    
    
    1.2
    
    
    
    (9.8
    )2005
    
    
    4.7
    
    
    
    (2.0
    )
    
    
    2.7
    
    
    
    (0.2
    )
    
    
    2.5Total
    
    $
    177.1
    
    
    $
    (74.6
    )
    
    $
    102.5
    
    
    $
    
    
    
    $
    102.5
 
 (1)
    
    Income Tax Benefit includes adjustments to reflect a previously unrecorded
deferred tax benefit of approximately $3.6 million related to our cheap stock
compensation expense at the time of our initial public offering, $1.8 million of which is
associated with amortization of cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation cost capitalized in
inventory. They represent the net change to cost of product and service revenue by year based
on the compensation cost incurred as a result of the restatement and the respective inventory
turnover in each affected period. 31




---



##### Table of Contents



Findings of the Special Committee
    Impact of Judgments and Interpretations on Restatement Values.
 Accounting for
Stock Issued to Employees
 
 32




---



##### Table of Contents



1)
    
    ten granting actions related to persons elected or appointed to the
Board of Directors (Director Grants);2)
    
    133 granting actions related to newly hired employees and routine
employee promotion or bonus grants (End-of-Month Grants);3)
    
    30 granting actions made in connection with broad-based awards to
non-officer employees for retention purposes (Employee Retention Grants);4)
    
    15 granting actions for awards to officers and other executive
employees (Officer Grants), including three Granting Actions for awards to our
Chief Executive Officer (CEO Grants); and5)
    
    one granting action deemed modified by our August 2002 tender
offer.
  (1) Director Grants
  33




---



##### Table of Contents



(2) End-of-Month
Grants
    (3) Employee
Retention Grants
  34




---



##### Table of Contents



(4) Officer
Grants
   35




---



##### Table of Contents



(5) CEO
Grants
 (6) Grant
Modified by Tender Offer
     1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    TotalDirector Grants
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.1
    
    
    $
    4.3
    
    
    $
    (2.2
    )
    
    $
    0.1
    
    
    $
    2.3End-of-Month Grants
    
    
    0.3
    
    
    
    24.1
    
    
    
    22.0
    
    
    
    12.5
    
    
    
    3.5
    
    
    
    
    
    
    
    0.9
    
    
    
    63.3Employee Retention Grants
    
    
    
    
    
    
    10.4
    
    
    
    22.9
    
    
    
    8.7
    
    
    
    13.1
    
    
    
    7.9
    
    
    
    2.8
    
    
    
    65.8Officer Grants
    
    
    
    
    
    
    3.5
    
    
    
    7.0
    
    
    
    2.1
    
    
    
    16.7
    
    
    
    (7.7
    )
    
    
    0.4
    
    
    
    22.0CEO Grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Grant Modified by Tender Offer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    36.9
    
    
    
    (15.5
    )
    
    
    0.4
    
    
    
    22.5Other, net (1)
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    1.2Pre-tax stock-based
compensation expense
adjustments (2)
    
    
    0.3
    
    
    
    38.0
    
    
    
    52.3
    
    
    
    24.1
    
    
    
    74.8
    
    
    
    (17.1
    )
    
    
    4.7
    
    
    
    177.1Income tax (benefit)/expense
    
    
    (1.4
    )
    
    
    (16.5
    )
    
    
    (21.1
    )
    
    
    (9.6
    )
    
    
    (30.1
    )
    
    
    6.1
    
    
    
    (2.0
    )
    
    
    (74.6
    )Net stock-based compensation
expense/(benefit) adjustments
    
    $
    (1.1
    )
    
    $
    21.5
    
    
    $
    31.2
    
    
    $
    14.5
    
    
    $
    44.7
    
    
    $
    (11.0
    )
    
    $
    2.7
    
    
    $
    102.5
 36




---



##### Table of Contents



(1)
    
    Other, net represents related employment tax charges and other stock-based
compensation charges.(2)
    
    Includes the following amounts attributable to the impact of variable accounting:
1999, $0; 2000, $0; 2001, $0; 2002, $0.9 million; 2003, $59.4 million; 2004, $(27.0) million; 2005,
$0.9 million; total, $34.2 million. We determined that as a result of revised
measurement, eleven granting actions required both a revised measurement date, and the application of
variable accounting. Generally, variable accounting resulted because strong evidence indicated
that the grant was approved at an earlier date (often a Board meeting). However, the granting
action was not recorded at that date, and was instead recorded at a subsequent grant date at a
lower price than the earlier date that we determined to be when the grant was originally awarded. Share-Based
Payment
  Common Stock &Additional Paid-In
    
    
    Deferred Stock
    
    
    
    
    
    
    Net Impact toFiscal Year
    
    Capital
    
    
    Compensation
    
    
    Retained Earnings
    
    
    Stockholders Equity1999
    
    $
    2.2
    
    
    $
    (2.3
    )
    
    $
    1.1
    
    
    $
    1.02000
    
    
    96.6
    
    
    
    (59.5
    )
    
    
    (21.5
    )
    
    
    15.62001
    
    
    12.3
    
    
    
    38.1
    
    
    
    (31.2
    )
    
    
    19.22002
    
    
    (19.1
    )
    
    
    13.1
    
    
    
    (14.2
    )
    
    
    (20.2
    )2003
    
    
    73.8
    
    
    
    (13.8
    )
    
    
    (44.0
    )
    
    
    16.0Subtotal
    
    
    165.8
    
    
    
    (24.4
    )
    
    
    (109.8
    )
    
    
    31.62004
    
    
    (42.0
    )
    
    
    17.0
    
    
    
    9.8
    
    
    
    (15.2
    )2005
    
    
    (2.6
    )
    
    
    4.6
    
    
    
    (2.5
    )
    
    
    (0.5
    )Total
    
    $
    121.2
    
    
    $
    (2.8
    )
    
    $
    (102.5
    )
    
    $
    15.9
 Tax Impact of Restatement Items
    37




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##### Table of Contents



Critical Accounting Policies and Use of Estimates
  Stock-Based Compensation
  Income Taxes
  38




---



##### Table of Contents



Results of Operations
 Net Revenue
   Three Months Ended September 30,2006
    
    
    2005% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    98,968
    
    
    
    83
    %
    
    $
    90,354
    
    
    
    85
    %
    
    $
    8,614
    
    
    
    10
    %Service
    
    
    19,846
    
    
    
    17
    %
    
    
    16,210
    
    
    
    15
    %
    
    
    3,636
    
    
    
    22
    %Total net revenue
    
    $
    118,814
    
    
    
    100
    %
    
    $
    106,564
    
    
    
    100
    %
    
    $
    12,250
    
    
    
    11
    %Net product revenue:Chassis
    
    
    70,267
    
    
    
    71
    %
    
    
    62,345
    
    
    
    69
    %
    
    
    7,922
    
    
    
    13
    %Stackable
    
    
    28,701
    
    
    
    29
    %
    
    
    28,009
    
    
    
    31
    %
    
    
    692
    
    
    
    2
    %Total net product revenue
    
    $
    98,968
    
    
    
    100
    %
    
    $
    90,354
    
    
    
    100
    %
    
    $
    8,614
    
    
    
    10
    %
 Nine Months Ended September 30,2006
    
    
    2005% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    284,320
    
    
    
    83
    %
    
    $
    239,534
    
    
    
    83
    %
    
    $
    44,786
    
    
    
    19
    %Service
    
    
    56,920
    
    
    
    17
    %
    
    
    48,254
    
    
    
    17
    %
    
    
    8,666
    
    
    
    18
    %Total net revenue
    
    $
    341,240
    
    
    
    100
    %
    
    $
    287,788
    
    
    
    100
    %
    
    $
    53,452
    
    
    
    19
    %Net product revenue:Chassis
    
    
    199,189
    
    
    
    70
    %
    
    
    160,557
    
    
    
    67
    %
    
    
    38,632
    
    
    
    24
    %Stackable
    
    
    85,131
    
    
    
    30
    %
    
    
    78,977
    
    
    
    33
    %
    
    
    6,154
    
    
    
    8
    %Total net product revenue
    
    $
    284,320
    
    
    
    100
    %
    
    $
    239,534
    
    
    
    100
    %
    
    $
    44,786
    
    
    
    19
    %
 39




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Americas
    
    
    63
    %
    
    
    63
    %
    
    
    62
    %
    
    
    65
    %EMEA
    
    
    17
    %
    
    
    21
    %
    
    
    18
    %
    
    
    18
    %Japan
    
    
    10
    %
    
    
    9
    %
    
    
    12
    %
    
    
    10
    %Asia Pacific
    
    
    10
    %
    
    
    7
    %
    
    
    8
    %
    
    
    7
    %
    Gross Margins
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    

2005
    
    

2006
    
    

2005Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %Restated(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restated(1)Gross margins:Product
    
    $
    55,500
    
    
    
    56
    %
    
    $
    52,154
    
    
    
    58
    %
    
    $
    158,065
    
    
    
    56
    %
    
    $
    138,546
    
    
    
    58
    %Service
    
    
    16,440
    
    
    
    83
    %
    
    
    13,160
    
    
    
    81
    %
    
    
    48,446
    
    
    
    85
    %
    
    
    38,842
    
    
    
    80
    %Total gross margins
    
    $
    71,940
    
    
    
    61
    %
    
    $
    65,314
    
    
    
    61
    %
    
    $
    206,511
    
    
    
    61
    %
    
    $
    177,388
    
    
    
    62
    %
 
 (1)
    
    See Note 2, Restatement of
Condensed Consolidated Financial Statements, to Condensed Consolidated Financial Statements.  40




---



##### Table of Contents



Operating Expenses
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    
    
    
    
    2006
    
    2005% of Net
    
    
    
    
    
    % of Net
    
    %
    
    
    
    
    
    % of Net
    
    
    
    
    
    % of Net
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeRestated(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restated(1)Research and development
    
    $
    16,740
    
    
    
    14
    %
    
    $
    14,929
    
    
    
    14
    %
    
    
    12
    %
    
    $
    53,771
    
    
    
    16
    %
    
    $
    39,835
    
    
    
    14
    %
    
    
    35
    %Sales and marketing
    
    
    30,454
    
    
    
    26
    %
    
    
    28,682
    
    
    
    27
    %
    
    
    6
    %
    
    
    96,069
    
    
    
    28
    %
    
    
    79,485
    
    
    
    28
    %
    
    
    21
    %General and administrative
    
    
    10,714
    
    
    
    9
    %
    
    
    11,178
    
    
    
    10
    %
    
    
    (4
    )%
    
    
    33,890
    
    
    
    10
    %
    
    
    20,193
    
    
    
    7
    %
    
    
    68
    %Other charges, net
    
    
    4,207
    
    
    
    4
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    9,887
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
 
 (1)
    
    See Note 2, Restatement of
Condensed Consolidated Financial Statements, to Condensed Consolidated Financial Statements.     41




---



##### Table of Contents




    
    Litigation settlement charges of $5.4 million were recognized in the nine months
ended September 30, 2006 in connection with settlement agreements reached separately, by
Foundry with Lucent and Alcatel-Lucent. Litigation settlement charges pertained
primarily to the accrual of fees earned by Lucent and Alcatel-Lucent related to
past periods.
    
    For the three and nine months ended September 30, 2006, costs of $4.2 million and
$4.5 million, respectively, were incurred for the independent review of our stock
option practices, which began in June 2006. In June 2006 our Audit Committee formed a
Special Committee and with the assistance of independent legal counsel and outside
accounting experts commenced a review of our stock option practices and accounting. As
of September 30, 2006, the investigation was not complete and additional costs of $ 2.9
million were incurred through the remainder of 2006.
 Interest and Other Income, Net
  Provision for Income Taxes
  42




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##### Table of Contents



Liquidity and Capital Resources
     Off-Balance Sheet Arrangements and Contractual Obligations
 Contractual Commitments
  Less Than
    
    
    1-3
    
    
    3-5
    
    
    More ThanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases of facilities
    
    $
    14,780
    
    
    $
    5,556
    
    
    $
    8,849
    
    
    $
    375
    
    
    $
    Purchase commitments with contract manufacturers
    
    
    47,443
    
    
    
    47,443
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    62,223
    
    
    $
    52,999
    
    
    $
    8,849
    
    
    $
    375
    
    
    $
    
  43




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##### Table of Contents



Off-Balance Sheet Arrangements
  Indemnifications
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
   Stock Options Granting Practices Review and Restatement Related to Stock Options
   44




---



##### Table of Contents




    
    Grants were often effected by written actions that contained Effective as of language
to indicate the grant date, rather than being effected at meetings of the Board of
Directors or committees of the Board of Directors, or using a written action that was
manually dated and effecting a granting action with the grant date based on the date of
the manual signatures.
    
    Grants to non-officers were delegated to a sole member Stock Option Committee
consisting of our CEO, which made it more difficult to confirm that the actions of the
sole member committee were taken on the dates indicated on the granting actions.
    
    Minutes of meetings where granting actions were made were not prepared on a
contemporaneous basis, which made it more difficult to confirm that the persons identified
as receiving grants, and the number of shares covered by such grant, had been finally
determined at the time of the meeting where the granting actions were made.
    
    We lacked a formal policy for issuing stock options, which contributed to our lack of
contemporaneous documentation and to inadequate attention to process considerations.
  Remedial
Measures Instituted by Foundry
    
    
    Our General Counsel or his designee takes the minutes of Compensation Committee
meetings.
    
    Details of grant recommendations are circulated in advance of each meeting, and the
Compensation Committee approves the grantee names and share amounts at the meeting.
    
    The exercise price of each stock option grant is the closing price of our common stock
on the date that the Compensation Committee approved the grant.
    
    Stock option grants are made only after they are approved by the Compensation Committee
and no changes are made after the Compensation Committees approval.
    
    All grants are communicated to employees within a relatively short period after the
grant date, as required by applicable accounting rules.
 45




---



##### Table of Contents




    
    The Executive Committee determined that the positions of the Chairman of the Board and
Chief Executive Officer should be held by different persons. Accordingly, on January 19,
2007, Mr. Johnson resigned as Chairman of the Board, and the Board of Directors elected
director Alfred J. Amoroso as Chairman. Mr. Amoroso has served as a member of our Board
of Directors since October 2000. He also serves as President and Chief Executive Officer
of Macrovision Corporation and as a member of its Board of Directors. Mr. Johnson
continues to serve as a member of our Board, and as our President and CEO.
    
    The Board of Directors accepted the resignation of Mr. Heffner as Vice President,
Finance and Administration and Chief Financial Officer on January 19, 2007, and Mr.
Heffner assumed a new role as Vice President of Corporate Development. His role as Vice
President of Corporate Development does not involve accounting or financial reporting
responsibilities. Mr. Heffner has repaid us the net after-tax difference between the
initial exercise price for two options he exercised for which the measurement date has
been changed, and the price of the shares on the new measurement dates, an amount of
approximately $162,000. All unexercised options which he holds which have been remeasured
were repriced to reflect the price of our stock on the new measurement dates.
    Inherent Limitations of Internal Controls
  46




---



##### Table of Contents




    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the
financial statements.
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 The matters relating to our Special Committee investigation into our stock option granting
practices and the restatement of our financial statements have exposed us to civil litigation
claims, regulatory proceedings and government proceedings which could
burden Foundry and have a
material adverse effect on us.
  47




---



##### Table of Contents



and/or
 We have
not been in compliance with The Nasdaq Stock Markets continued listing requirements and
remain subject to the risk of our stock being delisted from The
Nasdaq Global Select Market, which would
have a material adverse effect on us and our stockholders.
  The process of restating our financial statements, the associated disclosures, and complying with
SEC requirements are subject to uncertainty and evolving requirements.
  48




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##### Table of Contents



A number of our current and former executive officers and directors have been named as parties
to several derivative action lawsuits arising from our internal option review, and there is a
possibility of additional lawsuits, all of which could require significant management time and
attention and result in significant legal expenses.
  Ongoing
government inquiries relating to our past stock option practices may be time consuming and
expensive and could result in injunctions, fines and penalties that may have a material adverse
effect on our financial condition and results of operations.
  Intense competition in the market for networking solutions could prevent us from maintaining or
increasing revenue and sustaining profitability.
    We must continue to introduce new products with superior performance and features in a timely
manner in order to sustain and increase our revenue, and if we fail to predict and respond to
emerging technological trends and customers changing needs, our operating results may suffer.
  49




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##### Table of Contents



We depend on large, recurring purchases from
certain significant customers, and a loss, cancellation or delay in purchases by these customers
could negatively affect our revenue.
   
    
    our reseller agreements generally do not require minimum purchases;
    
    our customers can stop purchasing and our resellers can stop marketing our products at any time; and
    
    our reseller agreements generally are not exclusive and are for one-year terms, with no
obligation of the resellers to renew the agreements.
  The United States government is a significant customer and has been one key to our financial
success. However, government demand is unpredictable and there is no guarantee of future contract
awards.
  50




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##### Table of Contents



We may be subject to litigation risks and intellectual property infringement claims that are costly
to defend and could limit our ability to use certain technologies in the future. Additionally, we
may be found to infringe on intellectual property rights of others.
    If we fail to protect our intellectual property, our business and ability to compete could suffer.
   Our ability to increase our revenue depends on expanding our direct sales operations and reseller
distribution channels and providing excellent customer support.
  51




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##### Table of Contents



We are required to expense equity compensation given to our employees, which has reduced our
reported earnings, will significantly impact our operating results in future periods and may reduce
our stock price and our ability to effectively utilize equity compensation to attract and retain
employees.
  Because our financial results are difficult to predict and may fluctuate significantly, we may
not meet quarterly financial expectations, which could cause our stock price to decline.
     52




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##### Table of Contents



We purchase several key components for our products from sole sources; if these components are not
available, our revenue may be adversely affected.
    Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in
our ability to fill orders.
  53




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##### Table of Contents



Our gross margins and average selling prices of our products have decreased in the past and may
continue to decrease as a result of competitive pressures and other factors.
   Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue, gross
margins and expenses.
  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.
  54




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Our operations in international markets involve inherent risks that we may not be able to control.
As a result, our business may be harmed if we are unable to successfully address these risks.
  
    
    seasonal reductions in business activity;
    
    potential recessions in economies outside the United States;
    
    adverse fluctuations in currency exchange rates;
    
    difficulties in managing operations across disparate geographic areas;
    
    export restrictions;
    
    unexpected changes in regulatory requirements;
    
    higher costs of doing business in foreign countries;
    
    longer accounts receivable collection cycles;
    
    potential adverse tax consequences;
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    infringement claims on foreign patents, copyrights, or trademark rights.
    
    natural disasters and widespread medical epidemics;
    
    military conflict and terrorist activities; and
    
    political instability.
   55




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Due to the lengthy sales cycles of some of our products, the timing of our revenue is difficult to
predict and may cause us to fail to meet our revenue expectations.
  As a result of our delayed filing of our periodic SEC reports, our inability to maintain our Form
S-3 eligibility may adversely affect our ability to raise future capital or complete acquisitions.
  If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
  We had a material weakness in internal control over financial reporting in the past and cannot
assure you that additional material weaknesses will not be identified in the future. If our
internal control over financial reporting or disclosure controls and procedures are not effective,
there may be errors in our financial statements that could require a restatement or our filings may
not be timely and investors may lose confidence in our reported financial information, which could
lead to a decline in our stock price.
    56




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The timing of the adoption of industry standards may negatively affect widespread market acceptance
of our products.
  If our products do not interoperate with our customers networks, installations will be delayed or
cancelled and could harm our business.
  If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and lost sales and be subject to product liability claims.
  
    
    negative customer reactions;
    
    product liability claims;
    
    negative publicity regarding us and our products;
    
    delays in or loss of market acceptance of our products;
    
    product returns;
 57




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##### Table of Contents




    
    lost sales; and
    
    unexpected expenses to remedy defects or errors.
 We may incur liabilities that are not subject to maximum loss clauses.
  Our products may not continue to comply with the regulations governing their sale, which may harm
our business.
  We may engage in acquisitions that could result in the dilution of our stockholders, disrupt our
operations, cause us to incur substantial expenses and harm our business if we cannot successfully
integrate the acquired business, products, technologies or personnel.
  
    
    difficulties in the assimilation of products, operations, personnel and technologies of the acquired companies;
    
    diversion of managements attention from other business concerns;
    
    disruptions to our operations, including potential difficulties in completing ongoing projects in a timely manner;
    
    risks of entering geographic and business markets in which we have no or limited prior experience; and
    
    potential loss of key employees of acquired organizations.
  58




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Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  Anti-takeover provisions could make it more difficult for a third party to acquire us.
  Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist
acts or other catastrophic events.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  59




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##### Table of Contents



Item 6. Exhibits
 Number

Description3
.1

Amended and Restated Certificate
    of Incorporation of Foundry Networks, Inc. (Amended and Restated
    Certificate of Incorporation filed as Exhibit 3.2 to
    registrants Registration Statement on Form S-1 (Commission
    File No. 333-82577) and incorporated herein by reference;
    Certificate of Amendment to the foregoing filed as Exhibit 3.1
    to registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000 and incorporated herein by
    reference.).3
.2

Amended and Restated Bylaws of
    Foundry Networks, Inc. (Filed as Exhibit 3.2 to
    registrants Current Report on Form 8-K filed on
    April 24, 2007 and incorporated herein by reference.).10
.1

1996 Stock Plan.*(1)10
.2

Form of Stock Option Agreement
    under registrants 1996 Stock Plan.*(1)10
.3

1999 Employee Stock Purchase
    Plan, as amended.*(3)10
.4

1999 Directors Stock
    Option Plan (including related form agreements), as amended.*(3)10
.5

Form of Indemnification Agreement.
    (2)10
.6

OEM Purchase Agreement dated
    January 6, 1999 between Foundry Networks, Inc. and
    Hewlett-Packard Company, Workgroup Networks Division. (4)10
.7

Reseller Agreement dated July 1,
    1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd.
    (4)10
.8

2000 Non-Executive Stock Option
    Plan.*(5)10
.9

Form of Stock Option Agreement
    under registrants 2000 Non-Executive Stock Option Plan.*(5)10
.10

Lease agreement dated September
    28, 1999, between Foundry Networks, Inc., and Legacy Partners
    Commercial Inc., for offices located at 2100 Gold Street,
    San Jose, CA 95002. (6)10
.11

Confidential Settlement Agreement
    and Release, effective October 25, 2004, by and between Nortel
    Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc.,
    Bobby R. Johnson, Jr., H. Earl Ferguson, deceased, and Jeffrey
    Prince. (7) 60




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Number

Description10
.12

Sublease agreement dated March 25,
    2005, between Foundry Networks, Inc. and Hyperion Solutions
    Corporation, for offices located at 4980 Great America Parkway,
    Santa Clara, CA 95054. (8)10
.13

Form of Restricted Stock Purchase
    Agreement under the registrants 1996 Stock Plan. *(1)10
.14

2006 Stock Incentive Plan.*(9)10
.15

2006 Stock Incentive Plan-Form of
    Stock Grant Agreement *(9)10
.16

2006 Stock Incentive Plan-Form of
    Notice of Stock Option Grant and Stock Option Agreement. *(9)10
.17

2006 Stock Incentive Plan-Form of
    Stock Unit Agreement. *(9)10
.18

2006 Stock Incentive Plan-Form of
    Stock Appreciation Right Agreement. *(9)31
.1

Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.31
.2

Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.32
.1

Certification of Chief Executive
    Officer pursuant to Section 18 U.S.C. Section 1350.32
.2

Certification of Chief Financial
    Officer pursuant to Section 18 U.S.C. Section 1350.     *
    
    Indicates management contract or compensatory plan or
    arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock
    Option Agreement incorporated herein by reference to the exhibit
    filed with registrant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 registrant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 registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of Form of Restricted Stock Purchase Agreement under the
    1996 Stock Plan is incorporated herein by reference to the
    exhibit filed with registrants Annual Report on
    Form 10-K for the year ended December 31, 2005
    (Commission File No. 000-26689)(2)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577).(3)
    
    Incorporated herein by reference to the exhibit filed with the
Companys Annual Report on
Form 10-K for the year ended
December 31, 2006.(4)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577);
    Confidential treatment has been granted by the Securities and
    Exchange Commission with respect to this exhibit.(5)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-8
    filed on October 25, 2000 (Commission File
    No. 333-48560).(6)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended September 30, 1999 (Commission File
    No.
    000-26689).(7)
    
    Incorporated by reference from registrants Annual Report
    on
    Form 10-K
    filed on March 11, 2005 (Commission File
    No. 000-26689). 61




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##### Table of Contents



(8)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended March 31, 2005 (Commission File No.
    000-26689).(9)
    
    Copy of 2006 Stock Incentive Plan approved at the 2006 Annual Meeting of
    Stockholders incorporated by reference to the exhibits filed
    with registrants
    Form 8-K
    on June 22, 2006 (Commission File
    No. 000-26689). 62




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##### Table of Contents



SIGNATURE
  Foundry Networks, Inc.
(Registrant)By:

/s/
Daniel W. FairfaxDaniel W. FairfaxVice President, Finance and Administration and
     Chief Financial Officer 
(Principal Financial and Accounting Officer)  63




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##### Table of Contents



Exhibit Index
 Number

Description3
.1

Amended and Restated Certificate
    of Incorporation of Foundry Networks, Inc. (Amended and Restated
    Certificate of Incorporation filed as Exhibit 3.2 to
    registrants Registration Statement on Form S-1 (Commission
    File No. 333-82577) and incorporated herein by reference;
    Certificate of Amendment to the foregoing filed as Exhibit 3.1
    to registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000 and incorporated herein by
    reference.).3
.2

Amended and Restated Bylaws of
    Foundry Networks, Inc. (Filed as Exhibit 3.2 to
    registrants Current Report on Form 8-K filed on
    April 24, 2007 and incorporated herein by reference.).10
.1

1996 Stock Plan.*(1)10
.2

Form of Stock Option Agreement
    under registrants 1996 Stock Plan.*(1)10
.3

1999 Employee Stock Purchase
    Plan, as amended.*(3)10
.4

1999 Directors Stock
    Option Plan (including related form agreements), as amended.*(3)10
.5

Form of Indemnification Agreement.
    (2)10
.6

OEM Purchase Agreement dated
    January 6, 1999 between Foundry Networks, Inc. and
    Hewlett-Packard Company, Workgroup Networks Division. (4)10
.7

Reseller Agreement dated July 1,
    1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd.
    (4)10
.8

2000 Non-Executive Stock Option
    Plan.*(5)10
.9

Form of Stock Option Agreement
    under registrants 2000 Non-Executive Stock Option Plan.*(5)10
.10

Lease agreement dated September
    28, 1999, between Foundry Networks, Inc., and Legacy Partners
    Commercial Inc., for offices located at 2100 Gold Street,
    San Jose, CA 95002. (6)10
.11

Confidential Settlement Agreement
    and Release, effective October 25, 2004, by and between Nortel
    Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc.,
    Bobby R. Johnson, Jr., H. Earl Ferguson, deceased, and Jeffrey
    Prince. (7)10
.12

Sublease agreement dated March 25,
    2005, between Foundry Networks, Inc. and Hyperion Solutions
    Corporation, for offices located at 4980 Great America Parkway,
    Santa Clara, CA 95054. (8)10
.13

Form of Restricted Stock Purchase
    Agreement under the registrants 1996 Stock Plan. *(1)10
.14

2006 Stock Incentive Plan.*(9)10
.15

2006 Stock Incentive Plan-Form of
    Stock Grant Agreement *(9)10
.16

2006 Stock Incentive Plan-Form of
    Notice of Stock Option Grant and Stock Option Agreement. *(9)10
.17

2006 Stock Incentive Plan-Form of
    Stock Unit Agreement. *(9)10
.18

2006 Stock Incentive Plan-Form of
    Stock Appreciation Right Agreement. *(9)31
.1

Certification of Chief Executive
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.31
.2

Certification of Chief Financial
    Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
    Securities Exchange Act of 1934.32
.1

Certification of Chief Executive
    Officer pursuant to Section 18 U.S.C. Section 1350.32
.2

Certification of Chief Financial
    Officer pursuant to Section 18 U.S.C. Section 1350.  
 *
    
    Indicates management contract or compensatory plan or
    arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock
    Option Agreement incorporated herein by reference to the exhibit
    filed with registrant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 registrant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 registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of Form of Restricted Stock Purchase Agreement under the
    1996 Stock Plan is incorporated herein by reference to the
    exhibit filed with registrants Annual Report on
    Form 10-K for the year ended December 31, 2005
    (Commission File No. 000-26689)




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##### Table of Contents



(2)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577).(3)
    
    Incorporated herein by reference to the exhibit filed with the
Companys Annual Report on
Form 10-K
    for the year ended December 31, 2006.(4)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577);
    Confidential treatment has been granted by the Securities and
    Exchange Commission with respect to this exhibit.(5)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-8
    filed on October 25, 2000 (Commission File
    No. 333-48560).(6)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended September 30, 1999 (Commission File
    No.
    000-26689).(7)
    
    Incorporated by reference from registrants Annual Report
    on
    Form 10-K
    filed on March 11, 2005 (Commission File
    No. 000-26689).(8)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended March 31, 2005 (Commission File No.
    000-26689).(9)
    
    Copy of 2006 Stock Incentive Plan approved at the 2006 Annual Meeting of
    Stockholders incorporated by reference to the exhibits filed
    with registrants
    Form 8-K
    on June 22, 2006 (Commission File
    No. 000-26689).