|Table of Contents

UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, 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 September 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(State or other jurisdiction ofincorporation or organization) | 77-0431154(I.R.S. EmployerIdentification No.)
|--------------------------------------------------------------------- | ---------------------------------------------

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




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


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


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



Yes   |X|      No   |_|


     As of November 8, 2002, there
were 120,704,186 shares of the registrants common stock outstanding, par value
$0.0001.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

Table of Contents

|INDEX
|-----

|               |                                                                                                                                            | Page
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ----
|PART
      I   | FINANCIAL
      INFORMATION                                                                                                                |     
|              
|Item
      1.  | Financial
      Statements (Unaudited):                                                                                                   
|              
|               | Condensed
      Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                                                 | 3   
|              
|               | Condensed
      Consolidated Statements of Income for the Three and Nine Months Ended
      
            September 30, 2002 and
      2001 | 4   
|              
|               | Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended 
            September 30, 2002 and
      2001             | 5   
|              
|               | Notes
      to Condensed Consolidated Financial Statements                                                                                 | 6   
|              
|Item
      2.  | Managements
      Discussion and Analysis of Financial Condition and Results of Operations                                                | 12  
|              
|               | Risk
      Factors That May Affect Future Results and Market Price of Stock                                                                | 17  
|              
|Item
      3.  | Quantitative
      and Qualitative Disclosures About Market Risk                                                                           | 26  
|               |                                                                                                                                            |     
|Item
      4.  | Controls
      and Procedures                                                                                                              | 26  
|              
|PART
      II  | OTHER
      INFORMATION                                                                                                                   
|              
|Item
      1.  | Legal
      Proceedings                                                                                                                    | 27  
|              
|Item
      2.  | Changes
      in Securities and Use of Proceeds                                                                                            | 28  
|              
|Item
      3.  | Defaults
      Upon Senior Securities                                                                                                      | 28  
|              
|Item
      4.  | Submission
      of Matters to a Vote of Security Holders                                                                                  | 28  
|              
|Item
      5.  | Other
      Information                                                                                                                    | 28  
|              
|Item
      6.  | Exhibits
      and Reports on Form 8-K                                                                                                     | 28  
|              
|SIGNATURES     | 30                                                                                                                                        
|               |                                                                                                                                           
|CERTIFICATIONS | 31                                                                                                                                        
|              

|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)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                       | September 30,2002(unaudited) |  | December 31,2001(1)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------- |  | -------------------
|ASSETS                                                                                                                                                                                                 |                              |  |                    
|Current assets:                                                                                                                                                                                        |                              | 
|Cash and cash equivalents                                                                                                                                                                              |                              |  | $                  
|Short-term investments                                                                                                                                                                                 |                              |  |                    
|Accounts receivable, net of allowances for doubtful accounts of           $5,857 and $6,648 and sales returns of $1,501 and $1,501 at           September 30, 2002 and December 31, 2001, respectively |                              |  |                    
|Inventories                                                                                                                                                                                            |                              |  |                    
|Deferred tax assets                                                                                                                                                                                    |                              |  |                    
|Prepaid expenses and other current assets                                                                                                                                                              |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Total current assets                                                                                                                                                                                   |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Property
      and equipment                                                                                                                                                                           |                              |  |                    
|Less:
      Accumulated depreciation                                                                                                                                                                   |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Net property and equipment                                                                                                                                                                             |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Other long-term assets                                                                                                                                                                                 |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Total assets                                                                                                                                                                                           |                              |  | $                  
|                                                                                                                                                                                                       |                              |  |                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                   |                              | 
|Current liabilities:                                                                                                                                                                                   |                              | 
|Accounts payable                                                                                                                                                                                       |                              |  | $                  
|Accrued payroll and related expenses                                                                                                                                                                   |                              |  |                    
|Warranty accrual                                                                                                                                                                                       |                              |  |                    
|Other accrued expenses                                                                                                                                                                                 |                              |  |                    
|Income taxes payable                                                                                                                                                                                   |                              |  |                    
|Deferred support revenue                                                                                                                                                                               |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Total current liabilities                                                                                                                                                                              |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Commitments and contingencies (Note 4)                                                                                                                                                                 |                              | 
|Stockholders equity:                                                                                                                                                                                  |                              | 
|Common stock, $0.0001 par value:                                                                                                                                                                       |                              | 
|Authorized300,000,000 shares at September 30, 2002 and                  December 31, 2001, respectively                                                                                               |                              | 
|Issued and outstanding120,656,207 and 119,298,814 shares at                  September 30, 2002 and December 31, 2001, respectively                                                                   |                              |  |                    
|Treasury stock                                                                                                                                                                                         |                              |  |                    
|Additional paid-in capital                                                                                                                                                                             |                              |  |                    
|Note receivable from stockholder                                                                                                                                                                       |                              |  |                    
|Deferred stock compensation                                                                                                                                                                            |                              |  |                    
|Retained earnings                                                                                                                                                                                      |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Total stockholders equity                                                                                                                                                                             |                              |  |                    
|                                                                                                                                                                                                       |                              |  |                    
|Total liabilities and stockholders equity                                                                                                                                                             |                              |  | $                  
|                                                                                                                                                                                                       |                              |  |                    
|                                                                                                                                                                                                      

|(1) Derived from audited consolidated financial statements.






See accompanying notes to
condensed consolidated financial statements.
|----------------------------------------------------------------------------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.




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

|                                                                          | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30, |        
|------------------------------------------------------------------------- | ------------------------------- |  | ------------------------------ | -------
|
|Revenue, net                                                              |                                 |  | $                              | 76,596 
|Cost of revenue                                                           |                                 |  |                                | 35,543 
|                                                                          |                                 |  |                                |        
|Gross profit                                                              |                                 |  |                                | 41,053 
|Operating expenses:                                                       |                                 | 
|Research and development                                                  |                                 |  |                                | 8,907  
|Sales and marketing                                                       |                                 |  |                                | 18,492 
|General and administrative                                                |                                 |  |                                | 4,662  
|Amortization of deferred stock compensation                               |                                 |  |                                | 212    
|                                                                          |                                 |  |                                |        
|Total operating expenses                                                  |                                 |  |                                | 32,273 
|                                                                          |                                 |  |                                |        
|Income from operations                                                    |                                 |  |                                | 8,780  
|Interest and other income                                                 |                                 |  |                                | 1,184  
|                                                                          |                                 |  |                                |        
|Income before provision for income taxes                                  |                                 |  |                                | 9,964  
|Provision for income taxes                                                |                                 |  |                                | 2,959  
|                                                                          |                                 |  |                                |        
|Net income                                                                |                                 |  | $                              | 7,005  
|                                                                          |                                 |  |                                |        
|Basic net income per share                                                |                                 |  | $                              | 0.06   
|                                                                          |                                 |  |                                |        
|Weighted average shares used in computing basic net    income per share   |                                 |  |                                | 119,999
|                                                                          |                                 |  |                                |        
|Diluted net income per share                                              |                                 |  | $                              | 0.06   
|                                                                          |                                 |  |                                |        
|Weighted average shares used in computing diluted net    income per share |                                 |  |                                | 124,859
|                                                                          |                                 |  |                                |        
|                                                                         

|See accompanying notes to
condensed consolidated financial statements.
|----------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(in thousands)
|----------------------------------------------------------------------------------------------------

|                                                                                               | Nine Months EndedSeptember 30,
|---------------------------------------------------------------------------------------------- | ------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                          |                               
|Net income                                                                                     |                               
|Adjustments to reconcile net income to net cash provided by              operating activities: |                               
|Depreciation                                                                                   |                               
|Amortization of deferred stock compensation                                                    |                               
|Provision for doubtful accounts                                                                |                               
|Provision for excess and obsolete inventories                                                  |                               
|Tax benefit from stock option exercises                                                        |                               
|Change in operating assets and liabilities:                                                    |                               
|Accounts receivable                                                                            |                               
|Inventories                                                                                    |                               
|Other assets                                                                                   |                               
|Accounts payable                                                                               |                               
|Accrued payroll and related benefits                                                           |                               
|Income taxes payable                                                                           |                               
|Other accrued liabilities                                                                      |                               
|Deferred support revenue                                                                       |                               
|                                                                                               |                               
|Net cash provided by operating activities                                                      |                               
|                                                                                               |                               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                          |                               
|Purchases of property and equipment                                                            |                               
|Maturities of short-term investments                                                           |                               
|Purchases of short-term investments                                                            |                               
|Purchase of minority investment                                                                |                               
|                                                                                               |                               
|Net cash used in investing activities                                                          |                               
|                                                                                               |                               
|CASH FLOWS FROM FINANCING ACTIVITY:                                                            |                               
|Proceeds from issuances of common stock                                                        |                               
|                                                                                               |                               
|Net cash provided by financing activity                                                        |                               
|                                                                                               |                               
|Effect of exchange rate changes on cash                                                        |                               
|                                                                                               |                               
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                               |                               
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                 |                               
|                                                                                               |                               
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                       |                               
|                                                                                               |                               
|                                                                                              

|See accompanying notes to
condensed consolidated financial statements.
|----------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(Information for the three and nine months ended September 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 Gigabit Ethernet Layer 2 and Layer 3 switches, Metro routers 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. 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 nine months ended September 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 is included as a component of
stockholders equity.

Reclassifications




Certain items previously reported
in specific financial captions have been reclassified to conform with the
September 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 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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 September 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 investment grade U.S. debt
securities and commercial paper. As of September 30, 2002, short-term
investments also included corporate debt securities.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | September 30, 2002
|------------------------------------- | ------------------
|
|                                      |                   
|Money market funds                    |                   
|Corporate debt securities             |                   
|Commercial paper                      |                   
|Government securities                 |                   
|                                      |                   
|                                      |                   
|                                      |                   
|                                     
|Included in cash and cash equivalents |                   
|Included in short-term investments    |                   
|                                      |                   
|                                      |                   
|                                      |                   
|                                     
|
|
|                                      |                   
|Money market funds                    |                   
|Commercial paper                      |                   
|Government securities                 |                   
|                                      |                   
|                                      |                   
|                                      |                   
|                                      |                   
|                                     
|Included in cash and cash equivalents |                   
|Included in short-term investments    |                   
|                                      |                   
|                                      |                   
|                                      |                   
|                                     

|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):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | September 30,2002 |  | December 31,2001
| | ----------------- |  | ----------------
| | Purchased parts   |  |                 
| | Work-in-process   |  |                 
| | Finished goods    |  |                 
| |                   |  |                 
| |                   |  |                 
| |                   |  |                 
|

|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
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 $2.8 million and $2.4 million were recorded
for the three months ended September 30, 2002 and 2001, respectively. For the
nine months ended September 30, 2002 and 2001, provisions for excess and
obsolete inventory were $6.7 million and $12.4 million, respectively. The
decrease in the provision during the nine months ended September 30, 2002 was
due to lower inventory levels and the write-off and scrapping of $8.0 million of
obsolete inventory during the first quarter of 2002.


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 several sources and depends
on supply from these sources to meet its needs. In addition, Foundry depends on
several 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.




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


      Support
        Revenue.    Our suite of support programs provides
        customers with access to technical assistance, software updates and upgrades,
        hardware repair and replacement parts. Revenue from support contracts
        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 support revenue until the revenue recognition
        criteria are met. Revenue recognized from customer support services was
        $8.1 million and $7.8 million and accounted for 10.6% and 10.3% of total
        revenue for the quarters ended September 30, 2002 and 2001, respectively.
        Revenue from support services was $24.3 million and $20.4 million and
        accounted for 11.4% and 8.4% of total revenue for the nine months ended
        September 30, 2002 and 2001, respectively. Support revenue increased in
        absolute dollars during 2002 due to a higher installed base of our networking
        equipment as customers purchased new support contracts associated with
        their equipment purchases and renewed maintenance contracts on existing
        equipment. A total of $17.1 million of support revenue was deferred on
        the accompanying balance sheet as of September 30, 2002. We expect to
        recognize a majority of this amount as support revenue ratably over the
        next 12 months.
      Other
        Service Revenue.Revenue
        for training and installation services is recognized as services are rendered.
        Revenue from training and installation services accounted for less than
        1% of total revenue for the three and nine months ended September 30,
        2002 and 2001.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 and nine months
ended September 30, 2002 and 2001, no customers individually accounted for
greater than 10% of 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 36%
and 33% for the quarters ended September 30, 2002 and 2001, respectively. For
the nine months ended September 30, 2002 and 2001 export sales represented 37%
and 39%, respectively. For the three and nine months ended September 30, 2002
and 2001, no individual country outside of the United States accounted for
greater than 10% of revenue.


Computation of Earnings Per Share



Basic and diluted net income per
share (EPS) are presented in conformity with SFAS No. 128, Earnings Per
Share for all periods presented. In accordance with SFAS No. 128, basic
EPS 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 nine months ended September 30, 2002 and 2001, diluted EPS 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 EPS computation for the three months ended September 30, 2002 and
2001 were 14.4 million and 11.0 million shares, respectively. Anti-dilutive
shares for the nine months ended September 30, 2002 and 2001 were 17.3 million
and 11.2 million shares, respectively.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     
|-----------------------------------------------------
|
|
|
|                                                     
|Net income                                           
|                                                     
|Basic:                                               
|Weighted-average shares outstanding                  
|Less: Weighted-average shares subject to repurchase  
|                                                     
|Weighted-average shares used in computing basic EPS  
|                                                     
|Basic EPS                                            
|                                                     
|Diluted:                                             
|Weighted-average shares outstanding                  
|Add: Weighted-average dilutive potential shares      
|                                                     
|Weighted-average shares used in computing diluted EPS
|                                                     
|Diluted EPS                                          
|                                                     
|                                                     

|Stock-Based Compensation


In October 1995, the FASB issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
permits the use of either the fair value or the intrinsic value method of
accounting for stock-based compensation arrangements. Foundry determines the
value of stock-based compensation arrangements under the intrinsic value method
described by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and accordingly, recognizes no compensation
expense for stock option grants with an exercise price equal to the fair market
value of the shares at the date of grant.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Recent Accounting Pronouncements


     In July 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that a liability for costs associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Foundry does not
expect the adoption of SFAS 146 to have a material impact on its operating
results or financial condition.



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

4.   COMMITMENTS AND CONTINGENCIES

Leases


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

|
|
|
|
|
|
|
|
|
|
|
|
|
|

|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 purchase 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 September 30, 2002, the Company was
potentially committed to purchase approximately $36.9 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 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. That motion has been fully briefed and the parties are
awaiting a decision by the Court.
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|FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)






     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 Companys common
stock 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. A hearing on the defendants' motion to dismiss was held on November 1, 2002.




     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.  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. On October 9, 2002, the Company filed a lawsuit against Nortel in the
United States District Court, Northern District of California alleging that
certain of Nortels products infringe a Foundry patent as well as
allegations concerning breach of contract. The Company is seeking injunctive
relief as well as damages. Irrespective of the merits of the Companys
position, litigation is always an expensive and uncertain proposition. 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 income tax
provisions of $5.2 million and $8.3 million for the nine months ended September
30, 2002 and 2001, respectively. The income 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.


6.   STOCKHOLDERS EQUITY


     On August 21, 2002, Foundry filed
a Tender Offer Statement on Schedule TO with the Securities and Exchange
Commission related to a voluntary stock option exchange program for its
employees. Foundrys executive officers and directors were not eligible to
participate in this program. Under the exchange program, employees were given
the opportunity to voluntarily cancel unexercised vested and unvested stock
options previously granted to them in exchange for a stock option grant equal to
0.5 times the number of tendered options on or about March 21, 2003. However,
participants who elected to exchange any options were also required to exchange
any other options granted to him or her in the previous six months. On September
20, 2002, the Company accepted for exchange options to purchase 5,744,500 shares
of Foundry common stock. Subject to the terms and conditions of the exchange
program, the Company will grant replacement options to purchase an aggregate of
2,872,250 shares of the Companys common stock in exchange for such
tendered options on or about March 21, 2003. In order to receive the replacement
stock option grant, an employee must remain employed with Foundry or one of its
subsidiaries until the date when the replacement stock options are granted. Each
replacement option granted pursuant to this offer will vest on a three year
schedule with a six month cliff, meaning 1/6th of the new option
shares will vest six months after the new grant date, which will be on or about
March 21, 2003, and the remaining shares will vest 1/36th per month
for the remaining 30 months.
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|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations.


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



Critical Accounting Policies and Estimates


Our significant accounting
policies are also 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. If the
Companys actual warranty costs are greater than the accrual, cost of
revenues will increase in the future. Foundry also provides a reserve for
estimated customer returns. This provision is based on the historical returns,
analysis of credit memo data and return policies. Sales to Foundrys
resellers do not provide for rights of return and the contracts with
Foundrys original equipment manufacturers do not provide for rights of
return except in the event Foundrys products do not meet specifications or
there has been an epidemic failure, as defined in the agreements. If the
historical data used by the Company to calculate the estimated sales returns and
allowances does not properly reflect future returns, revenue could be
overstated.




      Revenue
        from customer support contracts 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 support
        revenue until the revenue recognition criteria are met. A total of $17.1
        million of support revenue was deferred on the accompanying balance sheet
        as of September 30, 2002. Other service revenue for training and installation
        services is recognized as services are rendered.
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|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. 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 doubtful accounts 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. 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 allowance must
be established. For the nine months ended September 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 September 30, 2002 and
December 31, 2001 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 September 30, 2002, the Company was potentially
committed to purchase approximately $36.9 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.
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|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):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           
|-------------------------------------------
|
|
|Revenue, net                               
|Cost of revenue                            
|                                           
|Gross profit                               
|                                           
|                                           
|Operating expenses:                        
|Research and development                   
|Sales and marketing                        
|General and administrative                 
|Amortization of deferred stock compensation
|                                           
|Total operating expenses                   
|                                           
|Income from operations                     
|Interest and other income                  
|                                           
|Income before provision for income taxes   
|Provision for income taxes                 
|                                           
|Net income                                 
|                                           
|                                           

|Net
revenue.    Net revenue for the quarter ended September
30, 2002 was $76.6 million, an increase of 2.5% from $74.7 million for the same
period in 2001. Net revenue for the nine months ended September 30, 2002 was
$214.0 million, a decrease of 12.9% from $245.8 million for the same period a
year ago. The slight increase in revenue during the third quarter of 2002
compared to the same period in 2001 was due to demand for our next generation
JetCore ASIC-based products primarily in the enterprise market. The decrease in
revenue for the nine-month period was a result of the unfavorable economic
environment and IT capital spending slowdown during 2002 compared to the same
period in 2001.




      Revenue
        from customer support services was $8.1 million and $7.8 million and accounted
        for 10.6% and 10.3% of total revenue for the quarters ended September
        30, 2002 and 2001, respectively. Support revenue was $24.3 million and
        $20.4 million and accounted for 11.4% and 8.4% of total revenue for the
        nine months ended September 30, 2002 and 2001, respectively. Support revenue
        increased in absolute dollars during 2002 due to a higher installed base
        of our networking equipment as customers purchased new support contracts
        associated with their equipment purchases and renewed maintenance contracts
        on existing equipment. Other service revenue from training and installation
        services, combined, accounted for less than 1% of total revenue for each
        comparative quarter and nine month period.


     No customers accounted for greater
than 10% of our net revenue for the three and nine months ended September 30,
2002 and 2001. Sales to customers outside of the United States accounted for
approximately 36% and 33% for the three months ended September 30, 2002 and
2001, respectively. For the nine months ended September 30, 2002 and 2001,
export sales accounted for 37% and 39% of our net revenue, respectively. During
the three and nine months ended September 30, 2002 and 2001, no individual
country outside of the United States accounted for more than 10% of total
revenue.


     During 2002, overall economic conditions
and IT capital spending by businesses continued to remain weak. As a
result, demand for our products was adversely affected during the nine months
ended September 30, 2002 compared to the same period a year ago. Although our
revenue increased sequentially quarter over quarter during 2002, from $62.4
million in the first quarter to $75.0 million in the second quarter, to $76.6
million in the third quarter, the uncertainties surrounding the political and
economic landscape continue to make it extremely difficult to accurately
forecast future sales and production requirements. If economic conditions in the
U.S. and globally do not improve, or if we experience a worsening in economic
conditions, we may experience material adverse effects on our revenue, operating
results and financial condition.




     Gross
profit.Gross profit for the three months ended
September 30, 2002 and 2001 was $41.1 million and $37.5 million, respectively.
Gross profit for the nine months ended September 30, 2002 and 2001was $113.2
million and $128.4 million, respectively. As a percentage of revenue, gross
profit increased to 53.6% for the third quarter of 2002 compared with 50.3% for
the third quarter of 2001 and 52.9% for the nine months ended September 30,
2002, an increase from 52.2% for the same period in 2001. The gross profit
percentage increases were due to a combination of cost savings from lower
component costs, value engineering of our new products, and mix of products
sold.
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|Demand for Foundrys products
has been adversely affected by 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, the provision for
excess and obsolete inventory of $12.4 million was recorded for the nine months
ended September 30, 2001 as compared to $6.7 million for the same period in
2002. The decrease in the provision was due to reduced inventory levels as a
result of the write-off and scrapping of $8.0 million of obsolete inventory in
2002. Gross margin may be adversely affected in the future by increases 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,
cost of facilities, and the depreciation of property and equipment related to
research and development activities. Research and development expenses increased
$0.5 million to $8.9 million for the third quarter of 2002 from $8.4 million for
the third quarter of 2001, and increased $1.7 million, to $26.3 million for the
nine months ended September 30, 2002 from $24.6 million for the nine months
ended September 30, 2001. Research and development expenses represented 12% and 11% of
net revenue for the three months ended September 30, 2002 and 2001,
respectively, and 12% and 10% of net revenue for the nine months ended September
30, 2002 and 2001, respectively. The increases in absolute dollars were
primarily due to the hiring of additional engineers. 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 were $18.5 million for the third quarter of 2002, a decrease
of $3.6 million from $22.1 million for the third quarter of 2001. Sales and
marketing expenses were $61.7 million for the nine months ended September 30,
2002, a decrease of $8.6 million from $70.2 million for the nine months ended
September 30, 2001. Sales and marketing expenses represented 24% and 30% of net
revenue for the three months ended September 30, 2002 and 2001, respectively,
and 29% of net revenue for each of the nine months ended September 30, 2002 and
2001. The decreases in absolute dollars were primarily due to cost-cutting
measures, such as the closing of certain sales offices and reduced advertising
activities, in response to 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 were $4.7 million for the third quarter of
2002, a decrease of $0.6 million, or 11%, from $5.3 million in the third quarter
of 2001 due primarily to a $0.7 million decrease in the provision for doubtful
accounts. General and administrative expenses were $11.0 million for the
nine months ended September 30, 2002, a decrease of $5.3 million, or 32.5%,
from $16.3 million for the nine months ended September 30, 2001 due primarily to
a $5.8 million decrease in bad debt expense. During the nine months ended
September 30, 2002, we provided $0.5 million to the provision for doubtful
accounts compared to $6.3 million for the nine months ended September 30, 2001
as a result of our improved collection efforts and credit quality of our
customers in 2002. General and administrative expenses represented 6% and 7% of net
revenue for the three months ended September 30, 2002 and 2001, respectively,
and 5% and 7% of net revenue for the nine months ended September 30, 2002 and
2001.




     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 period of the underlying options. We
recorded amortization of deferred stock compensation expense of approximately
$0.2 million and $0.6 million for the three months ended September 30, 2002 and
2001, respectively, and $0.9 million and $2.6 million for the nine-month periods
ended September 30, 2002 and 2001, respectively. At September 30, 2002, we had
approximately $0.2 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 to $1.2 million
in the third quarter of 2002 from $2.0 million in the third quarter of 2001
and to $3.9 million for the nine months ended September 30, 2002 from $7.2
million for the same period in 2001. 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 nine months ended September 30, 2002 of $5.2 million as compared to
$8.3 million for the same period in 2001. The effective tax rates for the nine
months ended September 30, 2002 were 30% compared to 38% for the nine months
ended September 30, 2001 based upon the estimated annualized tax rates.
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|Liquidity and Capital Resources


At September 30, 2002 Foundry had
cash, cash equivalents and short-term investments totaling $310.0 million as
compared to $274.7 million at December 31, 2001.


     Cash provided from operations
increased to $33.2 million for the nine months ended September 30, 2002 from
$26.7 million for the nine months ended September 30, 2001 due to several
factors. Foundry collected cash of $11.3 million from customers during 2002
compared to $5.2 million during 2001 as a result of greater shipment linearity
in the third quarter of 2002 and improved collections performance. As a result
of lower trade receivables, we recorded a provision for doubtful accounts of
$0.5 million for the nine months ended September 30, 2002 compared to $6.3
million for the same period in 2001. The provision for excess and obsolete
inventories also decreased to $6.7 million for the nine months ended September
30, 2002 from $12.4 million for the same period in 2001 as a result of the
write-off and scrapping of $8.0 million of obsolete inventories during 2002.
Foundrys accounts payable increased significantly at September 30, 2002
due to the timing of our inventory purchases at the end of the third quarter of
2002 to secure specific long lead-time inventory to meet our anticipated future
demand.


     Cash provided by investing
activities for the nine months ended September 30, 2002 was $12.2 million. Cash
used in investing activities for the same period in 2001 was $75.9 million. This
fluctuation was primarily a result of the timing of the maturities and purchases
of Foundrys short-term investments which are classified as
held-to-maturity investments.


     Cash provided by financing
activities during 2002 and 2001 resulted from the exercise of stock options by
employees and purchases of common stock under the employee stock purchase
program.




     As of September 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 September 30, 2002 will enable us to meet our
working capital requirements for at least the next 12 months.
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|RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK



We may not be able to maintain profitability.


     We generated net income of
$12.1 million for the nine months ended September 30, 2002 on revenues
of $214.0 million and net income of $2.9 million for the year ended December 31,
2001 on revenues of $311.2 million. As of September 30, 2002, we had retained
earnings of $105.6 million. We maintained profitability throughout 2002 despite
the challenging economic environment. 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 overall economic slowdown and reduced capital spending by businesses. 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 41% and 38% of total revenues for the three and nine months ended
September 30, 2002, compared to 38% and 36% for the same periods in 2001. The
loss of continued orders from 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.
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|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 apply greater resources
and sales coverage than we can and 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, and we
must enhance our current products and maintain customer satisfaction. In
addition, we must make certain our sales and marketing capabilities allow us to
effectively compete against our competitors. 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 could 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.
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|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 has had a material adverse
effect on our business. To the extent that the economic slowdown and reduction
in capital spending continue to adversely affect spending on Internet
infrastructure or if the Internet does not 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 7% of revenue for the nine
months ended September 30, 2002. The 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 prices of our products has decreased in the past 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.
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|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 Pervasive
Networks and Spot Distribution Ltd. in Europe, Mitsui in Japan, Shanghai Gentek
and GTI in China and Tellord Co. Ltd. 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:
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| | potential recessions in economies outside the United States;

longer accounts receivable collection cycles;

seasonal reductions in business activity;

higher costs of doing business in foreign countries;

difficulties in managing operations across disparate geographic areas;

difficulties associated with enforcing agreements through foreign legal systems;

political instability and export restrictions;

potential adverse tax consequences; and

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

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|One or more of such factors may
have a material adverse effect on 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
several sources; if these components are not available, our revenues may be
harmed.




     We currently purchase several key
components used in our products from several 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 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 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 any of our contract manufacturers, or the inability to obtain raw
materials, could cause a delay in our ability to fulfill orders.
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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 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 by third parties to impose licensing
fees on 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, 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.




     The networking industry is increasingly characterized by
the existence of a large number of patent claims and related
litigation regarding patent and other intellectual property rights. In
particular, some companies in the networking industry claim extensive patent
portfolios with respect to networking technology. As a result of the existence
of a large number of patents 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.
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|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 us, we could incur substantial monetary liability, and
be required to change our business practices. Either of these could have a
material adverse effect on our 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;

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.
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|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 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 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.
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|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 20.1% of our
stock; their interests could conflict with yours; significant sales of stock
held by them and Foundrys employees could have a negative effect on Foundrys stock price.




     Foundrys directors and
executive officers beneficially own approximately 20.1% of our outstanding
common stock as of September 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.
Our employees who own Foundry common stock are also collectively able to
significantly influence such matters as well.
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 employees, directors and executive officers, or
the prospect of these sales, could adversely affect the market price of
Foundrys common stock.




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


     Our board of directors has the
authority to issue up to 5,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of common stock may be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change of control of Foundry without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of common stock. We have no present plans to issue shares of
preferred stock. Further, certain provisions of our charter documents, including
provisions eliminating the ability of stockholders to take action by written
consent and limiting the ability of stockholders to raise matters at a meeting
of stockholders without giving advance notice, may have the effect of delaying
or preventing changes in control or management of Foundry, which could have an
adverse effect on the market price of our stock. In addition, our charter
documents do not permit cumulative voting, which may make it more difficult for
a third party to gain control of our board of directors.




Our operations could be significantly hindered by the
occurrence of a natural disaster, terrorist acts or 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.
In addition, since Silicon Valley is an important industrial area for the United
States, we may be subject to acts of terrorism, which could cause a material
disruption in our operations. 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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 $310.0 million of cash
equivalents and short-term investments at September 30, 2002 by approximately
$3.1 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.


Item 4.    Controls and Procedures


     Foundry evaluated the design and
operation of its disclosure controls and procedures to determine whether they
are effective in ensuring that the disclosure of required information is timely
made in accordance with the Exchange Act and the rules and forms of the
Securities and Exchange Commission. This evaluation was made under the
supervision and with the participation of management, including Foundrys
principal executive officer and principal financial officer, within the 90-day
period prior to the filing of this Quarterly Report on Form 10-Q. The principal
executive officer and principal financial officer have concluded, based on their
review, that Foundrys disclosure controls and procedures, as defined at
Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure that
information required to be disclosed by Foundry in reports that it files under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. No
significant changes were made to Foundrys internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|PART II.    OTHER INFORMATION



Item 1.    Legal Proceedings.


In December 2000, several similar
shareholder class action lawsuits were filed against Foundry and certain of its
officers in the United States Court for the Northern District of California,
following Foundrys announcement in December 2000 of its anticipated
financial results for the fourth quarter ended December 31, 2000. The lawsuits
were subsequently consolidated by the Court, under the caption In re Foundry
Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, lead
plaintiffs were selected as required by law and such plaintiffs filed a
consolidated amended complaint which alleged violations of federal securities
laws and purported to seek damages on behalf of a class of shareholders who
purchased Foundrys common stock during the period from September 7, 2000
to December 19, 2000. On October 26, 2001, the Court granted our 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. We reviewed the second amended complaint and moved to dismiss
that complaint as well. On June 6, 2002, the Court granted our 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, we filed a motion to dismiss that complaint. That motion has been fully
briefed and the parties are awaiting a decision by the Court.




     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 our 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. A hearing on the defendants
motion to dismiss was held on November 1, 2002.




     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.  The litigation process is inherently uncertain. If
the outcome of the litigation is adverse to us and if, in addition, we are
required to pay significant monetary damages in excess of available insurance,
our business could be significantly harmed.




     From time to time we are 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 us in the form of letters,
lawsuits and other forms of communication. In March 2001, Nortel filed a lawsuit
against us in the United States District Court for the District of Massachusetts
alleging that certain of our 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. On October 9, 2002, we filed a
lawsuit against Nortel in the United States District Court, Northern District of
California alleging that certain of Nortels products infringe a Foundry
patent as well as allegations concerning breach of contract. We are seeking
injunctive relief as well as damages. Irrespective of the merits of our
position, litigation is always an expensive and uncertain proposition. In the
event of a determination adverse to us, we could incur substantial monetary
liability, and be required to change our business practices. Either of these
could have a material adverse effect on our financial position, results of
operations, or cash flows.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

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

None.



Item 3.    Defaults Upon Senior Securities.

None.




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

None.

Item 5.    Other Information.


In accordance with Section
10A(I)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the
Sarbanes-Oxley Act of 2002 (the Act), we are required to disclose
the non-audit services approved by our Audit Committee to be performed by Ernst
& Young, our external auditor. Non-audit services are defined in the Act as
services other than those provided in connection with an audit or review of the
financial statements of a company. The Audit Committee has approved the
engagement of Ernst & Young for the following non-audit services; (1) the
preparation of tax returns in various foreign countries and (2) the preparation
of federal and state income tax returns.




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

(a)    Exhibits
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      
|------
|Number
|      
|3.1   
|      
|3.2   

|28
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Table of Contents

|Number |  | Description                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                                 
|10.1   |  | 1996 Stock Plan*                                                                                                                                                                
|      
|10.2   |  | 1999 Employee Stock Purchase Plan**                                                                                                                                             
|      
|10.3   |  | 1999 Directors Stock Option Plan**                                                                                                                                             
|      
|10.5   |  | OEM Purchase Agreement dated January 6, 1999 between Foundry Networks, Inc. and Hewlett-Packard Company,
Workgroup Networks Division.***                                        
|      
|10.6   |  | Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd.***                                                                                  
|      
|10.7   |  | 2000 Non-Executive Stock Option Plan****                                                                                                                                        
|      
|10.11  |  | Lease agreement dated September 28, 1999, between Foundry Networks, Inc., and Legacy Partners Commercial Inc.,
for offices located at 2100 Gold Street, San Jose, CA 95002.*****
|      
|99.1   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002                                                          
|      

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

|(b)    Reports on Form 8-K.



On July 3, 2002, we filed an
amendment on Form 8-K/A to a current report on Form 8-K filed on June 24, 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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:                               

|Date: November 14, 2002
|-----------------------

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|CERTIFICATIONS

I, Bobby R. Johnson, Jr., certify that:
|-------------------------------------------------------

|1. | I have reviewed this quarterly report on Form 10-Q of Foundry Networks, Inc.;                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|3. | Based on my knowledge, the
financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;                   
|4. | The registrants other
certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:                                                                                                     

| | a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | evaluated the effectiveness of
the registrants disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
| | c) | presented in this quarterly
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

|5. | The registrants other
certifying officers and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent functions):
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all significant deficiencies in
the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial
data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        

|6. | The registrants other
certifying officers and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: November 14, 2002
|-----------------------

| | /s/ Bobby R. Johnson, Jr. Bobby R. Johnson, Jr.Chief Executive Officerand President
| | -----------------------------------------------------------------------------------

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|CERTIFICATIONS

I, Timothy D. Heffner, certify that:
|----------------------------------------------------

|1. | I have reviewed this quarterly report on Form 10-Q of Foundry Networks, Inc.;                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|3. | Based on my knowledge, the
financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;                   
|4. | The registrants other
certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:                                                                                                     

| | a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | evaluated the effectiveness of
the registrants disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
| | c) | presented in this quarterly
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

|5. | The registrants other
certifying officers and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent functions):
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all significant deficiencies in
the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial
data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        

|6. | The registrants other
certifying officers and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: November 14, 2002
|-----------------------

| | /s/ Timothy D. Heffner Timothy D. HeffnerVice President, Finance and Administration, Chief Financial Officer
| | ------------------------------------------------------------------------------------------------------------

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