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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period
from                    to
 Commission File Number 000-26689
 FOUNDRY NETWORKS, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0431154
(I.R.S. Employer
Identification No.)
 2100 Gold Street
P.O. Box 649100
San Jose, CA 95164-9100
(Address of principal executive offices, including zip code)
 (408) 586-1700
(Registrants telephone number, including area code)
 N/A
(Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 Yes þ No o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
 Yes þ No o
 Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
 Yes o No
þ




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FOUNDRY NETWORKS, INC.
 TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2005 and 2004
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2005 and 2004
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    15Risk Factors That May Affect Future Results and the Market Price of Our Stock
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 4. Controls and Procedures
    
    31PART II OTHER INFORMATION
    
    31Item 1. Legal Proceedings
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 3. Defaults Upon Senior Securities
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    31Item 5. Other Information
    
    31Item 6. Exhibits
    
    31SIGNATURES
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share amounts)
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    244,377
    
    
    $
    112,274Short-term investments
    
    
    302,339
    
    
    
    331,202Accounts receivable, net of allowances for doubtful accounts of $3,252
and $3,117 and sales returns of $1,700 and $1,627 at September 30, 2005
and December 31, 2004, respectively
    
    
    77,065
    
    
    
    91,502Inventories
    
    
    31,094
    
    
    
    38,743Deferred tax assets
    
    
    25,334
    
    
    
    25,799Prepaid expenses and other assets
    
    
    6,400
    
    
    
    6,865Total current assets
    
    
    686,609
    
    
    
    606,385Property and equipment, net
    
    
    9,046
    
    
    
    8,852Investments
    
    
    152,210
    
    
    
    173,965Deferred tax assets
    
    
    18,359
    
    
    
    16,479Other assets
    
    
    6,946
    
    
    
    5,511Total assets
    
    $
    873,170
    
    
    $
    811,192LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    20,741
    
    
    $
    18,238Accrued payroll and related expenses
    
    
    16,835
    
    
    
    21,682Income taxes payable
    
    
    8,982
    
    
    
    Other accrued expenses
    
    
    9,607
    
    
    
    8,700Deferred support revenue
    
    
    33,293
    
    
    
    38,621Total current liabilities
    
    
    89,458
    
    
    
    87,241Deferred support revenue
    
    
    18,840
    
    
    
    17,613Total liabilities
    
    
    108,298
    
    
    
    104,854Commitments and contingencies (Note 3)Stockholders equity:Preferred stock, $0.0001 par value per share:Authorized  5,000 shares at September 30, 2005 and December 31, 2004;
None issued and outstanding as of September 30, 2005 and December 31,
2004
    
    
    
    
    
    
    Common stock, $0.0001 par value per share:Authorized  300,000 shares at September 30, 2005 and December 31, 2004:Issued and outstanding  140,072 and 137,226 shares at September 30,
2005 and December 31, 2004, respectively
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    490,368
    
    
    
    467,682Accumulated other comprehensive loss
    
    
    (46
    )
    
    
    (451
    )Retained earnings
    
    
    274,536
    
    
    
    239,093Total stockholders equity
    
    
    764,872
    
    
    
    706,338Total liabilities and stockholders equity
    
    $
    873,170
    
    
    $
    811,192
 
 (1)
    
    Derived from December 31, 2004 audited consolidated financial statements.  3




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Product
    
    $
    90,353
    
    
    $
    87,450
    
    
    $
    239,533
    
    
    $
    260,239Service
    
    
    16,211
    
    
    
    15,061
    
    
    
    48,255
    
    
    
    44,115Total net revenues
    
    
    106,564
    
    
    
    102,511
    
    
    
    287,788
    
    
    
    304,354Cost of revenues:Product
    
    
    37,810
    
    
    
    33,194
    
    
    
    100,894
    
    
    
    95,630Service
    
    
    2,726
    
    
    
    3,785
    
    
    
    9,374
    
    
    
    10,477Total cost of revenues
    
    
    40,536
    
    
    
    36,979
    
    
    
    110,268
    
    
    
    106,107Gross profit
    
    
    66,028
    
    
    
    65,532
    
    
    
    177,520
    
    
    
    198,247Operating expenses:Research and development
    
    
    12,387
    
    
    
    11,686
    
    
    
    39,055
    
    
    
    31,701Sales and marketing
    
    
    25,786
    
    
    
    23,228
    
    
    
    78,706
    
    
    
    71,490General and administrative
    
    
    9,550
    
    
    
    10,204
    
    
    
    20,034
    
    
    
    21,897Litigation settlement
    
    
    
    
    
    
    30,193
    
    
    
    
    
    
    
    30,193Total operating expenses
    
    
    47,723
    
    
    
    75,311
    
    
    
    137,795
    
    
    
    155,281Income (loss) from operations
    
    
    18,305
    
    
    
    (9,779
    )
    
    
    39,725
    
    
    
    42,966Interest and other income, net
    
    
    4,752
    
    
    
    2,568
    
    
    
    12,422
    
    
    
    6,095Income (loss) before provision for income taxes
    
    
    23,057
    
    
    
    (7,211
    )
    
    
    52,147
    
    
    
    49,061Provision (benefit) for income taxes
    
    
    7,104
    
    
    
    (3,593
    )
    
    
    16,704
    
    
    
    17,790Net income (loss)
    
    $
    15,953
    
    
    $
    (3,618
    )
    
    $
    35,443
    
    
    $
    31,271Basic net income (loss) per share
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.26
    
    
    $
    0.23Weighted average shares used in computing
basic net income (loss) per share
    
    
    139,581
    
    
    
    136,038
    
    
    
    138,711
    
    
    
    134,975Diluted net income (loss) per share
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.25
    
    
    $
    0.22Weighted average shares used in computing
diluted net income (loss) per share
    
    
    144,087
    
    
    
    136,038
    
    
    
    142,213
    
    
    
    142,730
  4




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 Nine Months Ended September 30,2005
    
    
    2004(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    35,443
    
    
    $
    31,271Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,682
    
    
    
    5,434Provision for doubtful accounts
    
    
    154
    
    
    
    Inventory provisions
    
    
    12,058
    
    
    
    10,735Tax benefit from stock option exercises
    
    
    2,538
    
    
    
    20,772Changes in operating assets and liabilities:Accounts receivable
    
    
    14,283
    
    
    
    1,782Inventories
    
    
    (4,409
    )
    
    
    (19,419
    )Prepaid expenses and deferred taxes and other assets
    
    
    (3,285
    )
    
    
    (13,807
    )Accounts payable
    
    
    2,503
    
    
    
    5,250Accrued payroll and related expenses
    
    
    (4,847
    )
    
    
    (1,716
    )Income taxes payable
    
    
    9,379
    
    
    
    (62
    )Other accrued expenses
    
    
    510
    
    
    
    4,762Litigation settlement payable
    
    
    
    
    
    
    35,000Deferred support revenue
    
    
    (4,101
    )
    
    
    8,404Net cash provided by operating activities
    
    
    66,908
    
    
    
    88,406CASH FLOWS FROM INVESTING ACTIVITIES:Maturities of short-term investments
    
    
    258,935
    
    
    
    386,001Purchases of short-term and long-term investments
    
    
    (208,317
    )
    
    
    (525,019
    )Purchases of property and equipment, net
    
    
    (5,976
    )
    
    
    (6,891
    )Net cash provided by (used in) investing activities
    
    
    44,642
    
    
    
    (145,909
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of note receivable
    
    
    
    
    
    
    480Proceeds from issuances of common stock
    
    
    20,148
    
    
    
    33,017Net cash provided by financing activities
    
    
    20,148
    
    
    
    33,497INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    131,698
    
    
    
    (24,006
    )Effect of foreign exchange rate changes on cash
    
    
    405
    
    
    
    (222
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    112,274
    
    
    
    161,718CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    244,377
    
    
    $
    137,490SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net
    
    $
    (6,225
    )
    
    $
    (5,415
    )
  5




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FOUNDRY NETWORKS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and nine months ended September 30, 2005 and 2004 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Principles of Consolidation
  Reclassifications
  Use of Estimates
  Cash Equivalents and Investments
    6




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September 30, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    84,607
    
    
    $
    
    
    
    $
    
    
    
    $
    84,607Municipal bonds
    
    
    113,574
    
    
    
    9
    
    
    
    (111
    )
    
    
    113,472Corporate bonds
    
    
    6,055
    
    
    
    
    
    
    
    (41
    )
    
    
    6,014Government-sponsored enterprise securities
    
    
    473,793
    
    
    
    16
    
    
    
    (2,614
    )
    
    
    471,195$
    678,029
    
    
    $
    25
    
    
    $
    (2,766
    )
    
    $
    675,288Cash equivalents
    
    $
    223,480
    
    
    $
    10
    
    
    $
    (40
    )
    
    $
    223,450Short-term investments
    
    
    302,339
    
    
    
    15
    
    
    
    (1,518
    )
    
    
    300,836Long-term investments
    
    
    152,210
    
    
    
    
    
    
    
    (1,208
    )
    
    
    151,002$
    678,029
    
    
    $
    25
    
    
    $
    (2,766
    )
    
    $
    675,288
 December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    72,203
    
    
    $
    
    
    
    $
    
    
    
    $
    72,203Municipal bonds
    
    
    288,232
    
    
    
    5
    
    
    
    (157
    )
    
    
    288,080Corporate bonds
    
    
    11,941
    
    
    
    
    
    
    
    (58
    )
    
    
    11,883Government-sponsored enterprise securities
    
    
    204,994
    
    
    
    2
    
    
    
    (1,443
    )
    
    
    203,553$
    577,370
    
    
    $
    7
    
    
    $
    (1,658
    )
    
    $
    575,719Cash equivalents
    
    $
    72,203
    
    
    $
    
    
    
    $
    
    
    
    $
    72,203Short-term investments
    
    
    331,202
    
    
    
    3
    
    
    
    (588
    )
    
    
    330,617Long-term investments
    
    
    173,965
    
    
    
    4
    
    
    
    (1,070
    )
    
    
    172,899$
    577,370
    
    
    $
    7
    
    
    $
    (1,658
    )
    
    $
    575,719
 Municipal and corporate bonds.
 Government-sponsored enterprise securities (GSEs).
  7




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Inventories
  September 30,
    
    
    December 31,2005
    
    
    2004Purchased parts
    
    $
    7,220
    
    
    $
    11,713Work-in-process
    
    
    12,011
    
    
    
    19,795Finished goods
    
    
    11,863
    
    
    
    7,235$
    31,094
    
    
    $
    38,743
  Concentrations
   Revenue Recognition
 General.
  Product.
 8




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Services.
   Segment and Geographic Information
    Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Americas
    
    
    63
    %
    
    
    64
    %
    
    
    65
    %
    
    
    65
    %EMEA
    
    
    21
    %
    
    
    16
    %
    
    
    18
    %
    
    
    17
    %Japan
    
    
    9
    %
    
    
    11
    %
    
    
    10
    %
    
    
    11
    %Asia Pacific
    
    
    7
    %
    
    
    9
    %
    
    
    7
    %
    
    
    7
    %
   9




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Computation of Per Share Amounts
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Net income (loss)
    
    $
    15,953
    
    
    $
    (3,618
    )
    
    $
    35,443
    
    
    $
    31,271Basic:Weighted average shares outstanding
    
    
    139,581
    
    
    
    136,038
    
    
    
    138,711
    
    
    
    134,975Basic earnings (loss) per share
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.26
    
    
    $
    0.23Diluted:Weighted average shares outstanding
    
    
    139,581
    
    
    
    136,038
    
    
    
    138,711
    
    
    
    134,975Add: Weighted average dilutive potential shares
    
    
    4,506
    
    
    
    
    
    
    
    3,502
    
    
    
    7,755Weighted average shares used in computing
diluted EPS
    
    
    144,087
    
    
    
    136,038
    
    
    
    142,213
    
    
    
    142,730Diluted earnings (loss) per share
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.25
    
    
    $
    0.22
 Stock-Based Compensation
    10




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands, except per share data)Net income (loss) as reported
    
    $
    15,953
    
    
    $
    (3,618
    )
    
    $
    35,443
    
    
    $
    31,271Less: Total stock-based
compensation expense determined
under fair value method for all
awards, net of related tax effect
    
    
    (9,261
    )
    
    
    (9,720
    )
    
    
    (28,171
    )
    
    
    (28,082
    )Pro forma net income (loss)
    
    $
    6,692
    
    
    $
    (13,338
    )
    
    $
    7,272
    
    
    $
    3,189Basic net income (loss) per share:As reported
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.26
    
    
    $
    0.23Pro forma
    
    $
    0.05
    
    
    $
    (0.10
    )
    
    $
    0.05
    
    
    $
    0.02Diluted net income (loss) per share:As reported
    
    $
    0.11
    
    
    $
    (0.03
    )
    
    $
    0.25
    
    
    $
    0.22Pro forma
    
    $
    0.05
    
    
    $
    (0.10
    )
    
    $
    0.05
    
    
    $
    0.02
   Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Stock Option Plan:Average risk free interest rate
    
    
    4.00
    %
    
    
    2.89
    %
    
    
    3.64
    %
    
    
    2.90
    %Average expected life of option
    
    4.0 years
    
    2.8 years
    
    2.9 years
    
    3.5 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    65
    %
    
    
    70
    %
    
    
    62
    %
    
    
    72
    %
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Employee Stock Purchase Plan:Average risk free interest rate
    
    
    2.71
    %
    
    
    2.33
    %
    
    
    2.48
    %
    
    
    2.12
    %Average expected life of option
    
    1.4 years
    
    1.4 years
    
    1.3 years
    
    1.4 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    62
    %
    
    
    68
    %
    
    
    63
    %
    
    
    67
    %
 Recent Accounting Pronouncements
   11




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2. COMPREHENSIVE INCOME OR LOSS
  3. COMMITMENTS AND CONTINGENCIES
 Guarantees and Product Warranties
    Balance, December 31, 2004
    
    $
    1,498Liabilities accrued for warranties issued during the period
    
    
    744Warranty claims settled during the period
    
    
    (713
    )Expirations and changes in estimates
    
    
    (54
    )Balance, September 30, 2005
    
    $
    1,475
  Balance, December 31, 2004
    
    $
    56,234Additions to deferred support revenue
    
    
    42,923Recognition of support revenue
    
    
    (47,024
    )Balance, September 30, 2005
    
    $
    52,133
  Purchase Commitments with Suppliers and Third-Party Manufacturers
  12




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Lease Commitments
  Patent License Agreement
  Litigation
  In re
Foundry Networks, Inc. Initial Public Offering Securities Litigation, related to In re Initial Public Offering Securities Litigation,
  13




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14




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4. INCOME TAXES
    
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our condensed consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q . This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors,
including, but not limited to, those discussed in the section entitled Managements Discussion and
Analysis of Financial Condition and Results of OperationsRisk Factors That May Affect Future
Results and the Market Price of Our 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.
We undertake no obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the risk factors described in this
document as well as in other documents we file from time to time with the SEC. All public reports
filed by us with the SEC are available free of charge on our website at www.foundrynetworks.com or
from the SEC at www.sec.gov as soon as practicable after we electronically file such reports with
the SEC.
 Overview
  15




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Critical Accounting Policies and Use of Estimates
  Results of Operations
 Net Revenue
   Three Months Ended September 30,2005
    
    
    2004% of
    
    
    
    
    
    
    % of$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    90,353
    
    
    
    85
    %
    
    $
    87,450
    
    
    
    85
    %
    
    $
    2,903
    
    
    
    3
    %Service
    
    
    16,211
    
    
    
    15
    %
    
    
    15,061
    
    
    
    15
    %
    
    
    1,150
    
    
    
    8
    %Total net revenue
    
    $
    106,564
    
    
    
    100
    %
    
    $
    102,511
    
    
    
    100
    %
    
    $
    4,053
    
    
    
    4
    %Chassis
    
    
    73,955
    
    
    
    69
    %
    
    
    70,733
    
    
    
    69
    %
    
    
    3,222
    
    
    
    5
    %Stackable
    
    
    32,609
    
    
    
    31
    %
    
    
    31,778
    
    
    
    31
    %
    
    
    831
    
    
    
    3
    %Total net revenue
    
    $
    106,564
    
    
    
    100
    %
    
    $
    102,511
    
    
    
    100
    %
    
    $
    4,053
    
    
    
    4
    %
 Nine Months Ended September 30,2005
    
    
    2004% of
    
    
    
    
    
    
    % of$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    239,533
    
    
    
    83
    %
    
    $
    260,239
    
    
    
    86
    %
    
    $
    (20,706
    )
    
    
    (8
    )%Service
    
    
    48,255
    
    
    
    17
    %
    
    
    44,115
    
    
    
    14
    %
    
    
    4,140
    
    
    
    9
    %Total net revenue
    
    $
    287,788
    
    
    
    100
    %
    
    $
    304,354
    
    
    
    100
    %
    
    $
    (16,566
    )
    
    
    (5
    )%Chassis
    
    
    193,106
    
    
    
    67
    %
    
    
    228,266
    
    
    
    75
    %
    
    
    (35,160
    )
    
    
    (15
    )%Stackable
    
    
    94,682
    
    
    
    33
    %
    
    
    76,088
    
    
    
    25
    %
    
    
    18,594
    
    
    
    24
    %Total net revenue
    
    $
    287,788
    
    
    
    100
    %
    
    $
    304,354
    
    
    
    100
    %
    
    $
    (16,566
    )
    
    
    (5
    )%
  16




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Americas
    
    
    63
    %
    
    
    64
    %
    
    
    65
    %
    
    
    65
    %EMEA
    
    
    21
    %
    
    
    16
    %
    
    
    18
    %
    
    
    17
    %Japan
    
    
    9
    %
    
    
    11
    %
    
    
    10
    %
    
    
    11
    %Asia Pacific
    
    
    7
    %
    
    
    9
    %
    
    
    7
    %
    
    
    7
    %
     Gross Margins
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %Gross margins:Product
    
    $
    52,543
    
    
    
    58
    %
    
    $
    54,256
    
    
    
    62
    %
    
    $
    138,639
    
    
    
    58
    %
    
    $
    164,609
    
    
    
    63
    %Service
    
    
    13,485
    
    
    
    83
    %
    
    
    11,276
    
    
    
    75
    %
    
    
    38,881
    
    
    
    81
    %
    
    
    33,638
    
    
    
    76
    %Total gross margins
    
    $
    66,028
    
    
    
    62
    %
    
    $
    65,532
    
    
    
    64
    %
    
    $
    177,520
    
    
    
    62
    %
    
    $
    198,247
    
    
    
    65
    %
  17




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##### Table of Contents



Operating Expenses
  Three Months Ended September 30,2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeResearch and Development
    
    $
    12,387
    
    
    
    12
    %
    
    $
    11,686
    
    
    
    11
    %
    
    
    6
    %Sales and Marketing
    
    
    25,786
    
    
    
    24
    %
    
    
    23,228
    
    
    
    23
    %
    
    
    11
    %General and Administrative
    
    
    9,550
    
    
    
    9
    %
    
    
    10,204
    
    
    
    10
    %
    
    
    (6
    %)Litigation settlement
    
    
    
    
    
    
    
    
    
    
    30,193
    
    
    
    29
    %
    
    
    n/a
 Nine Months Ended September 30,2005
    
    
    2004% of
    
    
    
    
    
    
    % of$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    % ChangeResearch and Development
    
    $
    39,055
    
    
    
    14
    %
    
    $
    31,701
    
    
    
    10
    %
    
    
    23
    %Sales and Marketing
    
    
    78,706
    
    
    
    27
    %
    
    
    71,490
    
    
    
    23
    %
    
    
    10
    %General and Administrative
    
    
    20,034
    
    
    
    7
    %
    
    
    21,897
    
    
    
    7
    %
    
    
    (9
    %)Litigation settlement
    
    
    
    
    
    
    
    
    
    
    30,193
    
    
    
    10
    %
    
    
    n/a
    18




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##### Table of Contents



Litigation settlement
  Interest and other income, net
  Income Taxes
   Liquidity and Capital Resources
    19




---



##### Table of Contents



Off-Balance Sheet Arrangements and Contractual Obligations
  Contractual Commitments
  Less Than
    
    
    1-3
    
    
    MoreTotal
    
    
    1 Year
    
    
    Years
    
    
    Than 3 YearsOperating leases- facilities
    
    $
    17,426
    
    
    $
    4,852
    
    
    $
    10,430
    
    
    $
    2,144Inventory purchase commitments
    
    
    51,173
    
    
    
    51,173
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    68,599
    
    
    $
    56,025
    
    
    $
    10,430
    
    
    $
    2,144
  Indemnifications
  Recent Accounting Pronouncements
   20




---



##### Table of Contents



Risk Factors That May Affect Future Results and the Market Price of Our Stock
 Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue,
gross margins and expenses.
  Although our customer base has increased, we still depend on large, recurring purchases from
certain significant customers, and a loss, cancellation or delay in purchases by these customers
could negatively affect our revenue.
   
    
    our reseller agreements generally do not require minimum purchases;
    
    our customers can stop purchasing and our resellers can stop marketing our products at any time; and
    
    our reseller agreements generally are not exclusive and are for one-year terms, with no
obligation of the resellers to renew the agreements.
  The United States government is a significant customer and has been one key to our financial
success. However, government demand is unpredictable and there is no guarantee of future contract
awards.
  21




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##### Table of Contents



Because our financial results are difficult to predict and may fluctuate significantly, we may
not meet quarterly financial expectations, which could cause our stock price to decline.
       Intense competition in the market for networking solutions could prevent us from maintaining or
increasing revenue and sustaining profitability.
  22




---



##### Table of Contents



We must continue to introduce new products with superior performance and features in a timely
manner in order to sustain and increase our revenue, and if we fail to predict and respond to
emerging technological trends and customers changing needs, our operating results may suffer.
   If we fail to protect our intellectual property, our business and ability to compete could
suffer.
   23




---



##### Table of Contents



We may be subject to litigation risks and intellectual property infringement claims that are
costly to defend and could limit our ability to use certain technologies in the future.
Additionally, we may be found to infringe on intellectual property rights of others.
    Our ability to increase our revenue depends on expanding our direct sales operations and reseller
distribution channels and continuing to provide excellent customer support.
   Our gross margins and average selling prices of our products have decreased and may continue to
decrease as a result of competitive pressures and other factors.
  24




---



##### Table of Contents



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.
   Our operations in international markets involve inherent risks that we may not be able to
control. As a result, our business may be harmed if we are unable to successfully address these
risks.
  
    
    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;
    
    infringement claims on foreign patents, copyrights, or trademark rights;
    
    difficulties in managing operations across disparate geographic areas;
    
    difficulties associated with enforcing agreements through foreign legal systems;
 25




---



##### Table of Contents




    
    adverse fluctuations in currency exchange rates;
    
    political instability and export restrictions;
    
    potential adverse tax consequences;
    
    unexpected changes in regulatory requirements;
    
    military conflict and terrorist activities; and
    
    natural disasters and widespread medical epidemics.
   We purchase several key components for our products from sole sources; if these components are
not available, our revenue may be harmed.
    Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay
in our ability to fill orders.
   26




---



##### Table of Contents



Due to the lengthy sales cycles of some of our products, the timing of our revenue is difficult
to predict and may cause us to fail to meet our revenue expectations.
  If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
  The Sarbanes-Oxley Act of 2002 requires us to undertake an annual evaluation of our internal
controls over financial reporting that may identify internal control weaknesses requiring
remediation, which could harm our reputation.
  Beginning January 1, 2006, we will be required to record compensation expense for stock options.
As a result, our profitability will be reduced significantly.
  The timing of the adoption of industry standards may negatively affect widespread market
acceptance of our products.
  27




---



##### Table of Contents



If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and lost sales and be subject to product liability claims.
  
    
    negative customer reactions;
    
    product liability claims;
    
    negative publicity regarding us and our products;
    
    delays in or loss of market acceptance of our products;
    
    product returns;
    
    lost sales; and
    
    unexpected expenses to remedy defects or errors.
 We may incur liabilities that are not subject to maximum loss clauses.
  Our products may not continue to comply with the regulations governing their sale, which may harm
our business.
  28




---



##### Table of Contents



We may engage in acquisitions that could result in the dilution of our stockholders, disrupt our
operations, cause us to incur substantial expenses and harm our business if we cannot
successfully integrate the acquired business, products, technologies or personnel.
  
    
    difficulties in the assimilation of products, operations, personnel and technologies of the acquired companies;
    
    diversion of managements attention from other business concerns;
    
    disruptions to our operations, including potential difficulties in completing ongoing projects in a timely manner;
    
    risks of entering geographic and business markets in which we have no or limited prior experience; and
    
    potential loss of key employees of acquired organizations.
  Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  Anti-takeover provisions could make it more difficult for a third party to acquire us.
  Our
operations may encounter disruptions as we relocate certain
activities to another facility.
  29




---



##### Table of Contents



Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist
acts or other catastrophic events.
  30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures
 Limitations on Effectiveness of Controls.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 Number
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Foundry Networks, Inc. (Amended and
Restated Certificate of Incorporation filed as Exhibit 3.2 to registrants Registration
Statement on Form S-1 (Commission File No. 333-82577) and incorporated herein by reference;
Certificate of Amendment to the foregoing filed as Exhibit 3.1 to registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.)
 31




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##### Table of Contents



Number
    
    Description3.2
    
    Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to registrants
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein
by reference.)10.1
    
    1996 Stock Plan.*(1)10.2
    
    Form of Stock Option Agreement under the registrants 1996 Stock Plan.*(1)10.3
    
    1999 Employee Stock Purchase Plan.*(2)10.4
    
    1999 Directors Stock Option Plan.*(3)10.5
    
    Form of Stock Option Agreement under the registrants 1999 Directors Stock Option Plan.*(3)10.6
    
    Form of Indemnification Agreement. (2)10.7
    
    OEM Purchase Agreement dated January 6, 1999 between Foundry Networks, Inc. and
Hewlett-Packard Company, Workgroup Networks Division. (4)10.8
    
    Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd. (4)10.9
    
    2000 Non-Executive Stock Option Plan.*(5)10.10
    
    Form of Stock Option Agreement under the registrants 2000 Non-Executive Stock Option Plan.*(5)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. (6)10.12
    
    Confidential Settlement Agreement and Release, effective October 25, 2004, by and between
Nortel Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc., Bobby R. Johnson, Jr.,
H. Earl Ferguson, deceased, and Jeffrey Prince. (7)10.13
    
    Sublease agreement dated March 25, 2005, between Foundry Networks, Inc. and Hyperion Solutions
Corporation, for offices located at 4980 Great America Parkway, Santa Clara, CA 95054. (8)31.1
    
    Rule 13a-14(a) Certification (CEO)31.2
    
    Rule 13a-14(a) Certification (CFO)32.1
    
    Section 1350 Certification (CEO)32.2
    
    Section 1350 Certification (CFO)
 
 *
    
    Indicates management contract or compensatory plan or arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock Option Agreement incorporated
herein by reference to the exhibit filed with the Companys Registration Statement on Form S-1
(Commission File No. 333-82577). Copy of 1996 Stock Plan reflecting the amendments approved at
the 2000 Annual Meeting of Stockholders incorporated by reference to the Companys Definitive
Proxy Statement for such meeting (Commission File No. 000-26689). Copy of 1996 Stock Plan
reflecting the amendments for approval at the 2002 Annual Meeting of Stockholders incorporated
by reference to the Companys Definitive Proxy Statement for such meeting (Commission File No.
000-26689).(2)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-1 (Commission File No. 333-82577).(3)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-1 (Commission File No. 333-82577). Copy of Directors Plan reflecting the
amendment for approval at the 2002 Annual Meeting of Stockholders incorporated by reference to
the Companys Definitive Proxy Statement for such meeting (Commission File No. 000-26689).(4)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-1 (Commission File No. 333-82577); Confidential treatment has been granted
by the Securities and Exchange Commission with respect to this exhibit. 32




---



##### Table of Contents



(5)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-8 filed on October 25, 2000 (Commission File No. 333-48560).(6)
    
    Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the
quarter ended September 30, 1999 (Commission File No. 000-26689).(7)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K filed on March 11,
2005 (Commission File No. 000-26689).(8)
    
    Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the
quarter ended March 31, 2005 (Commission File No. 000-26689). 33




---



##### Table of Contents



SIGNATURES
  Foundry Networks, Inc.(Registrant)By:
    
    /s/ Timothy D. HeffnerTimothy D. HeffnerVice President, Finance andAdministration, Chief Financial Officer(Principal Financial and Accounting Officer)
  34




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##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Foundry Networks, Inc. (Amended and
Restated Certificate of Incorporation filed as Exhibit 3.2 to registrants Registration
Statement on Form S-1 (Commission File No. 333-82577) and incorporated herein by reference;
Certificate of Amendment to the foregoing filed as Exhibit 3.1 to registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.)3.2
    
    Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to registrants
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein
by reference.)10.1
    
    1996 Stock Plan.* (1)10.2
    
    Form of Stock Option Agreement under the registrants 1996 Stock Plan.* (1)10.3
    
    1999 Employee Stock Purchase Plan.* (2)10.4
    
    1999 Directors Stock Option Plan.* (3)10.5
    
    Form of Stock Option Agreement under the registrants 1999 Directors Stock Option Plan.* (1)10.6
    
    Form of Indemnification Agreement. (2)10.7
    
    OEM Purchase Agreement dated January 6, 1999 between Foundry Networks, Inc. and Hewlett-Packard
Company, Workgroup Networks Division. (4)10.8
    
    Reseller Agreement dated July 1, 1997 between Foundry Networks, Inc. and Mitsui & Co., Ltd. (4)10.9
    
    2000 Non-Executive Stock Option Plan.* (5)10.10
    
    Form of Stock Option Agreement under the registrants 2000 Non-Executive Stock Option Plan.* (5)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. (6)10.12
    
    Confidential Settlement Agreement and Release, effective October 25, 2004, by and between
Nortel Networks, Limited, Nortel Networks, Inc., Foundry Networks, Inc., Bobby R. Johnson, Jr.,
H. Earl Ferguson, deceased, and Jeffrey Prince. (7)10.13
    
    Sublease agreement dated March 25, 2005, between Foundry Networks, Inc. and Hyperion Solutions
Corporation, for offices located at 4980 Great America Parkway, Santa Clara, CA 95054. (8)31.1
    
    Rule 13a-14(a) Certification (CEO)31.2
    
    Rule 13a-14(a) Certification (CFO)32.1
    
    Section 1350 Certification (CEO)32.2
    
    Section 1350 Certification (CFO)
 
 *
    
    Indicates management contract or compensatory plan or arrangement.(1)
    
    Copy of original 1996 Stock Plan incorporated herein by reference to the exhibit filed with
the Companys Registration Statement on Form S-1 (Commission File No. 333-82577). Copy of 1996
Stock Plan reflecting the amendments approved at the 2000 Annual Meeting of Stockholders
incorporated by reference to the Companys Definitive Proxy Statement for such meeting
(Commission File No. 000-26689). Copy of 1996 Stock Plan reflecting the amendments for
approval at the 2002 Annual Meeting of Stockholders incorporated by reference to the Companys
Definitive Proxy Statement for such meeting (Commission File No. 000-26689).(2)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-1 (Commission File No. 333-82577).




---



##### Table of Contents



(3)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-1 (Commission File No. 333-82577). Copy of Directors Plan reflecting the
amendment for approval at the 2002 Annual Meeting of Stockholders incorporated by reference to
the Companys Definitive Proxy Statement for such meeting (Commission File No. 000-26689).(4)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-1 (Commission File No. 333-82577); Confidential treatment has been granted
by the Securities and Exchange Commission with respect to this exhibit.(5)
    
    Incorporated herein by reference to the exhibit filed with the Companys Registration
Statement on Form S-8 filed on October 25, 2000 (Commission File No. 333-48560).(6)
    
    Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the
quarter ended September 30, 1999 (Commission File No. 000-26689).(7)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K filed on March 11,
2005 (Commission File No. 000-26689).(8)
    
    Incorporated herein by reference to the exhibit filed with the Companys Form 10-Q for the
quarter ended March 31, 2005 (Commission File No. 000-26689).