##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from          to
 Commission File Number 000-26689
 FOUNDRY NETWORKS, INC.
  Delaware
    
    77-0431154(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 4980 Great America Parkway
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
 (408) 207-1700
(Registrants telephone number, including area code)
 N/A
(Former name, former address and former fiscal year, if changed since last report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer þ Accelerated filer o Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ




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##### 



FOUNDRY NETWORKS, INC.
 Table of Contents
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Income
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II  OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURE
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 FOUNDRY NETWORKS, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    294,436
    
    
    $
    258,137Short-term investments
    
    
    458,374
    
    
    
    434,182Accounts receivable, net of allowances for doubtful accounts of $2,134
and $2,493 and sales returns of $2,318 and $2,910 at September 30, 2007
and December 31, 2006, respectively
    
    
    111,904
    
    
    
    73,145Inventories
    
    
    42,888
    
    
    
    34,856Deferred tax assets
    
    
    39,751
    
    
    
    39,455Prepaid expenses and other assets
    
    
    18,306
    
    
    
    8,978Total current assets
    
    
    965,659
    
    
    
    848,753Property and equipment, net
    
    
    8,785
    
    
    
    11,103Investments
    
    
    192,828
    
    
    
    194,114Deferred tax assets
    
    
    33,925
    
    
    
    35,150Other assets
    
    
    6,929
    
    
    
    6,270Total assets
    
    $
    1,208,126
    
    
    $
    1,095,390LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22,209
    
    
    $
    23,011Accrued payroll and related expenses
    
    
    41,657
    
    
    
    27,878Income taxes payable
    
    
    
    
    
    
    5,661Other accrued expenses
    
    
    12,733
    
    
    
    14,368Deferred support revenue
    
    
    49,651
    
    
    
    41,706Total current liabilities
    
    
    126,250
    
    
    
    112,624Deferred support revenue
    
    
    26,012
    
    
    
    23,858Income taxes payable
    
    
    10,757
    
    
    
    Other long-term liabilities
    
    
    547
    
    
    
    813Total liabilities
    
    
    163,566
    
    
    
    137,295Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value:Authorized  5,000 shares at September 30, 2007 and December 31, 2006;
None issued and outstanding as of September 30, 2007 and December 31,
2006
    
    
    
    
    
    
    Common stock, $0.0001 par value:Authorized  300,000 shares at September 30, 2007 and December 31, 2006:Issued and outstanding  149,255 and 147,034 shares at September 30,
2007 and December 31, 2006, respectively
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    799,724
    
    
    
    727,358Accumulated other comprehensive loss
    
    
    (795
    )
    
    
    (483
    )Retained earnings
    
    
    245,616
    
    
    
    231,205Total stockholders equity
    
    
    1,044,560
    
    
    
    958,095Total liabilities and stockholders equity
    
    $
    1,208,126
    
    
    $
    1,095,390
 
 (1)
    
    Derived from audited consolidated financial statements as of December 31, 2006.  3




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##### Table of Contents



FOUNDRY NETWORKS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenue:Product
    
    $
    136,974
    
    
    $
    98,968
    
    
    $
    372,976
    
    
    $
    284,320Service
    
    
    22,523
    
    
    
    19,846
    
    
    
    65,574
    
    
    
    56,920Total net revenue
    
    
    159,497
    
    
    
    118,814
    
    
    
    438,550
    
    
    
    341,240Cost of revenue:Product
    
    
    55,032
    
    
    
    43,468
    
    
    
    157,864
    
    
    
    126,255Service
    
    
    4,395
    
    
    
    3,406
    
    
    
    15,305
    
    
    
    8,474Total cost of revenue
    
    
    59,427
    
    
    
    46,874
    
    
    
    173,169
    
    
    
    134,729Gross margin
    
    
    100,070
    
    
    
    71,940
    
    
    
    265,381
    
    
    
    206,511Operating expenses:Research and development
    
    
    18,425
    
    
    
    16,740
    
    
    
    57,528
    
    
    
    53,771Sales and marketing
    
    
    38,425
    
    
    
    30,454
    
    
    
    116,985
    
    
    
    96,069General and administrative
    
    
    10,271
    
    
    
    10,714
    
    
    
    32,975
    
    
    
    33,890Other charges, net
    
    
    60
    
    
    
    4,207
    
    
    
    5,660
    
    
    
    9,887Total operating expenses
    
    
    67,181
    
    
    
    62,115
    
    
    
    213,148
    
    
    
    193,617Income from operations
    
    
    32,889
    
    
    
    9,825
    
    
    
    52,233
    
    
    
    12,894Interest and other income, net
    
    
    11,440
    
    
    
    9,123
    
    
    
    32,337
    
    
    
    24,506Income before provision for
income taxes and cumulative
effect of change in
accounting principle
    
    
    44,329
    
    
    
    18,948
    
    
    
    84,570
    
    
    
    37,400Provision for income taxes
    
    
    16,761
    
    
    
    6,738
    
    
    
    32,279
    
    
    
    14,819Income before cumulative
effect of change in
accounting principle
    
    
    27,568
    
    
    
    12,210
    
    
    
    52,291
    
    
    
    22,581Cumulative effect of change
in accounting principle, net
of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    439Net income
    
    $
    27,568
    
    
    $
    12,210
    
    
    $
    52,291
    
    
    $
    23,020Basic net income per share
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.35
    
    
    $
    0.16Weighted-average shares used
in computing basic net income
per share
    
    
    148,897
    
    
    
    146,082
    
    
    
    147,768
    
    
    
    144,627Diluted net income per share
    
    $
    0.18
    
    
    $
    0.08
    
    
    $
    0.34
    
    
    $
    0.15Weighted-average shares used
in computing diluted net
income per share
    
    
    156,486
    
    
    
    149,830
    
    
    
    154,776
    
    
    
    150,015
  4




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FOUNDRY NETWORKS, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    52,291
    
    
    $
    23,020Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    8,395
    
    
    
    7,345Stock-based compensation expense
    
    
    32,654
    
    
    
    38,585Provision for doubtful accounts
    
    
    (359
    )
    
    
    79Provision for sales returns
    
    
    (592
    )
    
    
    1,147Inventory provisions
    
    
    3,138
    
    
    
    8,534Deferred tax assets
    
    
    (3,243
    )
    
    
    (6,913
    )Excess tax benefits from stock-based compensation
    
    
    (6,342
    )
    
    
    (4,721
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (37,809
    )
    
    
    (3,164
    )Inventories
    
    
    (10,997
    )
    
    
    (17,600
    )Prepaid expenses and other assets
    
    
    (11,668
    )
    
    
    (4,968
    )Accounts payable
    
    
    (802
    )
    
    
    4,988Accrued payroll and related expenses
    
    
    6,337
    
    
    
    (2,376
    )Income taxes payable
    
    
    17,640
    
    
    
    (3,888
    )Other accrued expenses
    
    
    (1,457
    )
    
    
    6,369Deferred support revenue
    
    
    10,098
    
    
    
    5,634Net cash provided by operating activities
    
    
    57,284
    
    
    
    52,071CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale investments
    
    
    (35,025
    )
    
    
    (81,175
    )Purchases of held-to-maturity investments
    
    
    (560,775
    )
    
    
    (463,899
    )Proceeds from sales of available-for-sale investments
    
    
    46,750
    
    
    
    65,075Proceeds from maturities of held-to-maturity investments
    
    
    526,145
    
    
    
    299,693Purchases of property and equipment, net
    
    
    (4,180
    )
    
    
    (6,222
    )Net cash used in investing activities
    
    
    (27,085
    )
    
    
    (186,528
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuances of common stock
    
    
    39,714
    
    
    
    43,525Repurchase of common stock
    
    
    (39,644
    )
    
    
    Excess tax benefits from stock-based compensation
    
    
    6,342
    
    
    
    4,721Net cash provided by financing activities
    
    
    6,412
    
    
    
    48,246Increase (decrease) in cash and cash equivalents
    
    
    36,611
    
    
    
    (86,211
    )Effect of exchange rate changes on cash
    
    
    (312
    )
    
    
    (314
    )Cash and cash equivalents, beginning of period
    
    
    258,137
    
    
    
    291,511Cash and cash equivalents, end of period
    
    $
    294,436
    
    
    $
    204,986SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net of refunds
    
    $
    25,957
    
    
    $
    27,712
  5




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##### Table of Contents



FOUNDRY NETWORKS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(information for the three and nine months ended September 30, 2007 and 2006 is unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of Business
  Basis of Presentation
   Principles of Consolidation
  Reclassifications
  Use of Estimates
  6




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees, Accounting for
Stock-Based Compensation
     Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of revenue  Product
    
    $
    385
    
    
    $
    410
    
    
    $
    1,019
    
    
    $
    1,421Cost of revenue  Service
    
    
    601
    
    
    
    569
    
    
    
    1,464
    
    
    
    1,563Research and development
    
    
    4,956
    
    
    
    3,940
    
    
    
    11,734
    
    
    
    13,447Sales and marketing
    
    
    5,108
    
    
    
    4,375
    
    
    
    12,705
    
    
    
    16,074General and administrative
    
    
    2,236
    
    
    
    1,994
    
    
    
    5,879
    
    
    
    6,539Total
    
    $
    13,286
    
    
    $
    11,288
    
    
    $
    32,801
    
    
    $
    39,044
  Valuation of Stock-Based Compensation
  7




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##### Table of Contents



Three Months Ended September 30, 2007
    
    Nine Months Ended September 30, 2007Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    
    4.4
    %
    
    
    4.9
    %
    
    
    4.5
    %
    
    
    4.9
    %Expected term (in years)
    
    3.6 years
    
    1.5 years
    
    3.7 years
    
    1.3 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    40
    %
    
    
    41
    %
    
    
    40
    %
    
    
    42
    %Estimated annual forfeitures
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %Weighted-average fair value
    
    $
    6.41
    
    
    $
    4.10
    
    
    $
    6.21
    
    
    $
    3.88
 Three Months Ended September 30, 2006
    
    Nine Months Ended September 30, 2006Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    
    4.8
    %
    
    
    4.6
    %
    
    
    4.7
    %
    
    
    4.4
    %Expected term (in years)
    
    3.5 years
    
    1.4 years
    
    3.4 years
    
    1.4 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    48
    %
    
    
    47
    %
    
    
    47
    %
    
    
    48
    %Estimated annual forfeitures
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %Weighted-average fair value
    
    $
    4.65
    
    
    $
    3.90
    
    
    $
    5.45
    
    
    $
    3.96
 Expected Term. .
 Expected Volatility.
 Expected Dividend.
 Risk-Free Interest Rate.
 Estimated Forfeitures.
 Cash Equivalents and Investments
    8




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September 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    121,999
    
    
    $
    
    
    
    $
    
    
    
    $
    121,999Government-sponsored enterprise securities
    
    
    119,675
    
    
    
    18
    
    
    
    (3
    )
    
    
    119,690Available-for-sale:Auction rate municipal bonds
    
    
    81,050
    
    
    
    
    
    
    
    
    
    
    
    81,050Held-to-maturity:Municipal bonds
    
    
    43,873
    
    
    
    43
    
    
    
    (5
    )
    
    
    43,911Government-sponsored enterprise securities
    
    
    526,279
    
    
    
    370
    
    
    
    (15
    )
    
    
    526,634$
    892,876
    
    
    $
    431
    
    
    $
    (23
    )
    
    $
    893,284Cash equivalents
    
    $
    241,674
    
    
    $
    18
    
    
    $
    (3
    )
    
    $
    241,689Short-term investments
    
    
    458,374
    
    
    
    251
    
    
    
    (16
    )
    
    
    458,609Long-term investments
    
    
    192,828
    
    
    
    162
    
    
    
    (4
    )
    
    
    192,986$
    892,876
    
    
    $
    431
    
    
    $
    (23
    )
    
    $
    893,284
 December 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    89,299
    
    
    $
    
    
    
    $
    
    
    
    $
    89,299Government-sponsored enterprise securities
    
    
    104,425
    
    
    
    32
    
    
    
    
    
    
    
    104,457Available-for-sale:Auction rate municipal bonds
    
    
    92,774
    
    
    
    
    
    
    
    
    
    
    
    92,774Held-to-maturity:Municipal bonds
    
    
    46,377
    
    
    
    13
    
    
    
    (29
    )
    
    
    46,361Government-sponsored enterprise securities
    
    
    500,092
    
    
    
    8
    
    
    
    (1,145
    )
    
    
    498,955$
    832,967
    
    
    $
    53
    
    
    $
    (1,174
    )
    
    $
    831,846Cash equivalents
    
    $
    204,671
    
    
    $
    32
    
    
    $
    (6
    )
    
    $
    204,697Short-term investments
    
    
    434,182
    
    
    
    2
    
    
    
    (860
    )
    
    
    433,324Long-term investments
    
    
    194,114
    
    
    
    19
    
    
    
    (308
    )
    
    
    193,825$
    832,967
    
    
    $
    53
    
    
    $
    (1,174
    )
    
    $
    831,846
 Municipal bonds.
 Government-sponsored enterprise securities (GSEs).
 9




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The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
 Loss Less Than 12 months
    
    
    Loss Greater Than 12 months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal bonds
    
    $
    5,186
    
    
    $
    (5
    )
    
    $
    5,000
    
    
    $
    
    
    
    $
    10,186
    
    
    $
    (5
    )Government-sponsored
enterprise
securities
    
    
    39,209
    
    
    
    (3
    )
    
    
    48,985
    
    
    
    (15
    )
    
    
    88,194
    
    
    
    (18
    )$
    44,395
    
    
    $
    (8
    )
    
    $
    53,985
    
    
    $
    (15
    )
    
    $
    98,380
    
    
    $
    (23
    )
  Inventories
  September 30, 2007
    
    
    December 31, 2006Purchased parts
    
    $
    4,386
    
    
    $
    5,758Work-in-process
    
    
    19,675
    
    
    
    13,193Finished goods
    
    
    18,827
    
    
    
    15,905$
    42,888
    
    
    $
    34,856
  Concentrations
   Revenue Recognition
 General.
 10




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##### Table of Contents



Revenue Arrangements with Multiple Deliverables
 Product.
  Services.
 Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts.
 Segment and Geographic Information
  11




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##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Americas
    
    
    70
    %
    
    
    63
    %
    
    
    69
    %
    
    
    62
    %EMEA
    
    
    16
    %
    
    
    17
    %
    
    
    16
    %
    
    
    18
    %Asia Pacific
    
    
    9
    %
    
    
    10
    %
    
    
    9
    %
    
    
    8
    %Japan
    
    
    5
    %
    
    
    10
    %
    
    
    6
    %
    
    
    12
    %
   Computation of Per Share Amounts
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share amounts)Net income
    
    $
    27,568
    
    
    $
    12,210
    
    
    $
    52,291
    
    
    $
    23,020Basic:Weighted-average shares outstanding
    
    
    148,897
    
    
    
    146,082
    
    
    
    147,768
    
    
    
    144,627Basic EPS
    
    $
    0.19
    
    
    $
    0.08
    
    
    $
    0.35
    
    
    $
    0.16Diluted:Weighted-average shares outstanding
    
    
    148,897
    
    
    
    146,082
    
    
    
    147,768
    
    
    
    144,627Add: Weighted-average dilutive potential shares
    
    
    7,589
    
    
    
    3,748
    
    
    
    7,008
    
    
    
    5,388Weighted-average shares used in computing diluted EPS
    
    
    156,486
    
    
    
    149,830
    
    
    
    154,776
    
    
    
    150,015Diluted EPS
    
    $
    0.18
    
    
    $
    0.08
    
    
    $
    0.34
    
    
    $
    0.15
 Stockholders Equity
 Share Repurchase Program.
 Stock-Based Compensation Plans.
 12




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##### Table of Contents



Weighted-Average
    
    RemainingOptions
    
    Exercise
    
    Contractual
    
    AggregateOutstanding
    
    Price
    
    Life (years)
    
    Intrinsic Value(in thousands)Balance, December 31, 2006
    
    
    31,749,912
    
    
    $
    14.40Granted
    
    
    5,702,858
    
    
    $
    17.99Exercised
    
    
    (4,152,112
    )
    
    $
    9.56Forfeited/expired
    
    
    (1,806,845
    )
    
    $
    16.55Balance, September 30, 2007
    
    
    31,493,813
    
    
    $
    15.95
    
    
    
    4.68
    
    
    $
    142,683Vested and expected to vest at September 30, 2007
    
    
    29,362,519
    
    
    $
    16.01
    
    
    
    4.70
    
    
    $
    136,487Exercisable at September 30, 2007
    
    
    21,973,745
    
    
    $
    16.22
    
    
    
    4.72
    
    
    $
    117,224
   Stock Award Activity.
  Restricted Stock
    
    Weighted AverageOutstanding
    
    Grant Date Fair Value(in thousands)Balance, December 31, 2006
    
    
    628
    
    
    $
    14.58Granted
    
    
    647
    
    
    $
    17.54Vested
    
    
    (310
    )
    
    $
    14.59Forfeited
    
    
    (12
    )
    
    $
    14.21Balance, September 30, 2007
    
    
    953
    
    
    $
    16.59
  13




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##### Table of Contents



Restricted Stock Units.
 RemainingContractual
    
    AggregateShares
    
    Life (years)
    
    Intrinsic Value(in thousands)Balance, December 31, 2006
    
    
    Awarded
    
    
    1,597,000Released
    
    
    Forfeited/expired
    
    
    (19,000
    )Balance, September 30, 2007
    
    
    1,578,000
    
    
    
    1.92
    
    
    $
    28,040Vested and expected to vest at September 30, 2007
    
    
    1,255,559
    
    
    
    1.84
    
    
    $
    22,311Exercisable at September 30, 2007
    
    
    
    
    
    
    
    
    
    $
    
  Employee Stock Purchase Plan.
  Extension of Stock Option Exercise Periods for Former Employees.
 14




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##### Table of Contents



Amendment of Certain Stock Options.
 Guarantees and Product Warranties
 Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others,
   Balance, December 31, 2006
    
    $
    1,546Liabilities accrued for warranties issued during the period
    
    
    2,006Warranty claims settled during the period
    
    
    (1,035
    )Changes in liabilities for pre-existing warranties during the period, including changes in estimates
    
    
    (368
    )Balance, September 30, 2007
    
    $
    2,149
  15




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##### Table of Contents



Deferred Support Revenue
  Deferred support revenue at December 31, 2006
    
    $
    65,564New support arrangements
    
    
    74,365Recognition of support revenue
    
    
    (64,266
    )Ending balance at September 30, 2007
    
    $
    75,663
 Retained Earnings
  Balance at December 31, 2006
    
    $
    231,205Cumulative effect of adoption of FIN 48
    
    
    778Cumulative effect of adoption of EITF 06-2
    
    
    (683
    )Retirement of common stock
    
    
    (37,975
    )Net income
    
    
    52,291Balance at September 30, 2007
    
    $
    245,616
 Income Taxes
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities,
 The Fair Value Option for Financial Assets and
Financial Liabilities-including an amendment of FASB Statement No. 115
 16




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##### Table of Contents



Accounting for Sabbatical
Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,
 Fair Value Measurements,
 17




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##### Table of Contents



2. COMPREHENSIVE INCOME (LOSS)
  3. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments with Suppliers and Third-Party Manufacturers
  Litigation
 Intellectual Property Proceedings.
  Securities Litigation. In re Foundry Networks, Inc. Initial Public Offering Securities
Litigation, related to In re Initial Public Offering Securities
Litigation,
 18




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##### Table of Contents



In
re Initial Public Offering Securities Litigation,
 Watkins
v. Johnson, et al. Rosenbaum v. Johnson, et al. In re
Foundry Networks, Inc. Derivative Litigation
 Patel v. Akin, et al. Patel Patel Patel v. Akin, et al.
 19




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##### Table of Contents



Desai v. Johnson, et al. McDonald v. Johnson, et al. Jackson v. Akin, et al. Edrington v. Johnson, Jr., et al. In re Foundry Networks, Inc. Derivative Litigation Edrington v. Johnson, Jr., et al.
 SEC Information Inquiry.
 United States Attorneys Office Subpoena for Production of Documents.
 General. Accounting for Contingencies,
 4. INCOME TAXES
  20




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21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our condensed consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q . This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions, including our expectations concerning
revenue and operating expenses for the last quarter of 2007 and
our expectation that our interest income will decline over the next
several quarters. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors,
including, but not limited to, those discussed in Part II, Item 1A. Risk Factors. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect
managements opinions only as of the date hereof. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this document as well as in other documents we file from time
to time with the SEC. All public reports filed by us with the SEC are available free of charge on
our website at www.foundrynetworks.com or from the SEC at www.sec.gov as soon as practicable after
we electronically file such reports with the SEC.
 Overview
  Stock Option Investigation and Tender Offer
    22




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##### Table of Contents



Share Repurchase Program
  Critical Accounting Policies and Use of Estimates
  Income Taxes
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
  Share-Based Payment
 23




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##### Table of Contents



Results of Operations
 Net Revenue
   Three Months Ended September 30,2007
    
    
    2006% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    136,974
    
    
    
    86
    %
    
    $
    98,968
    
    
    
    83
    %
    
    $
    38,006
    
    
    
    38
    %Service
    
    
    22,523
    
    
    
    14
    %
    
    
    19,846
    
    
    
    17
    %
    
    
    2,677
    
    
    
    13
    %Total net revenue
    
    $
    159,497
    
    
    
    100
    %
    
    $
    118,814
    
    
    
    100
    %
    
    $
    40,683
    
    
    
    34
    %Net product revenue:Chassis
    
    $
    97,252
    
    
    
    71
    %
    
    $
    66,309
    
    
    
    67
    %
    
    $
    30,943
    
    
    
    47
    %Stackable
    
    
    39,722
    
    
    
    29
    %
    
    
    32,659
    
    
    
    33
    %
    
    
    7,063
    
    
    
    22
    %Total net product revenue
    
    $
    136,974
    
    
    
    100
    %
    
    $
    98,968
    
    
    
    100
    %
    
    $
    38,006
    
    
    
    38
    %
 Nine Months Ended September 30,2007
    
    
    2006% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    372,976
    
    
    
    85
    %
    
    $
    284,320
    
    
    
    83
    %
    
    $
    88,656
    
    
    
    31
    %Service
    
    
    65,574
    
    
    
    15
    %
    
    
    56,920
    
    
    
    17
    %
    
    
    8,654
    
    
    
    15
    %Total net revenue
    
    $
    438,550
    
    
    
    100
    %
    
    $
    341,240
    
    
    
    100
    %
    
    $
    97,310
    
    
    
    29
    %Net product revenue:Chassis
    
    
    265,965
    
    
    
    71
    %
    
    
    188,776
    
    
    
    66
    %
    
    $
    78,149
    
    
    
    42
    %Stackable
    
    
    107,011
    
    
    
    29
    %
    
    
    95,544
    
    
    
    34
    %
    
    
    10,507
    
    
    
    11
    %Total net product revenue
    
    $
    372,976
    
    
    
    100
    %
    
    $
    284,320
    
    
    
    100
    %
    
    $
    88,656
    
    
    
    31
    %
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Americas
    
    
    70
    %
    
    
    63
    %
    
    
    69
    %
    
    
    62
    %EMEA
    
    
    16
    %
    
    
    17
    %
    
    
    16
    %
    
    
    18
    %Asia Pacific
    
    
    9
    %
    
    
    10
    %
    
    
    9
    %
    
    
    8
    %Japan
    
    
    5
    %
    
    
    10
    %
    
    
    6
    %
    
    
    12
    %
 24




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##### Table of Contents



Gross Margin
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %Gross margin:Product
    
    $
    81,942
    
    
    
    60
    %
    
    $
    55,500
    
    
    
    56
    %
    
    $
    215,112
    
    
    
    58
    %
    
    $
    158,065
    
    
    
    56
    %Service
    
    
    18,128
    
    
    
    80
    %
    
    
    16,440
    
    
    
    83
    %
    
    
    50,269
    
    
    
    77
    %
    
    
    48,446
    
    
    
    85
    %Total gross margin
    
    $
    100,070
    
    
    
    63
    %
    
    $
    71,940
    
    
    
    61
    %
    
    $
    265,381
    
    
    
    61
    %
    
    $
    206,511
    
    
    
    61
    %
    25




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##### Table of Contents



Operating Expenses
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    
    
    
    
    2007
    
    2006% of Net
    
    
    
    
    
    % of Net
    
    %
    
    
    
    
    
    % of Net
    
    
    
    
    
    % of Net
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeResearch and development
    
    $
    18,425
    
    
    
    12
    %
    
    $
    16,740
    
    
    
    14
    %
    
    
    10
    %
    
    $
    57,528
    
    
    
    13
    %
    
    $
    53,771
    
    
    
    16
    %
    
    
    7
    %Sales and marketing
    
    
    38,425
    
    
    
    24
    %
    
    
    30,454
    
    
    
    26
    %
    
    
    26
    %
    
    
    116,985
    
    
    
    27
    %
    
    
    96,069
    
    
    
    28
    %
    
    
    22
    %General and administrative
    
    
    10,271
    
    
    
    6
    %
    
    
    10,714
    
    
    
    9
    %
    
    
    (4
    %)
    
    
    32,975
    
    
    
    8
    %
    
    
    33,890
    
    
    
    10
    %
    
    
    (3
    %)Other charges, net
    
    
    60
    
    
    
    
    
    
    
    4,207
    
    
    
    4
    %
    
    
    (99
    %)
    
    
    5,660
    
    
    
    1
    %
    
    
    9,887
    
    
    
    3
    %
    
    
    (43
    %)
    26




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##### Table of Contents




    
    Litigation settlement charges of $5.4 million were recognized in the nine months ended
September 30, 2006 in connection with settlement agreements reached separately, with Lucent
and AlcatelLucent. Litigation settlement charges pertained primarily to the accrual of
costs incurred and payable to Lucent and AlcatelLucent related to past periods.
    
    For the three months ended September 30, 2007 and 2006, costs of $0.1 million and $4.2
million were incurred, respectively, for the independent review of our stock option
practices and for the nine months ended September 30, 2007 and 2006, costs of $5.7 million
and $4.5 million were incurred, respectively, related to this review. The remaining costs
associated with the review should not be material going forward.
 Interest and Other Income, Net
  Provision for Income Taxes
   27




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Liquidity and Capital Resources
      28




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##### Table of Contents



Off-Balance Sheet Arrangements and Contractual Obligations
 Contractual Commitments
  Less Than
    
    
    1-3
    
    
    3-5
    
    
    More ThanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases of facilities
    
    $
    13,537
    
    
    $
    5,430
    
    
    $
    6,495
    
    
    $
    1,612
    
    
    $
    Purchase commitments with contract manufacturers
    
    
    67,989
    
    
    
    67,989
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    81,526
    
    
    $
    73,419
    
    
    $
    6,495
    
    
    $
    1,612
    
    
    $
    
  Off-Balance Sheet Arrangements
  Indemnifications
  
 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.
 29




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Intense competition in the market for networking solutions could prevent us from maintaining or
increasing revenue and sustaining profitability.
    We must continue to introduce new products with superior performance and features in a timely
manner in order to sustain and increase our revenue, and if we fail to predict and respond to
emerging technological trends and customers changing needs, our operating results may suffer.
   30




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##### Table of Contents



We depend on large, recurring purchases from certain significant customers, and a loss,
cancellation or delay in purchases by these customers could negatively affect our revenue.
   
    
    our reseller agreements generally do not require substantial 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.
  31




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##### Table of Contents



The matters relating to our Special Committee investigation into our stock option granting
practices and the restatement of our financial statements have exposed us to civil litigation
claims, regulatory proceedings and government proceedings which could burden Foundry and have a
material adverse effect on us.
  We may be subject to litigation risks and intellectual property infringement claims that are costly
to defend and could limit our ability to use certain technologies in the future. Additionally, we
may be found to infringe on intellectual property rights of others.
    If we fail to protect our intellectual property, our business and ability to compete could suffer.
   32




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##### Table of Contents



Our ability to increase our revenue depends on expanding our direct sales operations and reseller
distribution channels and providing excellent customer support.
   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.
     33




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##### Table of Contents



We purchase several key components for our products from sole sources; if these components are not
available, our revenue may be adversely affected.
    Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in
our ability to fill orders.
   34




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##### Table of Contents



Our gross margins and average selling prices of our products have decreased in the past and may
continue to decrease as a result of competitive pressures and other factors.
   Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue, gross
margins and expenses.
  We need additional qualified personnel to maintain and expand our business. If we are unable to
promptly attract and retain qualified personnel, our business may be harmed.
   35




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##### Table of Contents



Our operations in international markets involve inherent risks that we may not be able to control.
As a result, our business may be harmed if we are unable to successfully address these risks.
  
    
    seasonal reductions in business activity;
    
    potential recessions in economies outside the United States;
    
    adverse fluctuations in currency exchange rates;
    
    difficulties in managing operations across disparate geographic areas;
    
    export restrictions;
    
    unexpected changes in regulatory requirements;
    
    higher costs of doing business in foreign countries;
    
    longer accounts receivable collection cycles;
    
    potential adverse tax consequences;
    
    difficulties associated with enforcing agreements through foreign legal systems;
    
    infringement claims on foreign patents, copyrights, or trademark rights;
    
    natural disasters and widespread medical epidemics;
    
    military conflict and terrorist activities; and
    
    political instability.
   36




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##### 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.
  We are required to expense equity compensation given to our employees, which has reduced our
reported earnings, will significantly impact our operating results in future periods and may reduce
our stock price and our ability to effectively utilize equity compensation to attract and retain
employees.
  As a result of our delayed filing of our periodic SEC reports, our inability to maintain our Form
S-3 eligibility may adversely affect our ability to raise future capital or complete acquisitions.
  If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
  We had a material weakness in internal control over financial reporting in the past and cannot
assure that additional material weaknesses will not be identified in the future. If our internal
control over financial reporting or disclosure controls and procedures are not effective, there may
be errors in our financial statements that could require a restatement or our filings may not be
timely and investors may lose confidence in our reported financial information, which could lead to
a decline in our stock price.
   37




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##### 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;
    
    exposure to third party intellectual property infringement claims; and
    
    potential loss of key employees of acquired organizations.
  The timing of the adoption of industry standards may negatively affect widespread market acceptance
of our products.
  38




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##### Table of Contents



If our products do not interoperate with our customers networks, our sales may be delayed or
cancelled and could harm our business.
  If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and lost sales and be subject to product liability claims.
  
    
    negative customer reactions;
    
    product liability claims;
    
    negative publicity regarding us and our products;
    
    delays in or loss of market acceptance of our products;
    
    product returns;
    
    lost sales; and
    
    unexpected expenses to remedy defects or errors.
 We may incur liabilities that are not subject to maximum loss clauses.
  39




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##### Table of Contents



Our products may not continue to comply with the regulations governing their sale, which may harm
our business.
  Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  Anti-takeover provisions could make it more difficult for a third party to acquire us.
  Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist
acts or other catastrophic events.
  40




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##### Table of Contents



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
   Number of VotesName of Director Nominee
    
    For
    
    Withheld
    
    AbstainBobby R. Johnson, Jr.
    
    
    85,521,648
    
    
    
    0
    
    
    
    49,246,156Alfred J. Amoroso
    
    
    125,964,871
    
    
    
    0
    
    
    
    8,802,933C. Nicholas Keating
    
    
    86,768,052
    
    
    
    0
    
    
    
    47,999,752J. Steven Young
    
    
    85,774,299
    
    
    
    0
    
    
    
    48,993,505Alan L. Earhart
    
    
    125,520,715
    
    
    
    0
    
    
    
    9,247,089Celeste Volz Ford
    
    
    129,025,611
    
    
    
    0
    
    
    
    5,742,193
  Number of VotesFor
    
    Against
    
    AbstainRatification of appointment
    
    
    128,640,573
    
    
    
    6,069,930
    
    
    
    57,299
 
 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).3.2
    
    Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to
registrants Current Report on Form 8-K filed on April 24, 2007 and incorporated herein
by reference).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350.32.2
    
    Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350.
 41




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##### Table of Contents



SIGNATURE
  Foundry Networks, Inc.
(Registrant)By:
    /s/ Daniel W. FairfaxDaniel W. FairfaxVice President, Finance and Administration and
Chief Financial Officer
(Principal Financial and Accounting Officer)  42




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##### Table of Contents



Exhibit Index
 Number
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Foundry Networks, Inc. (Amended and
Restated Certificate of Incorporation filed as Exhibit 3.2 to registrants Registration
Statement on Form S-1 (Commission File No. 333-82577) and incorporated herein by
reference; Certificate of Amendment to the foregoing filed as Exhibit 3.1 to
registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference.).3.2
    
    Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to
registrants Current Report on Form 8-K filed on April 24, 2007 and incorporated herein
by reference.).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350.32.2
    
    Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350.